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[Music] [Applause] please be advised that this recorded webinar has been edited from its original format which may have included a product demo to set up a live demo or to request more information please complete the form to the right or if you are currently not on csu global there is a link to the website in the description of this video thank you hello everyone and welcome to today's webinar first date update 2020 case law developments and updates to delaware's llc act my name is annie tribaletti and i will be your moderator joining us today are guest speakers matt o'toole chris kelly and mike maxwell of potter anderson and karoon and with that let's welcome that chris and mike annie thank you this is matt o'toole good morning everyone thank you for joining us today we're going to cover case law developments and the recent statutory amendments to the delaware llc act and chris my partners chris kelly and mike maxwell will carry the laboring ore in terms of that discussion and each of them is well positioned to discuss the topic that he's going to cover chris has an active practice in the delaware chancery court including a variety of llc cases and mike has an active transactional practice addressing llc issues among other things and he also sits on the committee of the delaware bar association that is responsible for supporting our delaware legislature in its efforts to keep the llc act and other business organization statutes current and uh and up to date so with that i will turn things over to chris to talk about recent llc and alternative entity case law developments chris thanks matt good morning everyone uh today like we we've done in prior years we're going to discuss three recent llc and actually one uh limited partnership uh case that will you know have potential ramifications and application in the llc context uh that we'll we'll cover today the first case that we'll discuss today is the sky mineral investors versus dxs capital case and that's a quarter cancery decision where in in that case the majority members of a delaware llc sky mineral partners brought suit against the minority members and others alleging that the defendants engaged in a scheme to drive the company's operating subsidiary into bankruptcy in order to acquire its assets on the cheap the the court analyzed the defense motion to dismiss the complaint and the in its decision the court granted in part and denied in part the motion i'm not going to go into the court's analysis as to every claim but we'll focus on the primary issues for our purposes today according to the complaint the company's operating subsidiary owned mineral deposits and the company was trying to develop and monetize those assets including securing a 30 million dollar loan the minority members who were defendants their board representative allegedly learned that the mineral deposits were worth some 600 million but instead of informing the board of that fact the board designee allegedly informed certain minority members and their affiliates defendants allegedly entered into a scheme then to drive the subsidiary into bankruptcy in order to obtain the mineral rights cheaply the minority members allegedly perpetua perpetrated this scheme by exercising the blocking rights to starve the company of capital causing the subsidiary to default on the loan thereby driving the subsidiary to bankruptcy where an affiliate of the defendants purchased the assets the majority members brought suit against the minority members their affiliates and the lender for breach of contract bridge fiduciary duty aiding and abetting and fraud the defendants moved to dismiss the complaint the court of chancery rejected the defendant's argument that the court lacked personal jurisdiction over them based on the conspiracy theory of jurisdiction finding that the plaintiff's claim supported an inference that the non-member affiliates implemented a plan to starve the company of capital drive the subsidiary into bankruptcy and acquire the mineral deposits on the chief and that there were acts in delaware to further the conspiracy to defer jurisdiction with regard to the defendant's arguments that the complaint failed to state a claim the court found that the plaintiffs adequately pled a claim for breach of contract against the defendant minority members due to their alleged breach of the confidentiality obligations under the llc agreement allegedly leaking the information about the mineral deposits to the non-member defendants regarding the breach of fiduciary duty claims against the minority members board designee the court found that the llc agreement imposed by contract the same fiduciary duties as the common law except for the corporate opportunities doctor the court then found that the plaintiffs had adequately alleged that the board designee used his fiduciary status as a manager to harm the company noting that the designee allegedly leaked confidential information while concealing it from his fellow board members and reasoning that a fiduciary cannot intentionally sit back while his company collapses so that the fiduciary affiliate can buy the company's assets on the cheap in regard to the manager's alleged breaches of fiduciary duty the plaintiffs also allege that the manager was acting as an agent of the non-member affiliates and that therefore those defendants were liable for the manager's breaches of fiduciary duty based on an agency wall concept the court rejected the plaintiff's claim reasoning that the plaintiffs failed to allege that the non-member affiliates had a right to control the manager or force him to take the wrongful actions rather the manager exercised his own rights and obligations as well the court projected the plaintiff's claim that the non-member affiliates were liable for breach of fiduciary duty under a control theory because they did not own any units of the company appoint managers or have blocking rights in contrast the breach of fiduciary duty claims against the minority members withstood the defense motion to dismiss and we'll talk about this in a little bit more detail later the court found that the minority members blocking rights and the minority members use of those blocking rights led to an inference of actual control over the company and that they use their blocking rights in bad faith regarding the plaintiff's aiding and abetting claims the court denied the motion to dismiss those claims against the non-member affiliates finding that the members had adequately played finding that the plaintiffs had adequately played the non-member affiliates knowing participation in the alleged scheme to force the subsidiary into bankruptcy however the court granted the motion to dismiss the aiding and abetting claims against the lender finding the lender was simply a third-party commercial counterparty that provided a loan at arm's length got quote stiffs for 30 million and then ended up having to sell the loan at a substantial loss undercutting any inference of knowing participation chris this is something this is yep go ahead sorry go ahead i mean no no yeah no go ahead matt yeah i i was going to say that's that's a lot to unpack uh from from this case but uh is that uh does that conclude your overview of the case or did you have more to say about it yeah so that that that's the the summary of the case there are some practice points that are important to note for example with respect to the board designee who allegedly leaked information to the the other defendants and withheld that information from his fellow directors allegedly it's important to point out a few things one directors in in certain contexts have disclosure duties to their other directors so for instance delaware courts have long held that there may be a duty to disclose that adheres in the duty of loyalty such that the intentional failure or refusal of the director to disclose to the board a defaultation or scheme to defraud the corporation of which he has learned itself constitutes a wrong the duty to disclose as i mentioned it may arise in certain contexts it's not a general duty to disclose everything the director may know but rather the director disclosure cases implicate circumstances in which the director may be personally engaged in transactions harmful to the company but beneficial to the director or his affiliates and so uh here there was a a intentional alleged intentional failure to disclose to the other directors or managers that there was a significant value in the mineral deposits and at the same time a leak of an alleged leak of that information to others in order to perpetuate this scheme and so that that was part of the the court's basis for uh allowing the the the claim to withstand the motion to dismiss at the same time uh unpacking that further directors and officers generally have a fiduciary duty not to misuse or disclose the company's confidential or proprietary information and there was an allegation there uh in sky that that was done to further the scheme and to acquire the the mineral rights out of out of bankruptcy on the jeep and then a a third practice point to to note is that fiduciary duties may be owed by minority investors in certain contexts from the exercise of blocking rights as as we all know generally minority stockholders or minority investors do not owe fiduciary duties that's limited to directors officers and majority or controlling stockholders and that minority stockholders generally do not owe fiduciary duties however there are circumstances where fiduciary duties may arise and one of those is where blocking rights are exercised to the point where the the minority investor channels the company into a particular outcome by blocking or restricting other paths that that could lead to a finding the fiduciary duties were owed based on an inference of actual control so so chris a takeaway for business planners sort of picking up on your last point there in the context of an llc where there's contractual freedom if if you are representing a minority member who might have certain consent rights there is the ability to craft restrict even eliminate fiduciary duties right that's right the commonwealth fiduciary duties generally apply in the llc context but the act specifically 181101c authorizes drafters of llc agreements to expand restrict or eliminate a member or manager's duties including fiduciary duties the only restriction on that as as we know is that an llc agreement can't eliminate the implied covenant of good faith and fair dealing which adheres in every contract under delaware law so as as usual with llc's the contract is king and you you better pay attention to the king that's right so returning to our next case that's the the walsh versus white house case there that was another delaware chancery court decision which granted in part and denied in part a defense motion to dismiss there the claims were for breach of contract breach of the implied covenant and specific performance where the court found that a buyout provision in an llc agreement constituted a call option and that once the company exercised that option to report to purchase a departing members units the company could not then withdraw from that contractual purchase process for and refuse to purchase the plaintiff's membership units so returning to the facts of that case the plaintiff minority members and the defendant majority member white house founded the company defended carbon visual effects llc the limited liability company agreement contained a buyout provision that stated in pertinent part that in the event that a member ceases to be employed by the company for any reason the company shall have the right to purchase such members units and such member shall have the obligation to sell such units to the company if the company evoked that right the llc agreement established a multi-step process for valuing the members units first the company would select an appraiser to value the units if the member disagreed with that appraisal the member could identify its own appraiser and in the event that that member's valued the units more than 10 higher than the company's appraiser the two appraisers would jointly designate a third appraiser whose appraisal would control and bind the parties so in 2018 the company elected not to renew the plaintiff's employment notified the plaintiffs of the company's intent to repurchase their units and obtained an appraisal in response the plaintiffs informed the company that they intended to seek their own appraisal the company then changed tac telling plaintiffs it was no longer exercising its right to purchase their units plaintiffs however proceeded with getting the second appraisal which returned a value of more than 10 percent higher than the first appraiser's value and requested that the company follow through and and help identify a third appraiser the company did not respond plaintiffs then sued the company and the majority member white house for breach of the llc agreement breach of the implied covenant of good faith and fair dealing and specific performance of the buyout provision defendants moved to dismiss her failure to state a claim in addressing the breach of contract claim the court rejected the defendant's argument that the company's notice of its intent to purchase was a revocable offer finding that the buyout provision was instead a call option that had two pieces one there was an underlying agreement in the form of the company's right to purchase the plaintiff's units under the llc agreement and then there was the collateral promise on the part of the plaintiffs in the form of their obligation to sell their units to the company though the company had the choice under the llc agreement whether to accept the offer or not the company was bound to the underlying agreement to purchase the plaintiff's units once it accepted the offer by invoking the provision the court found it reasonably conceivable that the company accepted the plaintiff's underlying offer to sell their units by notifying them of the of its intent to purchase and by subsequently undertaking the first step of the appraisal process accordingly the court held that the complaint dated a claim against the company for breach of the llc agreement buyout provision the court in contrast granted the motion to dismiss with respect to the plaintiff's implied covenant claim holding that the buyout provision fully addressed the company's ability to withdraw from the transaction and therefore there was no contractual gap with the implied covenant of good faith and fair dealing to fill with respect to the specific performance claim the court denied the motion to dismiss rejecting the defendant's argument the plaintiffs were not willing to perform the contract because the complaint thought an appraisal process that would ignore minority and illiquidity discounts required by the llc agreement that could result in a lower valuation while noting that the plaintiff's interpretation of the contract so is to try to avoid those discounts was quote a reach the court reasoned that by seeking specific performance the plaintiffs demonstrated that they were willing to perform the contract lastly the court granted the motion to dismiss the claims against the majority unit holder white house because it did not have any obligations under the buyout provision so that's the summary of the walsh case i think you know as far as the takeaways go it's important to note that many llc agreements have buyout provisions similar to the provision in the walsh case and that depending on the particular terms and language of the the buyout provisions in in the llc agreement once invoked by the company there may be an obligation to complete the process depending on the precise language of the contract so so the advice for a company that's exercising a call right or contemplating exercise of a call right such as was involved in this case might be look look before you leap and insofar as we're again talking for the benefit of business planners there is the ability to draft those provisions in such a way as to provide some latitude for the company wouldn't that be a fair statement chris yep that's that's precisely right matt another another point to note and this is more of footnote is that uh the with respect to the analysis of the implied covenant by the court it's it's important to note that the implied covenant in years in every contract governed by delaware law but that it is a a narrow gap filler and so if the contract expressly covers the issue at hand then there's no room for the implied covenant to operate so the court will not rewrite a contract simply because a party later wishes it got a better deal and the implied covenant is rarely invoked successfully and oftentimes it's it's not you know for litigators out there if you have a contract provision that precisely covers the the issue at hand you know it may not make sense to bring an implied covenant claim because it could suggest to the court that your case isn't quite as strong on your preacher contract case as opposed to your implied covenant claim uh and so you know be careful uh in bringing an implied covenant claim if you feel you have strong contract language uh that clearly addresses the issue well chris that that's interesting because there is a rule i believe that in so far as a party is attempting to plead a claim for breach of the implied covenant one of the pleading requirements is that the the implied obligation is to be alleged with some measure of particularity and i guess the the practice point for litigators apart from your appropriate caution about whether you want to go down that path in the first place is that you really ought to be able to articulate an implied obligation to be pleaded um the breach of which should be should be pled and and you need to be comfortable that the subject matter that implicit obligation is not in fact stated in the agreement yep exactly and and i think it you know in the walsh case it is uh it is not always foreseeing that uh i i think there you know there's a a fair interpretation of the case that this was kind of a uh unusual situation where the contractual buyout process was started and then it was halted and so you know in that circumstance it it it's not you know unreasonable to have you know perhaps brought the implied covenant claim as as an alternative ground but uh in in a general sense if you feel you have strong contract language and you can't as matt mentioned if you can't articulate a the what the implied obligation is because the contract language is is expressed expressly covering the issue then you know it it may not make sense to bring the implied covenant claim at all and suggest that your case is is weaker than it really is right so turning to the third and final case we'll discuss today that's the delaware supreme court's decision in in murphy and in that case it was a three to two opinion by the delaware supreme court which reversed the court a chance for a decision that the limited partner plaintiffs were not entitled to certain books and records because they were not necessary and essential to the purpose of valuing their ownership stakes the majority of the court held that the limited partners were entitled to the books and records by the plain language of the partnership agreements without regard to the inspection statute set forth in 17305 of the delaware limited partnership act or any showing that the documents were necessary and essential to the plain of stated purpose by way of background the plaintiffs were limited partners and had demanded books and records under section 17305 of the delaware limited partnership act as well as partnership agreement provisions for the stated purposes of valuing their ownership interest in the partnerships and or investigating potential wrongdoing and mismanagement the partnerships had agreed to make many of the documents available aside from the other limited partners schedule k-1s that were part of the partnership's tax returns so the limited partner plaintiffs filed suit in the court of chancery seeking among other things the other limited partners schedule k-1s in the court of chancery the court determined that there was no credible basis to suspect possible wrongdoing but that the plaintiffs had stated a proper purpose of valuing their ownership interest the court of chancery further held however that the relevant provisions of the partnership agreements incorporated the proper purpose requirement from section 17 305 as well as the corresponding requirement that the requested books and records be necessary and essential to the plan of stated purpose which the court attributed to 17305 based on the [Music] many years of case law applying the analogous provision from the delaware general corporation law section 220. the court found that the limited partner plaintiffs had failed to show that the other limited partners schedule k-1s were necessary and essential to their stated purpose and therefore had failed to prove an entitlement to the other limited partners k-1s on appeal the delaware supreme court majority by 3-2 margin concluded that the limited partner plaintiffs were entitled to the other partners k-1s under the plain language of the partnership agreement because the limited partners were entitled to the k-1s under the partnership agreements the majority of the court did not address whether the limited partner plaintiffs would have been entitled to the k-1s under section 17305 of the limited partnership act or whether section 17305 incorporated the necessary and essential requirement uh analogous to the delaware general corporation law section 220. in that regard the majority specifically noted that whether a necessary and essential requirement should be implied to section 17305 was an issue of first impression for the court and that no supreme court case had applied the necessary and essential requirement of section 220 in the alternative entity context the majority declines to imply such a necessary and essential requirement in the partnership agreements noting that courts should be carry about implying contractual terms that the drafters of partnership agreements could easily have expressly addressed the majority found that the partnership agreements permitted limited partners to obtain books and records for purposes reasonably related to the limited partners interest as a limited partner and did not expressly require satisfaction of a necessary and essential requirement the partnership agreements specifically provided that limited partners were entitled to then full names and last name addresses of each partner as well as capital contributions partnership interests of each partner as well as tax information the specific identification of tax returns and capital contributions in the partnership agreement in the view of the majority of the court highlighted the importance of such information and the majority found that their the k-1s fell within the scope of the expressly enumerated categories of documents that within the partnership agreements turning to the descents view they believed that the language in the partnership agreements which tracked section 17 305 should be interpreted consistent with the statute because the parties would have expected that using that same language would lead to the same not different results according to the descent section 17 305 tracks section 220 and the court of chancery had interpreted section 17 305 by looking to section 220 for for many years the parties therefore in the court in the sense view would have understood section 220 necessary and essential requirement as applying to section 17 305 as well as the partnership agreements by their having used the the same language the dissent disagreed with the majority that the necessary and essential requirement did not apply to the categories of documents specified in the partnership agreements because such an interpretation would have provided the limited partners with an unconditional right to all of the documents listed for any proper purpose finally the dissent disagreed that the general partner's decision not to have established standards for inspection of books and records provided the limited partners with an unconditional right to inspect documents for any proper purpose because it would be inconsistent with the requirement that the inspection be for purposes reasonably related to the limited partners interest as a limited partner and to eliminate the requirement that the books and records be related to the stated purpose the descent viewed would read the word for out of the partnership agreement provision and so that's that's the murphy case and can i just jump in real quick this is matt just to address some of the questions that are that are coming in uh over the live feed for for purposes of clarification murphy is a limited partnership case the the question at issue was uh involved the inspection rights of limited partners in a delaware limited partnership and and the reason we're talking about the case here is not because it's an llc case but because quite possibly by analogy given the the similarities between the lp act and the lc llc act the the the result in murphy could be applied in an llc setting so that's why we're talking about this case today and and the other point that i'll just note very much in passing is that the discussion of the corporation law in murphy in interpreting the uh the contract in at issue and and its background language from the lp act raises the question of when it's appropriate to invoke corporate law in an alternative entity context like an llc or limited partnership not always appropriate but in a situation like this where there's similar statutory language and in this case language used in a in a contract it may well be appropriate to to resort to corporate law precedence and corporate law principles so with that in response to some of the questions that have come in online chris while you were you were talking i'll i'll ask you just broadly in regard to murphy is this is this outcome um in a divided supreme court decision is this uh uh or surprising result in some respects in one sense a little bit in in and in one sense not not really i i think the the case was decided based on on the specific language in the contract and in and and the language of the partnership agreements was was such that it was you know fairly uh interpreted as providing a an explicit right to review the the tax documents and that would have included the the other limited partners uh schedule k ones which um are you know you know may well be viewed as part of the overall tax returns of of the partnership uh in the view of of the majority of the court in in one sense um it was a little bit surprising in that the court the majority suggested that it was it was not clear that there was a necessary and essential uh requirement to you know aside from an explicit right to review certain you know specified documents it was it was a little surprising that the court suggested that there was not a a necessary and essential requirement in section 17305 i think given the the many years of um the delaware courts particularly the court of chancery looking to section 220 precedent which which you know interpreted uh or applied necessary in a central requirement that that there would be a a similar necessary and essential requirement in 17305 as well as the llc equivalent which is section 18305 um so so that was a little surprising um i i would expect that that question will be answered uh you know at some point down the road by the court um you know my you know my guess is that and it's you know just a guess so my guess is that given the the rich you know precedent from the court chancery of looking to section 220 um that that the court will ultimately you know find there is a necessary and essential requirement but um that's just just my my personal guess um you know and it's important to note that you know as far as the the other limited partners schedule k-1s you know as matt mentioned the the contractual freedom provided by the alternative entity statutes provide a lot of flexibility to either specify what what you want to allow your limited partners or or unit holders in llc to to be able to to examine and inspect and what what they're not permitted to to inspect and so if you you have a partnership agreement or limited liability company agreement inspection or books and records provisions it's uh important to to take a look at them and you know update them to to make sure that they fairly and precisely uh express what the uh what you want the rights uh of of your uh investors to be with respect to inspection of of the the company's books and records right so so chris the the llc that's named in the caption of the murphy case was actually the general partner of the of the other defendants that were the actual limited partners partnerships excuse me uh with respect to which inspection of books and records was was sought so so mike uh just sort of to loop you into the conversation here if you're advising a gp in the um aftermath of the murphy decision uh with respect to existing partnerships or with respect to to new you know with respect to new partnerships as as chris was saying uh you want to be careful about drafting in regard to existing partnerships limited partnerships any any sort of practice pointers that that you would advise uh gps to look at yeah look i think chris is exactly right as far as the the the contractual drafting and considering you know look at your provisions look at what you have in there you know as this case demonstrates broad contract rights are going to be enforced and you know even if you are tracking the language in 17305 or 18305 and thinking that that's going to result in a necessary and essential requirement being read into that i think you know as chris alluded to that there's some surprise i think among some of the practitioners that that that wasn't the case um and you know clearly the court punted on the issue of the of whether it would apply to the statute in the first place but i think as far as contract drafting a lot of practitioners kind of took that view and that's why i think the the dissent was was getting at uh but yeah so so broad contract rights are going to be enforced but but to chris's point and i think to the extent that you have these types of provisions uh addressing books and records in your partnership agreements or llc agreements the key is to look at those provisions and that to parse out what exactly the rights are that they're providing and to consider whether there's an ability to amend or or update those provisions to further express limitations on what rights should be provided it's it's a little bit easier when you are you know first drafting a partnership agreement or an llc agreement to provide those uh restrictions uh 18305g and i think it's 17305 f both permit you to restrict rights for members or managers to obtain information as in an original llc agreement but also in any subsequent amendment approved or adopted by all the members or in compliance with any applicable requirements of the llc agreement so to the extent that there's an ability to amend or update your provisions to avoid these types of results to the extent that that's the desire uh you know party should consider that as well and again coming back to the necessary and essential point um you know since that is a point that's that's not necessarily clear now as to whether um you know books and records under 18 220 would apply to the statutes of 17305 and 18305 and then you know even further into the contractual language even if it tracks those statutes uh i would say go ahead and insert that in if that's something that that you want to have is limitation in your in your provisions and and to what types of books and records can be requested and have to be provided by the managers or the general partners uh you should probably consider putting that in there expressly uh so at this point we're going to turn things over to mike to talk about the recent amendments to the delaware llc act and i thought mike it might be helpful before you launch into the particulars of this year's amendments maybe just provide a high-level overview of the the legislative amendment process in delaware which i think is still somewhat unique sure and thanks matt and good morning everyone as matt said uh we're discussing recent amendments to the act and i do think it's helpful to discuss the process because as you can imagine this year has been an unusual year because of the pandemic but amendments were still adopted and so looking at the process for adopting these amendments the legislative process in delaware relies on a public private partnerships between the legislative assembly and the delaware bar association and specifically entity statutes in delaware are handled by a corporate council and llc and related alternative entity amendments are uh reviewed and proposed by a subcommittee of that um corporate council of the delaware bar association and and those uh amendments you know it's made or the committee the subcommittee is made up of practitioners from the delaware bar uh representing a number of different firms large and small and so as as issues arise throughout the course of a year or two um whether it's through cases or through uh practice you know transactions or whatever it may be as those issues arise and we we find um things in the statute that may need to be updated or clarified or or wholesale amended or changed to to work better or more efficiently as those things arise they're brought before these the subcommittee and and uh vetted and considered and discussed uh ad nauseum and and as that process you know winds through the the subcommittee um in addition i should mention that we also work with certain of the agencies government agencies for example the delaware secretary of state to consider updates and amendments to the various entity statutes that they may request and so as these proposed amendments are brought in front of the committee they're discussed and as languages agreed upon and vetted throughout the course of the year ultimately they're put into a bill format and submitted to the legislature for their consideration and as part of this consideration process leadership of the the drafting committee will often go down and testify uh meet with legislature or legislators or and as well as testify in front of the legislature and the various committees answer questions and address any concerns they may have and and matt has served recently as as the chair of that committee and and so i i know this year things may have been a little bit different but matt did did you testify or have to give any testimony via electronic means like zoom or was how was that process any different this year it was it was uh considerably different from from prior years there was no live testimony and the the input that the legislature sought from us on the bar association side was really limited largely to the paper submissions that we provided and sort of informal informal uh consultation but there was not nothing formal is here all all driven by the pandemic but that to go back to mike's sort of larger discussion this collaborative relationship between the bar association and our general assembly really has yielded pretty good results over time and mike may allude during his comments to um you know a particular instance where the amendments really derived more or less directly from sort of practical experience with our statutes and and i think to the to the benefit of the law by um enactment of of proposal of changes that really do offer practical benefits so so mike thanks for that overview uh why don't you uh turn to the particulars of the 2020 amendments at this point sure thanks right so uh so the amendments adopted this year a lot of these were really uh additional revisions or clarifications to the act including various updates to provisions that were adopted over the last couple of years in particular last year regarding electronic signatures as well as some clarifications regarding appraisal rights and updates to the series and division sections uh there was also some updates this year to as a preview to 18301 with respect to clarifying the requirements for admission of members and just as a note a lot of times the amendments are made effective as of a certain date because of the uniqueness of this year and and how things were signed the amendments this year became effective when they were signed i think it was there's some uncertainty in when that would actually happen but this year was uh july 16 2020 so most of the amendments are effective as of that date so moving into electronic signatures and the delivery of documents the amendments uh to the act last year included the addition of provisions relating to the execution of documents by electronic signature and delivery of documents by electronic transmission specifically section 18113 established non-exclusive safe harbor methods to reduce certain acts or transactions to a written or electronic document and to sign and deliver a document manually or electronically specifically any act or transaction contemplated or governed by the act or llc agreement may be provided for in a document an electronic transmission will be deemed the equivalent of a written document specifically in 113a this permits llc transactions to be documented signed and delivered through docusign and similar electronic means mike this is matt can i jump in real quick on that so um your your slide refers to llc transactions and um that that is not um so broad as to encompass all transactions that an llc might engage in so for example if an llc were a commercial lessee and entered into a commercial lease agreement and wanted to handle that transaction purely by electronic means would that be covered the the form of the agreement and the manner of execution be covered by these provisions in the llc act or by by other law it would be by other law so when we talk about llc transactions uh and and i should caveat that with that's not to say that other law wouldn't permit that to be executed by electronic means whether it's the delaware uniform electronic transmissions act transaction act uh or other law but as far as llc transactions we're really talking about you know consensus maybe a merger agreement that's not filed with the delaware secretary of state things under the llc act that expressly require signatures or execution um subject to you know there's certain exceptions under 113 but those are really the types of transactions that were dealing with and not necessarily a commercial lease or something outside of the llc act so just because an llc is a party doesn't necessarily mean it's an llc transaction thank you so uh as i was mentioned whenever an llc act or whenever the llc act or an llc agreement require or permit a signature an electronic signature's permissible mode of executing a document and this has been clarified in the amendments this year so previously an electronic signature was defined as an electronic symbol or process that is attached to or logically associated with a document and executed or adopted by a person with an intent to authenticate or adopt the document the definition was amended this year to mean instead an electronic symbol or process that is attached or logically associated with a document and executed or adopted by a person with an intent to execute authenticate or adopt a document and then a new sentence was also added to clarify that a person may execute a document with such person signature which includes a manual effects similarly conformed or electronic signature the intent of course was really to further just clarify that a person may execute a document by using any type of signature that's contemplated by this provision uh i'm jumping something jumped ahead too soon uh another consideration with respect to these provisions uh you know just as background further provide that unless otherwise providing the llc agreement agreed to between the the sender and recipient an electronics transmission is delivered to the person at the time it enters an information processing system that the person has designated for the purpose of receiving electronic transmissions of the type delivered so long as the electronic transmission is in a form capable of being processed by that system and the person is able to retrieve it so what comes to mind for me is is email as the information processing system a few other points just to quickly recall and remember as we're dealing with electronic transmission or electronic signatures 113a does not prohibit the conduct of a transaction in accordance with uh delaware uniform electronic transactions act so long as the parts of the transaction that are governed by the llc act are documented signed delivered in accordance with 113a or otherwise in accordance with the llc act so as we discussed a commercial lease may be governed by duita but would not be covered by the llc act the 113a does not preempt any statute of frauds or other law that might require actions to be documented or documents to be signed or delivered in a specified manner the 113b enumerates certain documents and actions that are not governed by 113a which include for example documents filed with or submitted to the delaware secretary of state the register and chancery or court or other judicial or governmental body of the state of delaware or a certificate of llc interest or partnership interest when i say a certificate i mean a certificate that represents an llc interest as you know llc interest may be represented by a certificate uh so much of what you would think of with respect to stock or other types of equity but that so that that's excluded from uh 113a yeah on the on the theory that when when entities elect to have certificated interests even today that really means a piece of paper that's right that's right that's right um a few other points to think about here is uh 113b also provides it does not create a presumption that any that such excluded items are prohibited for being affected by electronic or other means it's just not covered under under the act if an exclusion applies however 113 may not be relied on as a basis for documenting an act or transaction or signing or delivering a document and and one other thing to consider here is as well going back to the policy the act and the freedom of of parties to to really structure their agreements and uh arrangements as they see fit if an ex a limited liability company agreement may limit the application of section 1813 by expressly restricting one or more of the statutorily permitted means of documenting an act or transaction or signing or delivering a document mike let me let me ask you a question about that contractual flexibility and particularly that that somewhat a typical requirement that the agreement do so in other words modify the the otherwise applicable rules expressly so if you have an llc agreement that provides for member action say or manager action by assigned written consent would that reference to assigned writing be enough in your view to displace the rules that would allow for electronic documentation and execution i don't think it would i think you have to be more explicit and more expressed with respect to electronic just requiring a written documentation and in fact i think the act addresses that it should be deemed a writing or a document right so um just saying it should be a written consent in and of itself is not going to restrict or eliminate the ability to rely on 113. and i think you have to be more expressed to the extent that that is your intent yeah i think i think that's right i think that the the rule that was enacted is really designed to facilitate the use of these modern modern means of concluding transactions right i wholeheartedly agree all right so moving on to our next next amendment and next slide talking about contractual appraisal rights uh so the llc act contemplates uh that contractual appraisal rights may be provided with respect to an llc interest or another interest in an llc in connection with certain listed transactions including amendments merger consolidation of both an llc or registered series division conversion of an llc to another business form as well as conversions of protected serious registered series and vice versa transfers to or domestications or sales of all or substantially all of the llcs assets currently or previously i guess prior to the adoption of the amendments this the rights you know were had to be contractually provided in an llc agreement an agreement plan a merger consolidation or a plan of merger or planning division so it was permissive in that these rights had to be contractually provided we've amended the act this year really to clarify that the contractual appraisal rights as a default rule are not available with respect to llc interests or another interest in an llc unless provided again in an llc agreement agreement merger consolidation plan and merger or plan a division so so really mike the the amendment this year doesn't make a substantive change so much as just changes the the nature of the the the rule from sort of a permissive deficient uh provision to a default rule that really clarifies the the state of play that's exactly right that's exactly right and and so if you're involved in these types of transactions and you do want to provide statutory or appraisal rights there are no statutory appraisal rights you have to um contractually provide those and and you know in m a transactions uh private equity uh you know those types of transactions where this might come up um it's good for practitioners to remember that this is different than the dgcl where you might have statutory appraisal rights here you have to contractually provide for those so moving on to our division and then following division we'll talk about series not too significant of amendments this year but as we talk about divisions i do think it makes sense to just review generally the concept of division that was adopted a few years ago as you may recall section 18 217 was added to the act to permit a delaware llc to divide into two or more separate distinct llc's which enables llcs with various assets to separate the assets apart essentially like a reverse merger unlike a classic asset transfer to another entity it allows the llc to be split apart into smaller freestanding llc's according to a plan a division that's adopted by the original llc the law does not require identical ownership or management and by design pools of assets can be reduced into smaller pools without needing to transfer the assets out of the llc now a division is affected pursuant to the adoption of a plan of division and filing with the secretary of state's certificate of division and the certificate of formation for each new llc formed pursuant to the division now whether or not an llc can be divided is subject to its llc operating agreement if the llc agreement of the dividing company specifies the manner of adopting a plan of division the plan of division shall be adopted as specified in the llc agreement if it's silent the same vote for authorizing a merger assuming that it's not prohibited is the vote required if the lc green is silent on merger then a division is authorized by the holder of over 50 percent of the llc interests and when an llc decides to divide a dividing llc must file a certification and a certificate of formation with the secretary of state and the original llc has the option to either continue its existence or terminate as a result of the division uh as you might uh recall following a division each division llc is liable for the deaths liabilities and duties of the original llc as are allocated to a pursuant to the plan of division and no other division llc is liable for such obligations unless the plan of division constitutes a fraudulent transfer under applicable law if any allocation of assets or liabilities determined by a court to constitute a fraudulent transfer each division llc will be jointly and severally liable on account of such fraudulent transfer which really incentivizes parties to not engage in in conduct that might reasonably be lead a court to determine that there's a fraudulent transfer issue any any liabilities and debts of the original dividing llc that are not allocated by the plan of division will be the joint several debts and liabilities of all division llc's and so with that background in mind uh amendments to section 18 to 17 of the act have addressed what can be contained in the certificate of d vision that's required to be filed to affect the division so recall in 18217h there's a list of items let me reverse over to that slide you'll see that on the slide here there's a list of items that are required to be included in the certificate of division what was not clear was whether additional statements not listed in the act and this provision uh were permitted to be included in the certificate of divisions um and so this section was amended this year really just expressly recognized that flexibility uh that is the flexibility to state uh such other information as the parties might want to include in that certificate of division mike why would why would somebody find it useful to take advantage of that flexibility and and add optional non-requisite information yeah so i think matt thinks that's a good question i think it's helpful for listing uh statements such as the allocation of the assets and clarifying uh which division companies succeeding to what assets for example as we'll discuss a little bit later in the towards the end of the presentation a division of a registered agent business could require the successor of the registered agent business assets confirm it is the successor and in the certificate of division under section 18 104. uh also um you know allocation of real estate assets in the certificate of division may enable parties in another jurisdiction to file the certificate of division without the need to file us create and file a separate deed as you're dividing those assets from the llc including real property assets so so there's there's a couple of different ways that that could be used and and again i'm sure there will be more creative uh uses for it as as this is enacted and as practitioners take advantage of this flexibility in the statute so we're now going to talk about series and the amendments to the series provisions of the llc act uh really very light amendments this year but again i think it's helpful for just a quick review regarding series llc's generally recall that section 18 215 was added to the act i think back in 1996 that provided that an llc could establish or provide for one or more series of members managers llc interests or assets a series being essentially an internal cell within the llc that may have a separate business purpose investment objectives separate rights powers and duties with respect to specified assets and liabilities of the llc and the goal really in setting these up is to have inter-series liability protections so that the debts liabilities obligations expenses incurred or contracted for or existing with respect to a series are enforceable against the assets of that series only and not against the assets of the llc generally or any other series of the llc similarly uh that none of the debts liabilities obligation expenses incurred contract before otherwise existing with respect to the llc generally or any other series are enforceable against the assets of our particular series so really providing a liability shield among the series and so a few years ago i guess 2018 and made effective as of august 1st 2019 uh as part of the amendment's new definition of series was added to the llc act so that the term series now refers to a designated series of members managers llc interests or assets which may but not need not be a protected series or registered series so a protected series really was uh in effect a a change with with some of the updates to 18 to 15. uh a protected series is a series that was established would be established in accordance with 18215b so really a change in the nomenclature used to refer to series already established under 18 215b with with some important updates including one of which was to uh clarify that a protected series is an association for all purposes of delaware law including the delaware ucc also a new concept of a registered series was added to the llc act with the addition of a new section 18 218 which has the same rights and powers and same inter-series limitation on liabilities that protected series established in accordance with 18215b uh it's also an association under delaware law it's however distinct in a few other ways including which a registered series is formed by the filing of a certificate of registered series with the secretary of state and accordingly was qualified as a registered organization under delaware ucc so with that background in mind the 2020 amendments the act men section 18 2 218 d4 dealing with registered series to confirm that a certificate of registered series shall be promptly amended if the certificate no longer complies with the requirement in 18218 e1 which really is just the requirement that the name of the registered series and a certificate of registered series begin with the name of the llc mike so if i guess sort of the the practical advice to derive from this amendment is if an llc has registered series and the llc is considering a name change it ought to consider the ramifications of that name change not only for itself but also for its registered series particularly if there are a lot of registered series because there would be a lot of filings required to change those names that's exactly right that is exactly right um you know it may yes especially if you have a lot of registered series because you may be following a lot of amendments to to deal with those issues so it's definitely something we are down the last couple of minutes i think mike so if you can um get us through the last couple of slides and then uh we'll try to address some of the questions that have come in online during the course of the presentation before we hand things back to over to annie sounds good yeah i'll i'll quickly take through these these last few slides the the admission of members uh section 18301 of the act's been amended this year to confirm that an llc agreement may provide for the admission of members in connection with formation i think that was always understood we provided some clarifying language there as well as to eliminate any statutory requirement that a member's admission after formation is subject to admission being reflected in the records of the llc and to clarify that an assignee of an llc interest is admitted as a member is provided under section 18704a and not necessarily subject to other statutory requirements regarding admission and really what this gets at um and and i won't go into the details in parity newport but the in periview newport the delaware court of chancery addressed admission of members and the requirements for admission of the act it was a complicated case address a number of different things but with respect to the issues involving the transfers of llc interests it essentially held that you were not admitted until uh in the absence of express language in the llc agreement um until the person's admission was reflected in the record of the llc and so what we've tried to do with the amendments to the section 18301 this year is to really um eliminate the the requirement that not stay in compliance with the requirements the admission set forth an llc agreement uh the timing of admission is not going to be effective until that there's no requirement that timing of admission be effective upon it being reflected in the records of the llc so there was some i think ambiguity and maybe some confusion as to how that would apply uh so if you comply with your llc agreement the the admission doesn't necessarily unless otherwise expressly provided near agreement uh require that you list them in the records the llc for that admission to become effective so really just quickly taking through books and records uh there was as you can see on the slide here a clarifying amendment to really just further enable electronic record keeping switched it from being a conversion into a paper form rather than a rate reform again just clarifying changes and then talking about registered agents as we mentioned earlier in our discussion about division registered agents certain certain transactions requiring our deemed a change of the name of a person acting as a registered agent including a merger consolidation as as the statute's been updated with other transactions such as division these have now been added to 18104 and just clarifying that you know the conversion of a registered agent or a division of a registered agent in which the resulting person succeeds to all the registered agent business of such registered agent pursuant to the plan of division and this gets back to our discussion on the certificate of division it's as set forth in the certificate of division shall be deemed to be a change of name for purposes of these sections of the act so 18 wonderful be at 904c which then require the registered agents to file certain filings to reflect that