Q&A on the Delaware Law Amendments Relating to Limited Liability Company Divisions
On August 1, 2018, the Delaware Limited Liability Company Act (DLLCA) was amended to add, among other things, a division statute (Amendments). The Amendments included new Section 18-217 which permits a Delaware limited liability company (LLC) to divide into two or more LLCs (each a Division company). In a division, the LLC effecting the division (the Dividing company) continues its existence or terminates its existence, as the case may be, as provided in the plan of division.
The DLLCA is amended annually to ensure that it is the preeminent statute governing LLCs and to ensure that the DLLCA addresses the needs of practitioners and persons using the LLC form, including the needs of M&A practitioners.
The article addresses the following questions:
- What were the amendments to the Delaware Limited Liability Company Act relating to limited liability company divisions?
- What was the purpose of the amendments?
- What protections for lenders are explicitly included in the amendments?
- Do existing credit agreement covenants restricting transfers prevent loan parties from dividing into multiple LLCs and reallocating assets and debt?
- How should new credit agreements be revised because of the amendments?
- Should existing credit agreements be amended as soon as possible to deal with the amendments?
- Should lenders require borrowers to amend their LLC agreements to prevent divisions?
- Because of the amendments, can borrowers potentially cause issues for lenders by creatively using unrestricted subsidiaries or additional newly formed borrowers?
- Rather than revise covenants, can lenders rely on existing credit agreement provisions for protection if there was a division and asset transfer?
- Can the credit agreement effectively provide that any division in violation of the credit agreement be null and void?
- How is the Delaware safe harbor applicable for New York law governed credit agreements?â€‹
- Is a new UCC-1 filing required over the newly divided LLC for the lender to maintain perfection? Can it be an all assets UCC-1 filing?
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Tarik J. Haskins, “Expert Q&A on the Delaware Law Amendments Relating to Limited Liability Company Divisions,” Practical Law (December 2018)