On August 1, 2019, important amendments to the Delaware Limited Liability Company Act (the “LLC Act”) and the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) will become effective. These amendments will provide for, among other things, the ability for (1) a Delaware limited partnership to effectuate a division, just as a Delaware limited liability company may now do, and (2) a Delaware series limited liability company or limited partnership to create a new type of series, known as a “registered series.”
Divisions of Limited Partnerships
As noted in our memo issued last summer, the LLC Act was amended, effective as of August 1, 2018, to permit “divisions” to be effectuated by a Delaware limited liability company.1 The LP Act is now being amended in a similar fashion to permit Delaware limited partnerships to effectuate such divisions as well.
As we recommended in our earlier memo related to divisions of limited liability companies, lenders should consider prohibiting divisions of limited partnerships unless consented to by such lender. We recommend that this prohibition extend to even those limited liability companies and limited partnerships that are not currently organized in Delaware, since it is possible for a restructuring or other type of reorganization to result in the entity becoming a Delaware limited liability company or limited partnership. In addition, there are a number of other states that allow for a similar division concept, and it is possible that additional states adopt legislation providing for similar provisions. We also recommended that this prohibition apply to all entities since, as we have seen, new legislation can make divisions available to other entities.
Registered Series of Limited Liability Companies and Limited Partnerships
The Delaware LLC Act and LP Act have for a number of years each permitted limited liability companies and limited partnerships to have multiple “series” and to segregate assets and liabilities to particular series. However, the upcoming amendments to the LLC Act and LP Act will provide for a new type of series, known as a “registered series” under Section 18-218 of the LLC Act and 17-221 of the LP Act, as applicable. The “old” type of series will now be known as a “protected series.”
The perfection of a security interest in the assets of a protected series had been subject to much ambiguity. Registered series are being created largely as a way to facilitate secured lending to these types of entities. Importantly, registered series are designed to qualify as “registered organizations” under the Uniform Commercial Code. Accordingly, a UCC financing statement being filed to perfect a security interest in the assets of a registered series created under the LLC Act or LP Act would be filed in the state of Delaware. The Delaware Secretary of State will also be able to provide certificates of good standing for registered series (which is not the case for protected series).
A protected series is permitted to convert into a registered series (and vice versa). Additionally, one or more registered series of a single limited liability company or limited partnership will be permitted to merge or consolidate with any other registered series of the same limited liability company or limited partnership, as applicable.
1 A Divisive Issue for Borrowers and Lenders: Delaware’s New LLC Division Statute