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Delaware Amends Renowned Business Statutes

January 1, 2006, Scott E. Waxman

Mr. Waxman is a partner at, and Chair of the Structured Finance and Alternative Entity Group of, Potter Anderson & Corroon LLP, Wilmington, Delaware.

    In the days before the end of the 143rd General Assembly, Delaware's Governor, Ruth Ann Minner, signed into law bills amending Delaware’s renowned alternative business entity statutes, namely the Delaware Revised Uniform Partnership Act, 6 Del. C. § 15-101, et seq. ("DRUPA"), the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101, et seq. ("DRULPA"), the Delaware Limited Liability Company Act, 6 Del. C. § 18-101, et seq. ("DLLCA"), and the Delaware Statutory Trust Act, 12 Del. C. § 3801, et seq. ("DSTA").  The amendments to these statutes represent a continuing effort by Delaware to create a flexible statutory framework for alternative business organizations.  The balance of this article will touch upon some of the more significant amendments to DRUPA, DRULPA, DLLCA, and DSTA.

AMENDMENTS TO DRUPA, DRULPA  and DLLCA

ATTENDANCE AT MEETINGS BY TELEPHONIC AND OTHER EQUIPMENT

    The amendments to DRUPA, DRULPA, and DLLCA include certain clarifications regarding how meetings of partners in partnerships and members and managers in limited liability companies are conducted.  These amendments become effective on August 1, 2006.  The clarifications confirm that unless otherwise provided in a partnership agreement or a limited liability company agreement, meetings of partners or members and managers, as the case may be, may be held by conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other.  Participation in such a meeting by such means constitutes presence in person at the meeting unless otherwise provided in the partnership agreement or limited liability company agreement, as the case may be.  It has always been the case that a partnership agreement or a limited liability company agreement could provide for attendance at meetings by telephonic and other means; these amendments simply make clear that this is now a statutory default rule that may be overridden by agreement.  (6 Del. C. §§ 15-407(d), 17-302(e), 17-405(d), 18-302(d), and 18-404(d)).

FORMATION OF LLLPs FROM INCEPTION

    The amendments to DRULPA clarify that one may form a limited liability limited partnership from the moment of its inception as an entity.  (6 Del. C. § 17-214).  This amendment, which becomes effective on August 1, 2006, is similar to an amendment that was enacted in 2005 for general partnerships.  Previously, practitioners were not uniform in their approach to this issue, some taking the position that a general partnership was required to exist for a moment in time as a general partnership before it could elect to become a limited liability partnership and that a limited partnership was required to exist for a moment in time as a limited partnership before it could elect to become a limited liability limited partnership.  Concern over this issue carried through to other statutory procedures, such as conversions and domestications into limited liability partnerships and limited liability limited partnerships.  Given that the ideal situation is one in which limited liability applies from inception, last year’s amendments to DRUPA and this year’s amendments to DRULPA are very favorable additions to the statutes.

REGISTERED AGENTS AND RESPONSIBILITY TO PROVIDE INFORMATION

    The amendments to DRUPA, DRULPA, and DLLCA include a number of provisions relating to registered agents, which do not become effective until January 1, 2007.  First, these sections expand the types of entities that are permitted to serve as registered agents of general partnerships that have registered agents,[1] limited partnerships, and limited liability companies.  Under the amendments, foreign statutory trusts, domestic and foreign general partnerships and limited liability partnerships are eligible to serve as registered agents for alternative entities in addition to all of the other types of entities that have always been able to so serve.  The amendments also clarify that so-called “Commercial Registered Agents” (i.e., those providing services for more than 50 entities) are required generally to be open during normal business hours and to have a natural person present to operate their offices and communicate with the Secretary of State’s Office.  (6 Del. C. §§ 15-111, 17-104, and 18-104).

    The amendments to DRULPA, DLLCA and DRUPA also require general partnerships that have registered agents, limited partnerships, and limited liability companies to provide their registered agents with the name of a designated natural person to receive communications from the registered agent.  In turn, registered agents are required to maintain this information in their records.  The Secretary of State is also granted new powers in connection with these amendments.  First, the Secretary of State is authorized to promulgate regulations relating to the obligation for entities to provide, and registered agents to maintain lists of, the names of designated natural persons who are to receive information from registered agents.  Second, the Secretary of State is authorized to bring suits in the Court of Chancery to enjoin any person or entity who fails to comply with the new requirements from serving as a registered agent or from being an officer, director or managing agent of a registered agent if such person has been convicted of a felony or any crime which includes an element of dishonesty or fraud or involves moral turpitude.  (6 Del. C. §§ 15-111, 17-104, and 18-104).

    These amendments to DRUPA, DRULPA, and DLLCA do not affect the premium on privacy that has always been inherent in Delaware’s alternative entity laws.  It still remains the case that the names of all members and partners are not required to be set forth in filings that are a matter of public record.[2]  By ensuring that alternative entities are required to furnish names and contact information of natural persons to communicate with registered agents, these amendments help alleviate concerns that Delaware entities could be used as vehicles through which to conduct illicit activities.  In addition, by allowing the Secretary of State to bring actions in the Court of Chancery to disqualify registered agents or persons associated with registered agents who have been convicted of crimes involving dishonesty or moral turpitude, these amendments help to maintain the integrity of Delaware as the jurisdiction of choice for the formation of business entities. 

DOMESTICATIONS, TRANSFERS, CONTINUANCES AND CONVERSIONS

    Certain amendments to DRUPA, DRULPA, and DLLCA, which become effective on August 1, 2006, have been drafted to ensure that the alternative entity statutes dovetail with amendments enacted to the Delaware General Corporation Law in 2005.  For the most part, these amendments are technical in nature and confirm existing law regarding the flexibility and favorable state law consequences of domestications, transfers, transfers and continuances and conversions.  (6 Del. C. §§ 15-901, 15-903, 15-904, 15-905, 17-215, 17-216, 17-217, 17-219, 18-212, 18-213, 18-214, and 18-216).

AMENDMENTS TO DSTA

      The amendments to DSTA add flexibility to its provisions and make it consistent in certain respects with Delaware's other alternative entity statutes.  Some of the salient provisions of the amendments, all of which become effective on August 1, 2006, are detailed below.

  • Unless otherwise provided in a governing instrument, meetings of beneficial owners or trustees, as the case may be, may be held by conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other.  Participation in such a meeting by such means constitutes presence in person at the meeting unless otherwise provided in the governing instrument.  As noted above with respect to partnerships and limited liability companies, it has always been the case that a governing instrument could provide for attendance at meetings by telephonic and other means; these amendments simply make clear that this is now a statutory default rule that may be overridden in the governing instrument of a statutory trust.
  • Provided that a person has become a beneficial owner or trustee of a statutory trust in accordance with Section 3801(f)(1) of DSTA, the amendments to DSTA clarify that such person is bound by the governing instrument of such statutory trust whether or not it executes the governing instrument of such statutory trust. (12 Del. C. § 3801(f)).
  • Consistent with amendments enacted in 2005 to DRULPA and DLLCA, the amendments to DSTA now permit a statutory trust to be continued even if an event of dissolution under the governing instrument has occurred, so long as all of the remaining beneficial owners at the time of such occurrence (and any other person whose approval is expressly required under the governing instrument to revoke a dissolution) vote to revoke the dissolution.  As with the amendments to DRULPA and DLLCA, the amendments to DSTA make clear that if the event of dissolution was caused by a vote or written consent, the dissolution cannot be revoked except with the affirmative vote of each beneficial owner or other person (or their respective personal representatives) who voted in favor of, or consented to, the dissolution in the first instance.  (12 Del. C. § 3808(c)).
  • Consistent with existing provisions in DRULPA and DLLCA and the 2005 amendments thereto, the amendments to DSTA add a protective provision regarding the circumstances in which reliance on records and other information affords protection from liability.  The amendment provides that a trustee, beneficial owner, or an officer, employee, manager or other person appointed under Section 3806(b)(7) (i.e., certain agents or delegatees), is fully protected in relying in good faith upon records of the statutory trust and upon information, opinions, reports or other statements presented by one of the foregoing or by any other person as to matters reasonably believed to be within such other person’s professional or expert competence.  The new provision also provides that reliance may also be placed upon such information or such persons with respect to certain determinations in the liquidation of a statutory trust, including as to the value and amount of assets or reserves or undertakings that would be sufficient to pay claims and obligations of the statutory trust. (12 Del. C. § 3806(k)).
  • Consistent with existing provisions in DRULPA and DLLCA, the amendments to DSTA confirm that in determining the claims for which reasonable provision must be made in the liquidation of a statutory trust, one is only required to provide for claims that are likely to arise or to become known within 10 years after the date of dissolution.  Previously, there was no time limitation, theoretically requiring a liquidator to provide for claims that might arise at any time in the future.  (12 Del. C. § 3808(e)).
  • Consistent with existing provisions in DRULPA and DLLCA, the amendments to DSTA confirm that a statutory trust is a separate legal entity the existence of which continues until the cancellation of the statutory trust’s certificate of trust.  (12 Del. C. § 3810(a)(2)).
  • Consistent with amendments enacted in 2005 to DRULPA and DLLCA, the amendments to DSTA make important clarifications with respect to fiduciary duties.  As amended, Section 3806(c) of DSTA confirms that the duties, including fiduciary duties of a trustee, beneficial owner, or other person to a statutory trust, another trustee, a beneficial owner or another person may be eliminated, in addition to being expanded or restricted.  While practitioners have long held the belief that duties, including fiduciary duties, could be eliminated in alternative entities, language in certain cases over the past few years cast some doubt on that position given the view of certain members of the bench that the statutes did not include the word “eliminated” and that the word “restricted”, as used in the statutes, might not be capable of being interpreted to restrict to such a degree that one has effectively eliminated such duties.  The amendments to DSTA, like their predecessors in DRULPA and DLLCA, confirm the ability for such duties to be eliminated, subject to the implied contractual covenants of good faith and fair dealing.  New Section 3806(d) clarifies that the default exculpation provision of DSTA applies only with respect to breaches of fiduciary duties.  Finally, new Section 3806(e) mirrors the amendments to Sections 3806(c) and (d) by providing that a governing instrument may provide for partial or complete exculpation (i.e., elimination of liability) for breaches of contract and breaches of duties, including fiduciary duties.  The new language in Section 3806(e) makes clear, however, that a governing instrument may not provide exculpation (i.e., may not limit or eliminate liability) for any act or omission that constitutes a bad faith violation of the implied contractual covenants of good faith and fair dealing.  (12 Del. C. §§ 3806(c), (d), and (e)).
  • To provide more clarity as to the circumstances under which it is not necessary to qualify as a foreign statutory trust in the State of Delaware, the amendments to DSTA set forth a list of activities that do not constitute “doing business” in Delaware.  (12 Del. C. §§ 3852(b), 3863).
CONCLUSION

      By clarifying existing law where the clarifications were deemed beneficial and creating more flexibility where additional contractual freedoms were viewed as advantageous, the recent amendments to DRUPA, DRULPA, DLLCA, and DSTA continue Delaware's leadership as the jurisdiction of choice for the formation of all types of business entities.

NOTES

[1] General partnerships are not required under DRUPA to make any filings with the Secretary of State.  To the extent that filings, such as a Statement of Partnership Existence, are made, a general partnership is required to appoint a registered agent.

[2] As has always been the case, the name and address of all General Partners must be set forth in a Certificate of Limited Partnership of a limited partnership.