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On August 1, 2018, a new Section, 18-217 was added to the Delaware Limited Liability Company Act, permitting a single Delaware LLC to divide into two or more Delaware LLCs. The original dividing LLC can continue to exist or terminate as part of the division.
A statutory division can be useful for several purposes including spinning off or selling a line of business.
Here are some things LLC owners, managers, or counsel who think a division could be beneficial may wish to know about this new statutory option.
In order to enter into a division, a Delaware LLC first has to adopt a plan of division. The plan has to set forth the following:
The next step is for the plan of division to be approved. The plan is to be approved in the manner specified in the LLC agreement for approving a division. If there is none specified, then it is approved in the manner set forth in the LLC agreement for approving a merger or consolidation. If the LLC agreement is silent on the approval of mergers or consolidations, then the plan must be approved by members who own more than 50 percent of the then current percentage or other interest in the LLC’s profits.
After the plan is approved a Certificate of Division must be filed with the Secretary of State, which states the following:
If the dividing LLC will not survive, the Certificate of Division acts as a Certificate of Cancellation.
A Certificate of Formation must be filed for each resulting LLC, simultaneously with the filing of the Certificate of Division. A Certificate of Formation is required to set forth the LLC’s name, the registered agent’s name and registered office address. If the division is not to become effective upon filing, the Certificate of Division and each Certificate of Formation must have the same future effective date.
CT Tip: In addition to the filings required in Delaware to effect the division, filings may also be necessary in other states as a result of the division. For example, if the original LLC will not survive, filings would be required in all states where it was registered to do business as a foreign LLC to remove the LLC from these records. In addition, the resulting LLCs will have to register to do business in foreign states where they will be transacting intrastate business.
When the division is effective, each of the Delaware LLCs resulting from the division will be liable for the debts, liabilities and duties of the original dividing Delaware LLC as are allocated to them pursuant to the plan of division.No other Delaware LLC resulting from the division will be liable for the original LLC’s obligations unless the plan of division constitutes a fraudulent transfer.
Debts and liabilities of the original dividing LLC that are not allocated by the plan of division will be the joint and several debts and liabilities of all the resulting LLCs.
For further information on LLC divisions, please consult Title 6, Sec. 18-217 of the Delaware Code.
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