State Legislative Updates

Delaware Amends Its Series LLC Law

Delaware Amends Its Series LLC Law

On August 1, 2019, significant amendments to the Delaware Series LLC law will go into effect. These amendments were enacted by Senate Bill 183, which was signed by Delaware’s governor last year.

Background

In 1996 Delaware became the first state to permit the creation of a Series LLC. Although many Series LLCs have been formed since then, the use of these entities has been inhibited by uncertainties as to how a series will be treated under certain laws, including tax laws, foreign qualification laws, bankruptcy laws, and the uniform commercial code.

In particular, there have been questions about whether a series can be a debtor under Delaware’s UCC law, and if so how it can be named on a financing statement and where that financing statement would be filed. Delaware – famously known for adapting its business entity laws to clarify issues of concern to practitioners – has done it again by amending the LLC Act to clarify the applicability of its UCC law to series of Delaware Series LLCs.

Establishing a Series

Sec. 18-215 of the LLC Act is the original section governing Series LLCs. Sec. 18-215(a) provides that a Delaware LLC can establish in its LLC agreement series of members, managers, LLC interests, or assets. Each series can have its own rights, powers, or duties with respect to specified property or obligations of the LLC, or profits and losses associated with specified property or obligations, and can have its own purpose or investment objective.

Sec. 18-215(b) establishes the liability shield. It provides that if the LLC agreement establishes series and the records maintained for each series account for the assets of that series separately from the assets of the LLC or other series, and notice of the limitation on liabilities is set forth in the LLC’s Certificate of Formation, then the debts, liabilities, obligations, and expenses existing with respect to a series will be enforceable against the assets of that series only and not against the LLC or any other series.

Protected Series

S.B. 183 amends Sec. 18-215(b) to introduce the term “protected series”. A series established pursuant to Sec. 18-215(b), as amended, will be known as a protected series. The term “protected series” emphasizes that the series is protected against the liabilities and obligations of the LLC itself and other series. It also distinguishes it from a series without liability protection and from a registered series formed under Sec. 18-218.

Registered Series

Sec. 18-218 is added by S.B. 183 to introduce the concept of a “registered series”. A registered series is established in the LLC agreement. It has a liability shield if it meets the same criteria that a protected series must meet.

However, unlike a protected series, a registered series is formed by filing a certificate of registered series with the Delaware Secretary of State that sets forth the LLC’s name and the name of the registered series. The name of a registered series must begin with the name of the LLC and must be distinguishable upon the records of the Secretary of State from the names of other series and domestic and qualified business entities.

Series LLCs and the UCC

These amendments are intended mainly to facilitate the use of series in financing transactions by clarifying the applicability of Delaware’s UCC law to Series LLCs.

S.B. 183 provides that protected series and registered series are “associations” for all purposes of Delaware law. This is intended to clarify that these series are “persons” for UCC Article 1 purposes, and therefore “organizations” that can be a debtor under the UCC.

Furthermore, because a filing with the Delaware Secretary of State is required to form a registered series, it should meet the definition of a “registered organization” under Article 9 of the UCC. Under Article 9 a secured lender can perfect its security interest against a registered organization by filing a financing statement in the debtor’s state of organization. The name requirements should clarify how to name a debtor registered series in the financing statement. In addition, the Delaware Secretary of State will issue a certificate of good standing for a registered series that is in good standing, and that may also encourage lending to series.

Conclusion

Practitioners and others using or considering using a Delaware Series LLC may wish to take note of these upcoming important changes to the law. 

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