Corporate Governance, Formation Issues

Delaware Divisive Merger Statute Takes Effect

An amendment to the Delaware Limited Liability Company Act that allows for the division of LLCs recently took effect. Here is what you...

Written by Amit Singh · 1 min read >

An amendment to the Delaware Limited Liability Company Act that allows for the division of LLCs recently took effect. Here is what you need to know – lenders should pay particular attention, as each resulting LLC is only liable for the obligations assigned to it, potentially impacting a lender’s security interest.

The amendment is part of a broader bill that was passed by the Delaware state legislature this summer that contained a number of amendments to the LLC Act and related statutes. This continued a practice of periodically amending the LLC Act to keep it current.

The amended LLC Act includes a new section, Section 18-217. This section allows a Delaware LLC to divide into two or more LLCs. The original LLC can continue to exist after the division; it is not required to dissolve.

Plan of Division

In order to effect a divisive merger, the dividing LLC must adopt a plan of division. The plan of division must:

1) set out of the terms and conditions of the division, including the conversion or exchange of LLC interests of the dividing company into or for LLC interests or other securities of the division LLCs, and the allocation of assets, property and duties of each newly formed LLC;

2) the name of each result company;

3) the name and address of a contact which has custody of a copy of the plan of division; and

4) any other matters that the dividing company determines to include.

Certificate of Division and Allocation of Assets, Liabilities

When a LLC avails itself to the new division provision, the surviving LLC and each newly formed LLC must file a certificate of division in the Secretary of State’s office. There are several items the certificate must include, which are outlined in the LLC Act. Some of those items are: the name of each division company, the date of the division (if it is in the future) and the name and address of a contact.

The certificate of division must be filed simultaneously with the certificate of formation for each resulting company. The certificate of division will act as a certificate of cancellation for a dividing company that does not survive the division.

Once the certificate of division is filed, the debts and liabilities of the original LLC will transfer to the newly formed company to which they are allocated. No other division company will be liable, provided it is not a fraudulent transfer. Should a court find any allocation of assets or liabilities constitutes a fraudulent transfer, each newly formed LLC will be liable. Debts and liabilities that are not allocated become joint debts and liabilities of all of the division companies.

Lenders need to be particularly careful as typical debt covenants do not address allocations of assets and liabilities by division. So, lenders and their counsel are advised to review and update any debt covenants to ensure plans of division are addressed. Section 18-217 specifically allows a limited liability company to prohibit divisions, so such a provision in the borrower’s limited liability company agreement would be a useful protection for the lender.

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