An Overview of 2021 Changes to the Delaware General Corporations Act and Alternative Entity Laws | Man’s pepper with trout
[co-author: Kevin Ahmed]
On June 30, Governor Carney promulgated certain amendments (amendments) to the Delaware General Corporation Law (DGCL), the Delaware Limited Liability Company Act (LLC), the Delaware Revised Uniform Partnership Act (GP Act) and the Delaware Revised Uniform Limited Partnership Act (LP Act and, together with the LLC Act and GP Act, the “Alternative Entity Acts”). The changes, which came into effect on August 1, provide for: (1) clarification of the voting rights of shares of a company held by its subsidiaries; (2) a new safe harbor for the ratification of void or voidable acts in the context of the alternative entity; (3) the application of the “necessary and essential” criterion to the rights of members and associates to obtain books and records; (4) the possibility for members, managers and partners in conflict to delegate to third parties; and (5) the ability of LPs and LLCs to convert into a statutory public utility entity.
Voting of shares held by the subsidiary
Article 160 (c) of the DGCL previously provided that the shares of the capital stock of a company held by itself or by a subsidiary of the company cannot be voted or counted for the purposes of the quorum. The amendments provide that shares of the capital stock of a corporation held by a corporation or unincorporated subsidiary cannot be voted or counted for the purposes of the quorum.
Ratification of void (or voidable) acts
Alternative entity laws have been amended to provide a safe harbor for the ratification of defective acts that are either void or voidable. These amendments were adopted in response to the decisions of the Delaware courts in Absalom Absalom Trust v. Saint Gervais LLC, CA n ° 2018-0452-TMR (Ch. Del. June 27, 2019) and Composecure, LLC v. Cardux, LLC, 206 A.3d 807 (Del. 2018), which generally held that certain invalid acts or transactions could not be ratified. Any ratification under the new Safe Harbor provisions is deemed to have been made at the time of such act or transaction. In addition, the amendments expressly provide that void or voidable acts may still be ratified by other means permitted by law.
Right to books and records
The changes provide that if a member or partner has the right to obtain information for a stated purpose under alternative entity laws or the operating or partnership agreement, that member’s or partner’s right will include a right to any information which is necessary and essential to achieve this stated objective. Under the changes, the right to all necessary and essential information may be changed in an LLC or partnership agreement. These amendments were adopted in response to the Delaware Supreme Court ruling in Murfey v. WHC Venture, LLC, 236 A.3d 337 (Del. 2020), in which the Court ruled that the “necessary and essential” test would only apply if it was contractually required in the partnership agreement (or, by analogy, the LLC).
Delegation of authority
Prior to the changes, alternative entity laws provided broad power for members, managers and partners to delegate their management rights to others. In response to the decision of the Delaware Court of Chancellery in Wenske v Bluebell Creameries, Inc., 214 A.3d 958 (Del. Ch. 2019), in which the court held that a conflicting principal was legally incapable of delegating authority over the object for which the principal was in conflict (even to a third party independent), the Amendments further expand the delegation power of members, managers and partners by providing that a member, manager or partner is allowed to delegate any of their rights, powers or duties regardless of any conflict of interest.
Conversion into public limited companies or limited liability companies of statutory public interest
The Amendments allow LPs and LLCs to convert to LPs or Public Interest LLCs, respectively. A statutory public interest entity is required to operate in a manner that balances the pecuniary interests of members or partners with the best interests of those materially affected by the conduct of the entity and its designated public interest. The amendments require that the LLC or the partnership agreement: (1) identify the entity as a public utility legal entity; and (2) state the specific public interest to be promoted. A limited partnership or LLC may become a public utility legal entity as specified in its partnership or LLC agreement, respectively, or by amending that agreement to conform to the requirements of a public utility legal entity. as provided for in Alternative Entity Laws.