2023 LLC And Partnership Law Updates Approved by the Delaware Legislature

Each year, the Delaware legislature, guided by drafting committees of the Delaware State Bar Association, improves and updates the various entity law codes to ensure that the laws governing Delawares business organizations remain state of the art. The 2023 amendments to the Delaware Limited Liability Company Act (the “LLC Act”), Senate Bill 113, the Delaware Revised Uniform Limited Partnership Act (the “LP Act”), Senate Bill 112, and the Delaware Revised Uniform Partnership Act (the “GP Act”), Senate Bill 115, were approved by the Delaware Senate on May 16, 2023, and by the Delaware House on June 27, 2023, and await signature by Delaware Governor John Carney. Once the bills are signed, the amendments will take effect August 1, 2023. The LP Act amendments largely track the LLC Act amendments, with some variations specific to LPs. Several changes to the LLC Act and the LP Act are also carried over to the GP Act. Highlights of the legislation applicable to limited liability companies (“LLCs”), limited partnerships (“LPs”) and general partnerships (“GPs”) follow:

• Amendment Pursuant to Agreement of Merger. Section 18-209 of the LLC Act has been amended to confirm that an agreement of merger or consolidation can only amend a limited liability company agreement (an “LLC agreement”) or adopt a new LLC agreement for the surviving LLC in a merger or the resulting LLC in a consolidation, eliminating any implication that the parties to a merger, pursuant to an agreement of merger or consolidation, could amend the LLC agreement of another constituent party to the merger or consolidation.

• Revocation of a Series Termination or Dissolution. Section 18-806 of the LLC Act permits the revocation of the dissolution of an LLC that has dissolved but has not filed a certificate of cancellation. Because dissolution occurs by operation of law and without a filing, an LLC may inadvertently dissolve. As a consequence of dissolution, the LLC is no longer authorized to engage in active business; rather, it must wind up its affairs. In recognition of the fact that a protected series or a registered series similarly may suffer an event of termination or dissolution before the parties are ready to wind up the series, the 2023 LLC Act amendments extend the revocation concept to protected series and registered series.

• Amendments to a Filed Certificate of Division. Section 18-217 permits an LLC to divide into one or more other LLCs. As part of the transaction, the dividing company must file a certificate of division setting forth certain information, including the name or business address of a division contact and the name and address of a division company that maintains a record of the plan of division on file. Existing Section 18-217 lacked a means to update this information if it changes or was incorrect at the time of filing. The 2023 LLC Act amendments permit the amendment of a certificate of division changing the name or business address of the division contact or the name and address of the division company with which the plan of division is on file.

• Division Clarification. The LLC Act amendments also clarify the terminology used when referring to post-division companies in Section 18-217(l)(1) and (9), confirming that a dividing company is divided into distinct and independent “division companies” (which may include a surviving company) but that there need not be a “surviving company” in a division. (The prior language referred to the dividing company dividing into distinct and independent “resulting companies.”)

• Irrevocability of Subscription. Finally, the LLC Act amendments add a new Section 18-506 to the LLC Act, which confirms that a subscription for an LLC interest may be made irrevocable if and to the extent stated in the applicable terms of the subscription.

• Amendment Pursuant to Agreement of Merger. As with the LLC Act, Section 17-211 of the LP Act is being amended to confirm that an agreement of merger or consolidation may only amend a limited partnership agreement (an “LP agreement”) or adopt a new LP agreement for the surviving limited partnership in a merger or the resulting limited partnership in a consolidation, and not for another constituent.

• Deemed Initial General Partner for a Series. Under Section 17-218 of the LP Act, a general partner has no personal liability for (1) the debts and obligations of the LP generally unless that general partner is a general partner of the limited liability company generally, and (2) the debts and obligations of a series of the limited liability company, unless the general partner is associated with that series. To address this situation, Sections 17-218 and 17-221 were amended in 2019 to make clear that an LP that has or may establish series must have at least one general partner of the partnership generally and at least one general partner associated with each of its protected and registered series. In recognition of the fact that, historically, LP Agreements for LPs with series may not have specified a general partner serving with respect to the partnership generally and/or a general partner or general partners for one more series, a safe harbor was added. Each of these sections thus provides: (a) if a partnership agreement does not designate a general partner for a protected series or a registered series, then each general partner of the limited partnership generally is deemed to be associated with such series, and (b) if a partnership agreement does not designate a general partner for the LP generally, then each general partner of the limited partnership that is not associated with any series is deemed to be a general partner of the limited partnership generally but, if there is no such general partner, then each partner of the limited partnership is deemed to be a general partner of the partnership generally. The 2023 LP Act amendments make clear that this “deemed relationship” rule only applies with respect to an initial general partner. If a successor general partner is thereafter appointed for an LLC, and it is unclear from the partnership documentation whether that successor general partner is associated with any series of the LLC, the deemed relationship rule will no longer operate to provide a safety net. Accordingly, it is important when drafting an LP Agreement for an LP with series to carefully consider who will serve as general partner for the partnership generally and for each series, to avoid unintended consequences.

• Revocation of a Series Termination or Dissolution. As is the case with LLCs, Section 17-806 of the LP Act permits the revocation of a dissolution for an LP prior to the filing of a certificate of cancellation for the LP. The LP Act amendments add analogous provisions for protected series and registered series of LPs similar to those included in the LLC Act amendments, with a few important distinctions.

• Amendments to a Filed Certificate of Division. The LP Act amendments modify section 17-220(h) in the same manner as the amendments to Section 18-217(h) of the LLC Act, to permit the amendment of a certificate of division to change the name or business address of the division contact or the name and address of the division partnership that maintains a record of the plan of division on file. A separate certificate of amendment must be filed with respect to each division partnership then existing as a Delaware LP on the records of the Delaware Secretary of State. Consistent with the LLC Act amendments, amended Section 17-220(h) requires a general partner of the dividing partnership or, if the dividing partnership was not a surviving partnership or no longer exists as an LP, the general partner of any resulting partnership, upon becoming aware that any of such information was false when certified or has changed to promptly amend the certificate of division. In contract to the LLC Act amendments, however, the LP Act amendments add the language identifying the authorized signatories of a certificate of amendment to certificate of division (pursuant to which a general partner of the surviving partnership or, if no surviving partnership then exists, a general partner of any resulting partnership may bind each division partnership), and the deemed consent to an amendment by each such division partnership, to Section 17-204 as a new clause (14) rather including it in Section 17-220(h). As with the analogous amendments to the LLC Act, if at least one division partnership remains in good standing at the time of filing of certificates of amendment to certificate of division, the Secretary of State must accept the amendment filings for all applicable division partnerships, notwithstanding the status of the remaining division partnerships.

• Division Clarifications. The LP Act amendments make parallel clarifications to the LLC Act amendments, clarifying that a dividing partnership is divided into separate division partnerships and that there need not be a surviving partnership.

• Irrevocability of Subscription. Like the LLC Act amendments, the LP Act amendments add a new Section 17-506 to the LP Act, which clarifies that a subscription for a limited partnership interest may be made irrevocable if and to the extent stated in the applicable terms of the subscription.

• Definition of Foreign Partnership. The GP Act amendments include the addition of a new definition for the term “foreign partnership” to Section 15-101. A “foreign partnership” is defined to mean a partnership that is formed under any law other than the laws of the State of Delaware; thus, this term encompasses both a partnership formed under the laws of another U.S. state or territory or a foreign jurisdiction.

• Irrevocability of Subscription. The GP Act amendments also add a new Section 15-208 that parallels the amendments to the LLC Act and the LP Act permitting irrevocable subscriptions to the extent so provided by the terms of the subscription.

• Amendment Pursuant to Agreement of Merger. As with the LLC Act and the LP Act, Section 15-902 of the GP Act is being amended to clarify that an agreement of merger or consolidation may only amend a partnership agreement or adopt a new partnership agreement for the surviving partnership in a merger or the resulting company in a consolidation rather than for another constituent to the merger or consolidation.

• Annual Reports by Foreign Limited Liability Partnerships. Section-1003 is being amended to clarify that the annual report requirement applies only to a foreign limited liability partnership and not to a foreign GP that is not a limited liability partnership.

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