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Delaware Amends Business Entity Statutes

By: Pia Angelikis, Esq., COGENCY GLOBAL on Thu, Jul 22, 2021

2020 Delaware Business Entity Amendments - DGCL-1

In keeping with Delaware’s annual tradition of updating its business entity statutes, Governor Carney signed Senate Bills 113-116 into law on June 30, 2021, amending Delaware’s General Corporation Law (DGCL), Limited Liability Act (LLC Act), Revised Uniform Limited Partnership Act (LP Act) and Revised Uniform Partnership Act (Partnership Act).

Let’s look at some of the key highlights of these amendments, effective August 1, 2021.

Amendments to the DGCL

Stock of a Corporation for Voting and Quorum Purposes:

Senate Bill 113 amends Section 160 of the DGCL entitled “Corporation’s powers respecting ownership, voting, etc., of its own stock; rights of stock called for redemption”. Under current law, shares of a corporation’s capital stock “belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes”. An amendment to Section 160(c) applies this restriction to shares of a corporation’s capital stock that belong to any other entity type (not just to the corporation or another corporation) “if a majority of the voting power of such other entity is held, directly or indirectly, by the corporation or if such other entity is otherwise controlled, directly or indirectly, by the corporation”.

Amendments to the LLC Act, LP Act and Partnership Act

Power to Ratify Void or Voidable Acts:

Senate Bill 114 amends Section 18-106 of the LLC Act entitled “Nature of business permitted; powers” by adding a new subsection (e), which states, in part, that members, managers or other persons whose approval would be required under the LLC agreement can ratify any act or transaction that may be taken by or in respect of an LLC or an LLC agreement but that is void or voidable at the time it is taken. Two Delaware court cases, CompoSecure, L.L.C. v. CardUX, LLC, 206 A.3d 807 (Del. 2018), and Absalom Absalom Trust v. Saint Gervais LLC, 2019 De. Ch. LEXIS 239 (Del. Ch. 2019) reflect the opposite result of the amendment. In those cases, the Delaware courts did not allow members or managers to ratify the void or voidable acts at issue. Under this new subsection (e), such ratification is now expressly allowed.

Similar amendments were made to Section 17-106 of the LP Act and Section 15-202 of the Partnership Act.

Right to Inspect Books and Records:

Senate Bill 114 also amends Section 18-305 of the LLC Act entitled “Access to and confidentiality of information; records” to add language to subsection (g) regarding a member’s rights to inspect an LLC’s books and records. This amendment adds language stating that if a member is entitled to obtain information “under this chapter or a limited liability company agreement for a purpose reasonably related to the member’s interest as a member or other stated purpose, the member’s right shall be to obtain such information as is necessary and essential to achieving that purpose”, unless such right has been expanded or restricted in the limited liability company agreement. This changes the current law to make the “necessary and essential” test the default rule.

Similar amending language was made to Section 17-305 of the LP Act and Section 15-403 of the Partnership Act.

Delegation of Rights and Powers Where There’s a Conflict of Interest:

Senate Bill 114 also amends section 18-407 of the LLC Act entitled “Delegation of rights and powers to manage”. Under current law, unless the LLC Agreement provides otherwise, a member or manager of an LLC has the power and authority to delegate any or all of its rights, powers and duties to manage and control the LLC’s business affairs to another person or persons. The amendment to Section 18-407 adds that the member or manager can make such a delegation “irrespective of whether the member or manager has a conflict of interest with respect to the matter as to which its rights, powers or duties are being delegated, and the person or persons to whom any such rights, powers or duties are being delegated shall not be deemed conflicted solely by reason of the conflict of interest of the member or manager.” This amendment creates a different rule than the rule that the Delaware court applied in the case, Wenske v. Bluebell Creameries, Inc., 214 A.3d 958 (Del. Ch. 2019). In Wenske, the court held that a principal cannot delegate authority to another over a subject matter that the principal has a conflict of interest in even if the person the principal is delegating authority to is an independent delegatee.

Similar amendments were made to Section 17-403(c) of the LP Act and Section 15-401(I) of the Partnership Act.

Statutory Public Benefit Entities:

Finally, Senate Bill 114 amends Sections 18-1201 and 18-1202(a) of the LLC Act regarding statutory public benefit LLCs, and Senate Bill 116 amends Sections 17-1201 and 17-1202(a) of the LP Act regarding statutory public benefit LPs. These amendments, among other things, add language, respectively, stating that an LLC that is not formed as a statutory public benefit LLC or LP can become one in the manner specified in the LLC agreement or partnership agreement or by amending its LLC agreement or partnership agreement and Certificate of Formation to comply with the statutory requirements for forming a public benefit LLC or LP. The amendments also add a requirement, respectively, that the LLC agreement or partnership agreement of a statutory public benefit LLC or partnership set forth that it is a public benefit LLC or partnership and state specifically the public benefit or benefits that it is furthering.

For the complete text of the amendments, see the links below.

Owners/principals of Delaware LLCs, partnerships and limited partnerships may want to review all of the amendments carefully with legal counsel to determine if any conforming changes should be made to their entity’s organizational documents. Generally, service companies can assist with any necessary public record filings.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Delaware Corporate, UCC and Compliance