Proposed Amendments to Delaware’s LLC and Partnership Acts
May 20, 2021
Publication| Limited Liability Company & Partnership Advisory
Legislation proposing to amend the Delaware Limited Liability Company Act (LLC Act), the Delaware Revised Uniform Limited Partnership Act (LP Act) and the Delaware Revised Uniform Partnership Act (GP Act) (collectively, the LLC and Partnership Acts) has been introduced to the Delaware General Assembly. The following is a brief summary of some of the more significant proposed amendments that affect Delaware limited liability companies (Delaware LLCs), Delaware limited partnerships (Delaware LPs) and Delaware general partnerships (Delaware GPs), including amendments (i) providing safe harbor procedures for the ratification of void and voidable acts and transactions, (ii) clarifying the standards governing default information rights under the LLC and Partnership Acts, (iii) confirming the broad authority of conflicted persons to delegate managerial authority, (iv) modifying the provisions governing statutory public benefit Delaware LLCs and statutory public benefit Delaware LPs (collectively, Statutory Public Benefit Entities), and (v) confirming that Delaware GPs that opt out of separate entity status characteristics as permitted by the GP Act remain governed by the GP Act. If enacted, all of the proposed amendments will become effective on August 1, 2021.
Ratification of Void or Voidable Acts and Transactions
The proposed amendments add a new subsection to each of the LLC and Partnership Acts that provides a safe harbor procedure for (i) the ratification of acts or transactions taken by a Delaware LLC, Delaware LP or Delaware GP that are void or voidable when taken, and (ii) waiving failures to comply with any requirements under the limited liability company agreement or the partnership agreement, as applicable, of a Delaware LLC, Delaware LP or Delaware GP that make such acts or transactions void or voidable. The amendments are intended to provide a rule different from that applied in each of CompoSecure, L.L.C. v. Cardux, LLC, 206 A.3d 807 (Del. 2018), and Absalom Absalom Trust v. Saint Gervais LLC, 2019 WL 2655787 (Del. Ch. June 27, 2019), in which the relevant Delaware court applied a rule that void acts or transactions generally may not be ratified. In CompoSecure, the Delaware Supreme Court declared that a Delaware LLC is unable to ratify acts or transactions rendered void by the plain language of its limited liability company agreement. The Delaware Supreme Court defined void acts as those that are “ultra vires and generally cannot be ratified.” In Absalom Absalom Trust, the Delaware Court of Chancery applied the CompoSecure rule in determining that a transaction deemed “null and void” by the express contractual terms of a Delaware LLC’s limited liability company agreement is incapable of being ratified.
The proposed amendments allow the ratification of acts or transactions that are void or voidable when taken (or the waiver of the failure to comply with any requirements of the limited liability company agreement or the partnership agreement, as applicable, making such act or transaction void or voidable) by the persons whose approval would otherwise be required under such agreement at the time of such ratification or waiver (i) for such act or transaction to be validly taken or (ii) to amend such agreement in a manner to permit such act or transaction to be validly taken. Under the proposed amendments, any act or transaction ratified (or the waiver of the failure to comply with any requirements of such agreement) is given retroactive effect and deemed validly taken at the time of such act or transaction. The proposed amendments expressly provide that the applicable new subsection being added to each of the LLC and Partnership Acts is not to be construed to limit the ratification or waiver of void or voidable acts or transactions by other means permitted by law. Accordingly, the proposed amendments are not intended to preclude or restrict other valid means of ratification or waiver or to impair the effectiveness of valid ratifications and waivers effected prior to the adoption of the proposed amendments.
The proposed amendments additionally provide a procedure whereby the entity, a member, a manager or a partner, as applicable, and any person claiming to be substantially and adversely affected by a ratification or waiver (excluding any harm that would have resulted had the act or transaction been valid when taken) may petition the Delaware Court of Chancery for a determination with respect to the validity and effectiveness of any such ratification or waiver effected pursuant to the new subsections of the Delaware LLC and Partnership Acts.
If an amendment to a limited liability company agreement or partnership agreement to permit an otherwise void or voidable act to be validly taken requires notice to any persons under the terms of such agreement, and the ratification or waiver of such act or transaction is effectuated by the persons whose approval would be required to amend such agreement, notice of the ratification or waiver must be given following such ratification or waiver to such persons who would have been entitled to notice of the amendment and who have not otherwise received notice of, or participated in, such ratification or waiver.
Application of “Necessary and Essential” Test to Information Rights
In books and records cases involving Delaware corporations, Delaware courts have long held that a stockholder’s right to inspect a corporation’s books and records is limited to information that is “necessary and essential” to the stockholder’s stated purpose for such information. However, in Murfey v. WHC Ventures, LLC, 236 A.3d 337 (Del. 2020), the Delaware Supreme Court declined to apply an analogous standard to a limited partner’s request to inspect certain books and records of a Delaware limited partnership under a contractual books and records provision contained in the applicable partnership agreement, holding that limited partners are not limited to inspecting books and records that are “necessary and essential” to the purpose for inspection where the partnership agreement did not expressly condition a contractual inspection right upon satisfying the “necessary and essential” standard.
The proposed amendments to the LLC and Partnership Acts provide that a member or partner who is entitled to obtain information for a stated purpose (whether under the LLC Act, the LP Act or the GP Act, as applicable, or a limited liability company agreement or partnership agreement, as applicable) may obtain such information as is “necessary and essential” to achieving that purpose, unless such right has been expanded or restricted in a limited liability company agreement or partnership agreement, as applicable. To the extent current law does not apply the “necessary and essential” test to a member’s or partner’s (i) statutory rights to obtain information for a purpose reasonably related to such person’s interest, or (ii) contractual rights to obtain information for a stated purpose, the proposed amendments are intended to change current law.
Confirmation of Broad Authority to Delegate Managerial Authority
Each of the LLC and Partnership Acts contains a similar general default provision addressing the broad right of members, managers and partners to delegate managerial authority. The proposed amendments to the LLC and Partnership Acts expand this broad authority by providing that a member or manager of a Delaware LLC, a general partner of a Delaware LP and a partner of a Delaware GP may delegate any of its rights, powers or duties, including any core governance functions, to manage and control the business and affairs of such entity regardless of whether such person has a conflict of interest with respect to the rights, powers or duties being delegated, and that the person to whom such rights, powers or duties are delegated shall not be deemed to be conflicted solely by reason of a conflict of interest of the delegating party. The proposed amendments seek to create a rule different than that applied by the Delaware Court of Chancery in Wenske v. Bluebell Creameries, Inc., 214 A.3d 958 (Del. Ch. 2019), that a conflicted person is legally disabled from delegating authority over the subject matter as to which such person is conflicted. The proposed amendments also make clear that any delegation may be made to a committee of one or more persons.
New Provisions Governing Statutory Public Benefit Entities
In a development that may be of significant interest to social entrepreneurs, the LLC Act and the LP Act were recently amended to enable Delaware LLCs and Delaware LPs to elect to be Statutory Public Benefit Entities. In general, a Statutory Public Benefit Entity is a for-profit limited liability company or limited partnership that is intended to produce a public benefit and to operate in a responsible and sustainable manner. To that end, a Statutory Public Benefit Entity is required to be operated in a way that balances the pecuniary interests of the members or partners, as applicable, of such Statutory Public Benefit Entity, the best interests of those materially affected by such Statutory Public Benefit Entity’s conduct, and such Statutory Public Benefit Entity’s purported public benefit.
Each Statutory Public Benefit Entity is currently required in its certificate of formation or certificate of limited partnership, as applicable, to (i) identify itself as a Statutory Public Benefit Entity, and (ii) set forth one or more specific public benefits to be promoted by such Statutory Public Benefit Entity. “Public benefit” is statutorily defined broadly as “a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than members or partners, as applicable, in such capacities) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.” Under the proposed amendments, a Statutory Public Benefit Entity is also required to identify such specific public benefit and its existence as a Statutory Public Benefit Entity in its limited liability company agreement or partnership agreement, as applicable. The proposed amendments further provide that the public benefit listed in the limited liability company agreement or partnership agreement will control as among the members, managers and partners, as applicable, and other persons bound by such agreement, in the event there is an inconsistency between the applicable agreement and certificate, and that a provision in the applicable agreement or certificate will not be effective to the extent it is inconsistent with the applicable provisions of the LLC Act or the LP Act. Additionally, the proposed amendments also obligate the managers, members or general partners, as applicable, of a Statutory Public Benefit Entity to promptly amend such Statutory Public Benefit Entity’s certificate of formation or certificate of limited partnership, as applicable, if such person becomes aware that a specific public benefit to be promoted is inaccurately set forth in such certificate.
The proposed amendments also allow an existing Delaware LLC or Delaware LP to become a Statutory Public Benefit Entity either by (i) complying with the applicable requirements specified in its limited liability company agreement or partnership agreement, as applicable, or (ii) amending its certificate of formation or certificate of limited partnership, as applicable, and its limited liability company agreement or partnership agreement, as applicable, to comply with the statutory requirements.
Delaware GPs that Opt Out of Separate Entity Status Characteristics Remain Governed by GP Act
The general default rules under the GP Act provide that (i) a Delaware GP is a separate legal entity distinct from its partners, (ii) property acquired by a Delaware GP is property of the Delaware GP and not of the partners individually, and (iii) a partner is not a co-owner of partnership property and has no interest in specific partnership property, unless, in each case, the partnership agreement and a statement of partnership existence or statement of qualification modify these default rules. The proposed amendments to the GP Act confirm that, unless the partnership agreement of such Delaware GP provides otherwise, a Delaware GP that has a partnership agreement and a statement of partnership existence or statement of qualification modifying one or more of such default rules, such as the rule that a Delaware GP is a separate legal entity, continues to be governed by all other provisions of the GP Act, including provisions relating to the dissolution of the Delaware GP.
The proposed amendments reflect Delaware’s continuing commitment to maintaining statutes governing Delaware LLCs, Delaware LPs and Delaware GPs that effectively serve the business needs of the national and international business communities. The proposed amendments to the LLC Act, the LP Act and the GP Act are contained in Senate Bill Nos. 114, 116 and 115, respectively.
If you have any questions about this Delaware LLC & Partnership Law Update or other legal issues, please contact a Richards, Layton & Finger attorney.