The Delaware Limited Liability Company Act (LLC Act) recently was amended to permit a Delaware limited liability company (LLC) to divide itself into two or more LLCs and allocate its assets, and liabilities among itself and/or one or more newly created LLCs. Lenders and other contractual parties will want to consider specifically addressing Divisions in credit agreements, indentures, acquisition agreements and other agreements involving Delaware LLCs.
Effective August 1, 2018, the Delaware Limited Liability Company Act (LLC Act) was amended to add a new Section 18-217 referred to here. New Section 18-217 permits a Delaware limited liability company (Dividing LLC) to divide itself into two or more LLCs and allocate its assets, liabilities, rights, and duties among itself (if it will survive the Division) and/or one or more newly created LLCs (Division LLCs).
To undertake a Division, the Dividing LLC must adopt a plan of division (Plan). The Plan must set forth the following:
• the terms and conditions of the Division, including the conversion or exchange of the LLC interests of the Dividing LLC into or for LLC interests or other securities of the Division LLCs and the allocation of assets, properties, rights, series, debts, liabilities, and duties of the Dividing LLC among itself and/or the Division LLCs
• the name of each Division LLC and the name of the Dividing LLC if it will survive the Division
• the name and business address of a Division Contact (defined in Section 8-217) which shall maintain custody of a copy of the Plan
• any other matters that the Dividing LLC determines to include.
The Plan also must adopt a new LLC agreement for each Division LLC and, if the Dividing LLC will survive the Division, may amend the LLC agreement of the Dividing LLC or adopt a new LLC Agreement for the Dividing LLC.
Each Division LLC and the Dividing LLC is liable only for the debts, liabilities and duties allocated to it in the Plan. However, all liens upon any assets of the Dividing LLC will be preserved after the Division. A Plan need not list each individual asset, property, debt, liability, or duty of the Dividing LLC to be allocated so long as each of these are reasonably identified by a method that allows their identity to be objectively determined. Debts and liabilities of the Dividing LLC that are not allocated by the Plan will be treated as joint and several debts and liabilities of the Dividing LLC and the Division LLCs. In addition, if the Division is determined by a court of competent jurisdiction to be a fraudulent transfer the debts and liabilities of the Dividing LLC shall be treated as joint and several obligations of the Dividing LLC and the Division LLCs.
The Plan must be adopted in the same manner as a plan of merger. Adoption of the Plan can be done as specified in the LLC agreement of the Dividing LLC, or if not specified, the Plan must be adopted by 50 percent or more of the members of the Dividing LLC.
After the Plan is adopted, the Dividing LLC (if it survives the Division) or any Division LLC must file a certificate of division in the office of the Delaware Secretary of State which must include certain information required by Section 18-217. The certificate of division and the certificates of formation for the Division LLCs must be filed simultaneously.
Section 18-217 provides that once a Division is effective, the rights, privileges, powers, property, debts, liabilities, and duties of the Dividing LLC that have been allocated to a Division LLC pursuant to a Plan, remain vested in that Division LLC and shall not be deemed, as a result of the Division, to have been assigned or transferred to such Division LLC for any purpose of the laws of the State of Delaware. This means that a Division possibly may be used to bypass an assignment or transfer restriction in an agreement if such restriction does not encompass assignments or transfers by operation of law.
Section 18-217 applies to all LLCs whether formed before or after August 1, 2018. However, if a Dividing LLC is a party to a written agreement entered into prior to August 1, 2018 that restricts mergers, consolidations or transfers of assets by the Dividing LLC, Section 18-217 provides that such restrictions also will apply to each Division LLC. The implication is that such a restriction with respect to mergers, consolidations, or transfers of assets in agreements entered into after August 1, 2018, will not apply to Division LLCs.
Lenders and other contractual parties will want to review credit agreements, indentures, acquisition agreements and other contracts involving Delaware LLCs entered into after August 1, 2018 and consider specifically addressing Divisions in those agreements. For example, covenants in credit agreements and indentures entered into after August 1, 2018 may need to include language to (i) prohibit Divisions involving borrowers, guarantors or restricted subsidiaries, (ii) ensure that Divisions are treated as asset sales, restricted payments and/or investments, as appropriate, and (iii) ensure that any Division LLCs are required to become guarantors or collateral grantors to the same extent as other new or acquired subsidiaries are required to become guarantors and collateral grantors.
In addition, because Section 18-217(k) specifically provides that a limited liability company agreement may specify that an LLC does not have the power to divide, lenders may consider requiring that borrowers and guarantors, as a condition to closing of a loan, amend their limited liability company agreement to prohibit Divisions and adding language in the credit documents to prohibit any amendment of such limitation.