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Sep 24, 2018

Delaware Divisive Merger Statute

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Effective August 1, 2018, the Delaware Limited Liability Company Act (DLLCA) was amended to include a new § 18-217. Section 18-217 allows a domestic Delaware limited liability company (LLC) to divide itself into two or more domestic LLCs and to allocate the assets and liabilities of the dividing LLC (the “dividing company”) among itself (if the dividing company survives the division) and the newly formed LLCs (the “resulting companies”). The dividing company is not required to dissolve in connection with the division and may continue its existence as a surviving company (the surviving company, if one, together with the resulting companies, the “division companies”). The division of a dividing company and the allocation of its assets and liabilities among the division companies are not deemed to be an assignment or transfer of such assets or liabilities for purposes of Delaware state law. Therefore, § 18-217 may be used by a Delaware LLC to circumvent assignment and transfer restrictions in agreements entered into after August 1, 2018.

Plan of Division

In order to effect a division pursuant to § 18-217, the dividing company must adopt a plan of division in accordance with the dividing company’s limited liability company agreement (LLC Agreement). If the dividing company’s LLC Agreement does not specify the manner for adopting a plan of division and does not prohibit the dividing company from dividing, the plan of division shall be adopted in the same manner as is specified in its LLC Agreement for adopting a plan of merger or consolidation. The plan of division must set forth certain enumerated items listed in DLLCA § 18-217(g), including (i) details regarding any conversion or exchange of the dividing company’s limited liability company interests into or for limited liability company interests of a division company, (ii) an allocation of the dividing company’s assets and liabilities among the division companies, (iii) the adoption of a new LLC Agreement for each resulting company, and (iv) the name and business address of a “division contact.” For a period of six years after the effective date of the division, the division contact must provide to any creditor of the dividing company, at the request of such creditor, the name and address of the division company to which such creditor’s claim was allocated pursuant to the division. The division contact can be a natural person who is a Delaware resident, the surviving company (if applicable), one of the resulting companies, or any other Delaware business entity. It is unclear from the statute whether a successor division contact must be appointed if the division contact converts into a non-Delaware entity.

Certificate of Division

To effect a division, the surviving company or any other division company must file a certificate of division with the office of the Delaware Secretary of State, together with a certificate of formation for each resulting company. DLLCA §18-217(h) lists the items that must be set forth in a certificate of division. The certificate of division and each certificate of formation filed in connection therewith must have the same effective date or time. If the dividing company does not survive the division, the certificate of division will serve also as a certificate of cancellation for the dividing company.

Allocation of Assets and Liabilities

When the certificate of division becomes effective, the debts, liabilities and obligations of the dividing company will vest in the applicable division company to which they are allocated under the plan of division, and no other division company will be liable for such debts, liabilities or obligations. However, if a court of competent jurisdiction determines that the allocation of a dividing company’s assets, debts and liabilities under a plan of division constitutes a fraudulent transfer, each division company shall be jointly and severally liable for those debts and liabilities. Further, any debts or liabilities of a dividing company that are not allocated to a division company pursuant to the plan of division are deemed to be the joint and several obligations of each division company.[1]

Application

Section 18-217 applies to all LLCs formed under Delaware law and may be used by a Delaware LLC to circumvent assignment and transfer restrictions in agreements. However, § 18-217(o) provides that if an LLC formed prior to August 1, 2018 is a party to an agreement entered into prior to August 1, 2018 and such agreement restricts the consummation of a merger or consolidation by the LLC or the transfer or assignment of the LLC’s assets, then such restrictions shall be deemed to apply to a division of such LLC as if the division was a merger, consolidation or transfer of assets. Therefore, § 18‑217 cannot be used to circumvent assignment and transfer restrictions in agreements entered into prior to August 1, 2018.

Footnotes

[1] Note that a plan of division is not required to list each individual asset, debt and liability of the dividing company, so long as the assets, debts and liabilities of the dividing company are reasonably identifiable so that the identity and allocation of such assets, debts and liabilities are objectively determinable.

Authors and Contributors

Sarah McLean

Partner

Mergers & Acquisitions

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+1 713 354 4897

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+1 512 647 1910

Houston

Todd Lowther

Partner

Tax

+1 713 354 4898

+1 713 354 4898

Houston