2021 Amendments to Delaware Entity Statutes

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Certain amendments to the Delaware Limited Liability Company Act (DLLCA), the Delaware Revised Uniform Limited Partnership Act (DRULPA), the Delaware Revised Uniform Partnership Act (DRUPA) and the Delaware General Corporation Law (DGCL) went into effect on August 1, 2021. The most significant amendments affect Delaware limited liability companies and partnerships with respect to ratification of prior void or voidable acts, the authority to delegate rights, powers and duties and the statutory right to obtain books and records.

Below is a brief description of these 2021 amendments.

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RATIFICATION OF VOID OR VOIDABLE ACTS

The DLLCA, the DRULPA and the DRUPA were each amended to provide a safe harbor procedure for the (1) ratification of acts or transactions that are void or voidable when taken and (2) waiver of a failure to comply with the terms of the limited liability company agreement or the partnership agreement that caused such acts or transactions to be void or voidable. The 2021 amendments modify the common law rule that void acts (as opposed to voidable acts) generally cannot be ratified.

These safe harbors (adopted as new subsections under Section 18-106 of the DLLCA, Section 17-106 of the DRULPA and Section 15-202 of the DRUPA) allow ratification (or waiver of a failure to comply with the limited liability company agreement or the partnership agreement) by the persons whose approval, at the time of ratification or waiver, would be required either to (1) validly approve the void or voidable act or (2) amend the agreement in a manner to permit such an act to be validly taken. Any act or transaction ratified is given retroactive effect and deemed validly taken at the time of the act or transaction. These safe harbors do not preclude other valid means of ratification or waiver permitted by law.

Additionally, if an amendment to a limited liability company agreement or partnership agreement to permit an otherwise void or voidable act requires notice to any persons pursuant to its terms, notice of the ratification or waiver must be given to the persons entitled to notice of the amendment and have not otherwise received notice of, or participated in, such ratification or waiver.

The 2021 amendments also provide a procedure whereby the ratification or waiver may be challenged in the Delaware Court of Chancery by the entity, a member, a manager, a partner or any other person claiming to be substantially and adversely affected by the ratification or waiver (excluding any harm that would have resulted had the act been valid when taken).

DELEGATION OF MANAGEMENT AUTHORITY

Unless otherwise provided in the limited liability company agreement or partnership agreement, members, managers and partners have broad, unfettered authority to delegate (even irrevocably) their rights, powers and duties to manage and control the business. The DLLCA, the DRULPA and the DRUPA were previously amended, in response to court decisions, to clarify that the statutes should not be construed in a manner that restrict the power to delegate. In response to a separate court decision, the 2021 amendments again clarify the breadth of the delegation power, providing that a member, manager or partner may delegate any of its rights, powers or duties irrespective of whether it has a conflict of interest and, if it has a conflict of interest, the person to whom the power was delegated shall not be deemed conflicted solely by reason of such conflict of interest.

BOOKS AND RECORDS DEMANDS

A stockholder’s right to inspect the books and records of a Delaware corporation is limited to information that is “necessary and essential” to the stockholder’s stated purpose for such inspection. While this “necessary and essential” test was thought to also apply to books and records demands under the DLLCA, the DRULPA and the DRUPA, a recent Delaware Supreme Court case held otherwise with respect to a limited partnership where the partnership agreement did not expressly impose the “necessary and essential” test on a contractual inspection right.

The 2021 amendments provide that the “necessary and essential” test applies to a member’s or partner’s statutory right to obtain books and records for a purpose reasonably related to their interest as a member or partner—provided that such right may be expanded or restricted in a limited liability company agreement or partnership agreement.

STATUTORY PUBLIC BENEFIT ENTITIES

The DLLCA and the DRULPA permit the formation of a statutory public benefit limited liability company or limited partnership, which is a for-profit entity that is intended to produce a public benefit and operate in a responsible and sustainable manner. A statutory public benefit entity is required to operate in a way that balances the pecuniary interests of the members or partners and the best interests of those materially affected by the entity’s conduct and its designated public benefit.

The 2021 amendments require that the limited liability company agreement or partnership agreement (1) identify the entity as a statutory public benefit entity and (2) set forth the specific public benefit to be promoted, each of which the DLLCA and the DRULPA already require to be included in the entity’s certificate of formation or certificate of limited partnership. The 2021 amendments also provide that the public benefit identified in the limited liability company agreement or partnership agreement will control as among the members, managers, partners or other persons bound by the agreement in the event of an inconsistency between that public benefit and the public benefit set forth in the certificate of formation or certificate of limited partnership (and the certificate must be promptly amended if a manager, member or general partner becomes aware that the public benefit stated therein is inaccurate).

Additionally, the 2021 amendments provide a mechanism to allow an existing entity to become a statutory public benefit entity by either (1) amending its certificate of formation or certificate of limited partnership and its limited liability company agreement or partnership agreement to comply with the DLLCA or the DRULPA or (2) complying with the requirements, if any, in its limited liability company agreement or partnership agreement.

GENERAL PARTNERSHIP OPT-OUTS

The DRUPA was amended to clarify that, unless otherwise provided in the partnership agreement, a Delaware general partnership that has modified one or more of the DRUPA’s default rules (such as the rule that a partnership is a separate legal entity) in its partnership agreement and a statement of partnership existence or statement of qualification shall continue to be governed by all other provisions of the DRUPA.

This amendment is in response to a Delaware Supreme Court holding that a Delaware limited liability partnership, which opted out of separate entity status, was dissolved when one of the partners withdrew and a new partner admitted, notwithstanding a provision in the partnership agreement pursuant to which a withdrawal of a partnership would not cause the dissolution of the partnership.

STOCK COUNTED FOR QUORUM AND VOTING

The DGCL was amended to clarify that shares of a corporation’s stock held by another entity cannot be voted or counted for quorum purposes if the corporation either directly or indirectly holds a majority of such other entity’s voting power or if the corporation directly or indirectly controls such other entity.