Lenders should modify restrictive covenants related to mergers, reorganizations, acquisitions and similar transactions in new and amended loan documents due to amendments to the Delaware Limited Liability Company Act (“Amendments”) that became effective August 1, 2018.

The Amendments authorize “division” of a Delaware limited liability company (“LLC”).  Under the new rules, an LLC may divide itself into two or more LLCs.  As part of the division, the LLC may allocate its assets, rights, liabilities and duties among the divisions.  The original LLC then may continue its existence or terminate itself.  Each division has only the liabilities, and owns only the assets, allocated to it in the plan of division absent a fraudulent transfer under applicable law.

Loan agreements generally contain negative covenants restricting acquisitions and fundamental changes such as mergers and reorganizations.  For borrowers formed in Delaware, those restrictive covenants should be amended to make specific reference to divisions.  Although the Amendments provide that liens continue in assets notwithstanding the division, the loan documents should require borrowers to take all necessary action to continue security interests and pledges to maintain the collateral position enjoyed by the lender prior to division.  For example, UCC financing statements amendments may be required.

Existing loan agreements with restrictive covenants related to fundamental changes receive limited continuing protection.  The Amendments provide that for LLCs formed, and agreements made, prior to August 1, 2018, a restriction on mergers, consolidations or asset transfers of the LLC will apply to divisions of the LLC.  Lenders, however, should cover divisions in all future amendments and restatements of existing loan documents.