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Editorial 8 MIN READ

Delaware's 2019 LLC Act amendments, a preview

What the Corporation Law Section's annual rewrite of Title 6, Chapter 18 is likely to do this year, and why the registered-series proposal is the one to watch

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 7 sections
  1. The annual-amendment machine
  2. What last year's bill did, as context
  3. The registered-series proposal
  4. Technical cleanup, and the usual definitional seams
  5. What is almost certainly not in this bill
  6. How to read the bill when it lands
  7. Sources

very year, around the time the General Assembly returns from its winter recess, the Corporation Law Section of the Delaware State Bar Association sends a thin package of amendments to the Delaware Limited Liability Company Act across Legislative Hall. The 2019 package has not yet been introduced as a Senate Bill, and the public synopsis is not yet online. The rhythm of the last several years, however, makes the shape of it guessable.

This article is a preview, not a recap. If you are drafting an operating agreement this quarter and want to know what to leave alone until August, it is worth knowing what the Section is likely proposing and why.

The annual-amendment machine

Title 6, Chapter 18 of the Delaware Code is what a Delaware LLC actually is. The chapter has been amended in almost every legislative session since 1992, sometimes by a handful of conforming fixes and sometimes by substantive rewrites. The process is not mysterious. The Corporation Law Section, a standing section of the Delaware State Bar with a large working membership of practitioners from Delaware and national firms, maintains a subcommittee that tracks Court of Chancery opinions, interstate developments, and commercial drafting patterns that have surfaced ambiguities in the statute. The subcommittee drafts proposed amendments over the fall and winter. The Section approves a package. A friendly sponsor in the Delaware Senate introduces the bill, usually in March or April. Hearings are perfunctory. The bill passes, the Governor signs, and by its own terms the statute takes effect on August 1 of the year of enactment.

The loop from a bench opinion to a statutory fix runs roughly thirteen to fourteen months in the fast case, which is as close to real-time as any state-level corporate code gets. Our read on the 2017 amendments walked through the mechanics of that loop in detail: Obeid v. Hogan came down in June 2016, Senate Bill 72 rewrote Section 18-407 to settle the delegation question, and the fix was effective thirteen months later.

The Section publishes its approved draft and a plain-English synopsis ahead of introduction. When the 2019 bill surfaces in the coming weeks, the place to read it first is the firm write-ups from Richards, Layton & Finger, Morris Nichols, and Young Conaway, which track the process in near real time. The synopsis drafted by the sponsor, usually Senator Bryan Townsend, is the most authoritative plain-English reading and controls at the margins where the text is read against the Section's intent.

What last year's bill did, as context

The 2018 amendment package was small. The substantive edits were modest conforming fixes to the definitional and foreign-entity sections, an adjustment to the merger and conversion provisions to track cross-border deal practice, and a handful of clarifications to the certificate-of- formation mechanics. Nothing in the 2018 bill would have changed the way a single-member LLC files or operates in Delaware. Nothing required any existing operating agreement to be amended.

The dullness of the 2018 package was the point. The 2017 bill had carried the Section 18-407 delegation rewrite, which was the year's substantive headline; a 2018 follow-on with only technical cleanup is how the Corporation Law Section handles a low-docket year. The pattern is worth watching. A quiet 2018 creates room for a more substantive 2019, and there has been one project parked in the Section's drafting queue for several years that has started to look ready.

The registered-series proposal

The big-ticket item the Section has been working on is a "registered series" regime for Delaware LLCs, grafted onto the existing series framework in Section 18-215. The project has been discussed at Section meetings and in practitioner commentary since at least 2016, and the direction of travel tracks the Uniform Law Commission's Uniform Protected Series Act, finalized in 2017. A registered-series construct would complement, not replace, the protected series that already exist under Section 18-215.

The problem with the current Delaware series is not that the liability partitions do not work; under Section 18-215(b), series of a Delaware LLC "have" separate debts and obligations if the operating agreement provides for it, the records are kept separately, and the certificate of formation gives notice of the limitation. The problem is that a series, as currently structured, does not exist on any state filing. It is a creature of contract and recordkeeping, which means UCC searches come back ambiguous, title companies balk, and counterparties in secured transactions have to diligence the underlying operating agreement to satisfy themselves that the series they are lending to or buying from actually exists as a separate liability pool. Commercial drafters have been living with the problem for the better part of a decade. Our 2016 piece on series LLCs described the diligence friction in detail.

A registered-series regime fixes that by creating a form of series that has a filing of its own, a name of its own on the Division of Corporations' rolls, and a status that third parties can look up. Expected features, based on the Section's drafts and on the parallel Uniform Act: a Certificate of Registered Series filed with the Division; a registered-series name that must include a designator and that must be distinguishable on the records; the ability for a registered series to merge with or convert from another registered series of the same LLC; Good Standing certificates issued at the series level; and, critically, the ability to be a "registered organization" for UCC Article 9 purposes, so that a secured lender can perfect by filing against the series as debtor under its jurisdiction-of-formation rules.

If the 2019 bill adds a new Section 18-218 titled "Registered Series of Limited Liability Company Interests" or something close, that is the provision to read first. It will change how sophisticated drafters structure real-estate holdings, fund vehicles, and any arrangement that has been using protected series but bumping into the third-party- recognition problem.

The cost math would move with it. Delaware would almost certainly charge a filing fee for a Certificate of Registered Series (in the range the Division already charges for amendments, not in the range of a full Certificate of Formation), and the annual tax regime would need to be addressed. The protected series of an LLC today does not pay its own $300 annual tax; the registered series, because it has its own filing and its own name, probably will. The economics will still be favorable for holders of ten or fifty parallel special-purpose vehicles; the per-series overhead goes from a formation fee and a $300 annual tax under separate LLCs to something meaningfully lower under a single LLC with registered series beneath it. The exact fee structure will be whatever the Division publishes once the bill is signed.

Technical cleanup, and the usual definitional seams

Alongside any substantive item, the 2019 package will almost certainly carry the routine conforming amendments the Section never fails to include. Watch for edits to Section 18-101's definitions where terms used elsewhere in the Act have drifted; watch for adjustments to Section 18-104, the registered-agent and registered-office provisions, where the Section has been slowly pulling LLC practice into line with the corresponding DGCL language; and watch for a sentence or two in the merger and conversion sections (Sections 18-209, 18-212, 18-214, 18-216) cleaning up cross-border mechanics. None of these are the reason anyone reads the bill, but they are usually the reason the bill is a page or two longer than practitioners expected.

There is also the question of whether the Section uses the 2019 bill to address any Chancery opinion that has surfaced since the last package. As of this writing, no single opinion from 2018 or early 2019 has generated the kind of practitioner unease that Obeid did in 2016, but the Section tracks opinions continuously, and a short fix in response to a decision on indemnification, inspection rights, or a contractual- fiduciary-duty question would not be a surprise.

What is almost certainly not in this bill

Two items that practitioners keep asking about are unlikely to appear.

The first is a broad blockchain amendment. Delaware already gave its corporations the ability to maintain stock ledgers on distributed electronic databases in the 2017 DGCL package (Senate Bill 69 of the 149th General Assembly). The LLC Act allows electronic records under already-permissive language, and the Section has shown no appetite for a parallel distributed-ledger carve-out that would duplicate a capacity the Act effectively has. If blockchain-related drafting appears in the 2019 package at all, it will be narrow, not thematic.

The second is anything responsive to the federal tax reforms of late 2017. The Tax Cuts and Jobs Act changed the arithmetic of entity choice and surfaced a raft of new questions around pass-through treatment and state-level conformity, but the answer at the state level has largely been silence. Our read on Delaware's non-response described why: Delaware's LLC product is a governance product, not a tax product, and the Section has been studious about not letting federal tax policy drive amendments to Chapter 18. Expect that posture to hold.

How to read the bill when it lands

When the 2019 bill is introduced, read the synopsis first. It is short, it is written by lawyers for lawyers, and it will tell you which sections are substantive and which are conforming. Read the new Section 18-218, if there is one, against the existing Section 18-215 to understand what the registered series can do that a protected series cannot. Then read the Section-by-Section walkthrough that RLF or Morris Nichols will publish within a week of introduction. By the time the bill reaches committee the practitioner consensus on what it means will be essentially fixed.

For a founder forming a Delaware LLC this spring, none of this changes anything you do now. If you were planning to use a series structure and the registered-series provision passes, revisit the structure in the fall once the Division of Corporations has published its filing forms and the fee schedule for the new series type. Everything else will continue to work exactly as it did in 2018.

The interesting question is not whether the 2019 bill will pass. It will. The interesting question is whether the registered-series regime, once live, finally moves the series LLC from a drafter's curiosity into a standard tool. That answer takes years, and it will come from title companies and UCC filers, not from Legislative Hall.

Sources

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