Delaware Proposes Amendments to its Alternative Entity Statutes

The Corporate Law Section of the Delaware State Bar Association recently approved amendments to three Delaware statutes collectively known as the Alternative Entity Statutes:

The amendments have been introduced and are being considered by the Delaware legislature. If approved by the legislature and signed by the Governor, they will become law on August 1, 2021.

Overall, the nearly identical amendments to the DRUPA, DRULPA, and LLCA seek to clarify, amend, and add information that would, in part, alter existing law.

DRUPA Amendments

The proposed amendments to the DRUPA seek to clarify and amend existing information as well as add new language to the statute. The first proposed amendment alters Section 15-103 to clarify the effect of modifications to default rules contained in a statement of partnership existence or a statement of qualification and a partnership agreement as contemplated by Sections 15-201(a), 15-203 and 15-501. This amendment confirms that despite any such modifications, the other provisions of the chapter continue to apply unless the partnership agreement provides that such other provisions do not apply.

The next proposed amendment seeks to add a subsection to Section 15-202 that provides a safe harbor procedure for ratifying acts or transactions that may be taken by or in respect of a partnership under the DRUPA or its partnership agreement that are void or voidable and provides that failure to comply with requirements of a partnership agreement that make such acts or transactions void or voidable may be waived, in each case, by the partners or other persons whose approval would be required under the partnership agreement. Any ratified act or transaction or failure to comply with waived requirements under the new sections, is deemed to have been taken at the time of such act or transaction. This amendment also confirms that void or voidable actions may be ratified or requirements may be waived by other means permitted by law.

If this proposed amendment is approved, it would provide a different rule than that applied in Composecure, L.L.C. v. Cardux, LLC, 206 A.3d 807 (Del. 2018) and Absaloam Absaloam Trust v. Saint Gervais LLC, 2019 WL 2655787 (Del. Ch. June 27, 2019). In discussing ratification of void acts, Composecure, stated that the “common law rule is that void acts are ultra vires, and generally cannot be ratified, but voidable acts are acts falling within the power of the corporation, though not properly authorized, and are subject to equitable defenses.” Composecure L.L.C. v. Cardux, LLC, 302 A.3d 807, 816-17 (Del. 2018). Similarly, the Absaloam case looked to Composecure and reinforced the existing rule that void language is incapable of being ratified. Absaloam Absaloam Trust v. Saint Gervais LLC, 2019 WL 2655787 at *3 (Del. Ch. June 27, 2019). The proposed amendment differs from the cases in that it determines that void or voidable actions may be ratified or requirements may be waived.

Next, the proposed amendment alters Section 15-401(1) to allow a partner to delegate any of its rights, powers or duties irrespective of whether it has a conflict of interest and the person with whom the rights are being delegated are not deemed conflicted solely by reason of the conflict of interest of the partner. If adopted, this amendment would be different than the rule applied by the Delaware Court of Chancery in Wenske v. Bluebell Creameries, Inc., 214 A.3d 958, 967 (Del. Ch. 2019). In that case, the court held that a conflicted principal could not delegate authority over the subject matter as to which the principal is conflicted, even if the delegatee is independent.

The final proposed amendment to the DRUPA clarifies Section 15-403 to allow a partner to obtain information that is “necessary or essential” to achieving a purpose authorized by Section 15-403 or the partnership agreement, unless the right has been expanded or restricted in the partnership agreement. The proposed amendment is intended to change any existing law that does not apply the necessary and essential test. This proposed amendment is intended to change the rule set forth in Murfey v. WHC Ventures, LLC, 236 A.3d 337 (Del. 2020), which held that the “necessary and essential” test does not apply to a proper purpose requirement in a partnership agreement.

DRULPA and LLCA Amendments

The DRULPA and LLCA amendments are nearly identical to each other and contain similarities to the DRUPA amendments. The proposed amendments make changes to add clarity, amend Sections 17-201 and 18-201 to provide the manner in which a limited liability company or limited partnership can become a statutory public benefit entity, and repeal Sections 17-1203 and 18-1203 pertaining to votes needed for certain amendments and mergers of a public benefit limited liability company or limited partnership, respectively.

Similar to the proposed amendments of the DRUPA, the DRULPA and LLCA amendments add a safe harbor provision for ratifying acts or transactions that may be taken by a limited partnership or limited liability company, respectively, under the appropriate act or entity agreement that are void or voidable and waiving failures to comply with requirements of the appropriate entity agreement that make such acts and transactions void or voidable. This amendment allows void or voidable actions to be ratified or requirements waived by other means permitted by law and is not intended to preempt or restrict other means of ratifying acts or transactions or waiving requirements. The proposed amendments would overturn the Composecure, L.L.C. v. Cardux, LLC, 206 A.3d 807 and Absaloam Absaloam Trust v. Saint Gervais LLC, 2019 WL 2655787, cases, which held that void language is incapable of being ratified.

Additionally, the proposed amendments alter Sections 17-305 and 18-305 to clarify that a member or limited partner, respectively, is allowed to obtain information that is “necessary and essential” to achieving a purpose authorized by the respective statute or agreement, unless such right has been expanded or restricted by the limited liability company agreement or partnership agreement. These proposed amendments are intended to change the current law set out in Murfey v. WHC Ventures LLC, 236 A.3d 337, 364 (Del. 2020), holding that the necessary and essential test does not apply to a proper purpose requirement.

The amendments also alter Sections 17-403 and 18-407, to allow a delegation of rights or powers by a general partner, member or manager with a conflict of interest. The amendments allow a general partner, member or manager to delegate its rights, powers or duties, irrespective of whether it has a conflict of interest with respect to the matter as to which such rights, powers or duties are being delegated, and that person to whom such rights, powers or duties are being delegated shall not be deemed conflicted solely because of the conflict of interest with the respective partner or member. As seen in the DRUPA amendments, this would differ from the current controlling law in Wenske v. Bluebell Creameries, Inc., 214 A.3d 958, 967, which held that a conflicted principal could not delegate authority over the subject matter as to which the principal is conflicted, even if the delegatee is independent.

The final proposed amendments to the DRULPA and LLCA alter Sections 17-1202 and 18-1202. These sections define a statutory public benefit company and provide information for what is needed to establish one. The amendments alter this section to require that the agreement of the statutory public benefit company

  • state that the company is a statutory public benefit company,
  • set forth the specific public benefit or benefits to be promoted,
  • provide that the respective company agreement control in the event of any inconsistencies between the public benefit(s) set forth and the certificate of formation,
  • require amendments of the certificate of formation in certain circumstances, and
  • clarify that any inconsistencies between the respective company agreement and the statute are not effective to the extent of the inconsistency.

These amendments are intended to keep the respective statutes current and to maintain their national preeminence. If approved, the proposed amendments would become effective on August 1, 2021.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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