On April 6, the Delaware Corporation Law Section of the Delaware Bar Association proposed some major and minor amendments to the Delaware Limited Liability Company Act. If introduced in and approved by the Delaware General Assembly and the governor, one of the most significant changes will involve the provisions of the act dealing with series limited liability companies (series LLCs). The proposed amendments are intended to clarify the characteristics of series LLCs and further facilitate their use.
Series LLCs are most frequently used as vehicles for investment funds and for holding title to assets in certain types of equipment financing transactions. In these types of transactions, assets are distributed from the "master" LLC into separate series of the LLC. Each series can have its own pool of assets titled in the name of the series LLC and each may have its own investment, return or management criteria. Set up in this way, the series LLC can greatly reduce the administrative costs and burdens that would otherwise be present in these types of financings or investment vehicles.
More widespread use of the series LLC has been hindered, in part, by confusion over the interpretation of the statute and the interaction between a series LLC and the Delaware Uniform Commercial Code (the UCC). The series LLC has been widely misunderstood to constitute only a series LLC having the statutorily mandated limitation on liability language in the certificate of formation of the LLC. However, the proposed amendments attempt to make clear that a series LLC includes a series LLC formed under current Section 18-215(a) without the limitation on liability language in the certificate of formation (a series), a series LLC formed under current Section 18-215(b) with the limitation on liability language in the certificate of formation (a protected series), a series LLC formed under new Section 18-218(a) without the limitation on liability language in the certificate of formation and registered with the Delaware Secretary of State (a registered series) and (a series LLC formed under new Section 18-218(b) and (c) with the limitation on liability language in the certificate of formation and registered with the Delaware Secretary of State (a registered protected series).
The proposed amendments will clarify the applicability of certain UCC provisions to series LLCs. The UCC uses the term "registered organization" in setting forth the rules to determine the location of a debtor. It has been unclear whether a series LLC fell within the meaning of this term. There was also some question as to whether a series LLC was a "person" within the meaning of Article 1 of the UCC. The proposed amendments clarify that both a protected series LLC and a registered series LLC are "associations," which fits those types of series LLCs into the definition of a person for UCC purposes.
In order to better understand the proposed amendments, it is helpful to review how the act is currently constructed. A series LLC may presently exist in one of two forms: those series established pursuant to Section 18-215(a) of the act, and those protected series established pursuant to Section 18-215(b) of the act. A series established pursuant to Section 18-215(a) requires that the limited liability company agreement establish or provide for the establishment or one or more designated series of members, managers, limited liability company interests or assets and allows that any such series may have separate rights, powers or duties with respect to specific property or obligations of the limited liability company or profits and losses associated with specified property or obligations. It also provides that a series may have a separate business purpose or investment objective. A series formed in this way does not require any additional filings with the state, does not include limitation on liability language in the limited liability company agreement, or in the certificate of formation of the limited liability company.
To create one or more protected series under the present iteration of Section 18-215(b): the limited liability company agreement must provide for the establishment of such series; the limited liability company agreement must provide that the records maintained for any such series account for the assets associated with such series separately from the other assets of the limited liability company, or any other series thereof; the limited liability company must account for the assets associated with any such series separately from the other assets of the limited liability company or any other series, and the limitation on liability language set forth in Section 18-215(b) must be included in the limited liability company's certificate of formation. If these steps are followed, then the act provides that the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series. In addition, unless otherwise provided in the limited liability company agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series.
Importantly, a protected series formed pursuant to Section 18-215(b) may hold assets in the name of such protected series. A protected series established pursuant to Section 18-215(b) has the power and capacity to, in its own name, contract, hold title to assets, grant liens and security interests, and sue and be sued.
The proposed amendments to Section 18-215(a) will continue to provide for the establishment of a series as discussed above, but language will be added to make clear that the other additions to the act are not to be construed to limit the principle of freedom of contract to a series that is not a protected series or a registered series.
The proposed amendments to Section 18-215(b) are primarily intended to introduce and apply the new term "protected." A protected series established pursuant to the proposed amendments to Section 18-215(b), will essentially be a series established pursuant to Section 18-215(b) prior to the amendment, except that, henceforth, such a series will be known as a "protected series." Such protected series will be established in the same manner and will have similar rights, powers and characteristics as a series established under the previous iteration of this Section 18-215(b). The new term will highlight the limitation on liability feature of series established under Section 18-215(b) and add clarity to the idea that such a series is distinct from a "series" established pursuant to Section 18-215(a) and a "registered series" established pursuant to new Section 18-218. A notable addition in the proposed amendments is Section 18-215(b)(12), which provides that a protected series is an "association." This addition will operate to clarify that a protected series meets the definition of "person" found in Article 1 of the UCC.
The proposed amendments further introduce the concept of "registered series" in new Section 18-218. If adopted, this new section will provide that a series of a Delaware LLC may be registered with the Delaware secretary of state by filing a certificate called a "certificate of registered series." Such a series shall be referred to as a "registered series." A registered series can be of two varieties. In order to establish the first type of registered series: the limited liability company agreement must provide for the establishment or formation of one or more series; and a certificate of registered series must be filed in accordance with Section 18-218(d). The certificate of registered series must set forth the name of the limited liability company and the name of the registered series. Pursuant to proposed Section 18-218(e), the name of a registered series as set forth in the certificate of registered series must begin with the name of the limited liability company and must be distinguishable from other entities, series or otherwise, on the records in the office of the Delaware secretary of state.
A registered series formed in this manner will have all of the powers and characteristics of a registered series described in Section 18-218(c), but will not have the limitation on liabilities described in Section 18-218(b).
The second type of proposed registered series is a series that complies with the requirements of a registered series as set forth above, but has also complied with Sections 18-218(b) and (c), which adds the limitation on liabilities characteristics found in a protected series. Pursuant to such proposed sections, if the certificate of formation of the limited liability company sets forth notice of limitation on liabilities as referenced in Section 18-218(c), and to the extent the records maintained for a registered series account for the assets associated with such series separately from the other assets of the limited liability company, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to such series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof, and, unless otherwise provided in the limited liability company agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series.
In order to establish this second type of proposed registered series: the limited liability company agreement must provide for the establishment or formation of one or more series; the certificate of formation of the limited liability company must set forth a notice of limitation on liabilities as referenced in Section 18-218(c), and a certificate of registered series must be filed in accordance with Section 18-218(d). This type of registered series is also subject to the naming conventions set forth in Section 18-218(e).
The concept of a registered series may alleviate some confusion when dealing with Article 9 of the UCC. As a result of these proposed amendments, a registered series may more clearly fall within the meaning of a "registered organization" in Section 9-102(71) of the UCC, which in turn may add clarity to the name and location of a registered series as a debtor, as used Section 9-307(e) of the UCC. Pursuant to proposed Section 18-218(c)(12) of the act, a registered series is also an association. As discussed with respect to protected series above, this designation operates to fit a registered series into the definition of a "person" found in Article 1 of the UCC. Additionally, once a certificate of registered series is filed, the Delaware secretary of state may issue a good standing certificate with respect to such registered series unless the certificate of registered series is canceled or the limited liability company itself ceases to be in good standing.
The proposed amendments also include new sections providing for the conversion of a protected series into a registered series, the conversion of a registered series into a protected series, and the merger and consolidation of registered series.
The proposed amendments discussed above add clarity to the characteristics of series limited liability companies and are likely to help increase their use.
Delaware Business Court Insider, May 9, 2018
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