• 2010 Amendments to Delaware Alternative Entity Acts and Proposed Durable Personal Power of Attorney Act
  • July 1, 2010 | Author: Allison L. Land
  • Law Firm: Skadden, Arps, Slate, Meagher & Flom LLP - Wilmington Office
  • As part of Delaware’s annual review and updating of its alternative entity laws, the Delaware legislature has approved a series of amendments to the Delaware Limited Liability Company Act (the DLLCA), the Delaware Revised Uniform Limited Partnership Act (DRULPA), and the Delaware Revised Uniform Partnership Act (DRUPA) (collectively, the Acts). The amendments are summarized below and will become effective on August 2, 2010. In addition, in an effort to clarify Delaware law relating to durable powers of attorney, the legislature is considering the adoption of the Durable Personal Power of Attorney Act summarized below, which, if adopted, will apply to durable powers of attorney that are subject to the Act and executed after August 1, 2010.

    I. Amendments to Alternative Entity Acts

    (A) Short-Form Mergers

    The amendments would permit short-form mergers to be effected where the parent is a limited liability company (LLC), limited partnership or general partnership and each subsidiary to be merged with the parent is a corporation in which the parent owns at least 90 percent of the outstanding shares of each class of stock. A corresponding amendment to the Delaware General Corporation Law will permit such a short-form merger. Under these amendments, at least one of the constituent subsidiary corporations must be a Delaware corporation, and the laws of each subsidiary’s jurisdiction of organization must not forbid such a short-form merger. Either the parent LLC or partnership or any of the subsidiary corporations may be the surviving entity of the merger. In order to effect such a short-form merger, a “plan of merger” stating the terms and conditions of the merger must be approved by the vote required for a merger under the LLC’s or partnership’s governing documents. However, the stockholders of the subsidiary corporations would not be entitled to vote on the merger, and no merger agreement would be required to be executed by the constituent entities. Instead, a certificate of ownership and merger would be filed by the parent with the Delaware Secretary of State certifying that the merger was approved in accordance with the LLC or partnership agreement of the parent. If the parent owns less than 100 percent of any of the constituent subsidiary corporation’s outstanding stock, the certificate of ownership and merger also must state the terms and conditions of the merger, including the merger consideration to be paid by the surviving entity.

    These amendments will provide parties with flexibility in structuring tender offers and related “back-end” mergers by enabling them to use alternative entities as the acquiring entity making the offer. As such, the governance and internal affairs of the acquiring entity (including the vote required to approve the short-form merger) may be specified in the LLC or partnership agreement, and parties are afforded a greater degree of latitude than would be permitted if the acquiring entity were a corporation under the “freedom of contract” principles inherent in the Acts.

    (B) Application of Statute of Frauds to LLC and Partnership Agreements

    In a recent decision, the Delaware Supreme Court held that the statute of frauds applies to LLC agreements. Olson v. Halvorsen, C.A. No. 1884 (Del Supr. Dec 15, 2009). The Olson decision raised a number of practical concerns, including those arising in situations where the parties have an oral or implied LLC or partnership agreement (which is specifically permitted by the Acts), but the terms of such agreement cannot be performed within a one-year period. Another practical concern arises where there is a written LLC or partnership agreement, but the holder of LLC or partnership interests does not execute the agreement, as is generally the case when the interests are received as merger consideration and where the interests are those of a publicly held LLC or limited partnership. To avoid these practical concerns, the amendments provide that LLC and partnership agreements are not subject to any statute of frauds.

    (C) Powers of Attorney

    Legislation enacted in New York in 2009 imposes a number of requirements on powers of attorney executed by individuals within the state of New York. Because powers of attorney often are contained in LLC and partnership agreements, as well as the related subscription documents, to the extent they are executed by individuals located in the state of New York, the validity of many of these powers of attorney may be called into question if they do not comply with the New York requirements. To avoid the potential for uncertainty, the amendments to the Acts provide that a power of attorney (i) with respect to the organization, internal affairs or termination of an LLC or partnership or (ii) granted by a person (A) as a member or partner of the LLC or partnership, or as an assignee of a membership or partnership interest or (B) seeking to become a member, partner or assignee, is irrevocable if it so states and if it is coupled with an interest. As amended, the Acts provide that such a power of attorney is deemed to be coupled with an interest if it is granted to the LLC or partnership or a manager, member or partner thereof, or any of their respective officers, directors, managers, members, partners, trustees, employees or agents. Such an irrevocable power of attorney, unless otherwise provided therein, is not affected by the subsequent death, disability, incapacity, dissolution, termination of existence or bankruptcy of, or any other event concerning, the principal. The amendments also clarify that LLCs and partnerships have the power to grant, hold and exercise a power of attorney, unless otherwise provided in their LLC or partnership agreement.

    (D) Choice of Law in LLC and Limited Partnership Agreements

    The amendments clarify that, to the extent an LLC or limited partnership agreement provides for the application of Delaware law, such agreement will be governed by and construed under the laws of Delaware in accordance with its terms. DRUPA previously contained such a provision and, accordingly, is not being amended. The synopsis to the amendments makes clear that the amendments are not intended to negate the application of Delaware law to the interpretation and enforcement of an LLC or limited partnership agreement that does not explicitly provide for the application of Delaware law, or to negate the application of the internal affairs doctrine to LLCs and limited partnerships.

    Thus, under the Acts as amended, the parties to an LLC or partnership agreement will have a greater degree of certainty that if, and to the extent, their agreement provides for choice of Delaware law, such choice will be honored. In addition, to the extent parties desire to have their LLC or partnership agreements governed by laws other than Delaware, only those provisions of the agreements that do not constitute “internal affairs” may contain such a choice of other laws.

    (E) Modifying Information Access Rights in LLC and Partnership Agreements

    Under the Acts, a member or partner who is denied access to information regarding the LLC or partnership after making a proper demand has a right to bring suit to compel such disclosure in the Delaware Court of Chancery if such a demand has not been replied to within five business days. Under the amendments, the five business-day period may be made shorter or longer, as set forth in the LLC or partnership agreement, but not longer than 30 business days. Accordingly, the Acts will permit parties to negotiate, in drafting the LLC or partnership agreement, the period of time that management believes will be necessary to formulate a reply to a demand for information and to gather the required information for disclosure.

    In addition, the amendments clarify the manner in which the information rights of a member, manager or partner may be restricted. As previously drafted, the Acts provided that such restrictions may be contained in the original LLC or partnership agreement or in any amendment thereto approved and adopted by all of the members or partners and in compliance with any applicable requirement in the LLC or partnership agreement. However, other sections of the Acts permit amendments to the LLC or partnership agreement to be approved by less than unanimous consent of the members or partners to the extent so provided in the LLC or partnership agreement. Accordingly, the Acts contain inherent tension as to the appropriate standard to modify the information access rights in the LLC or partnership agreement. The amendments clarify that any modification to the information access rights set forth in an amendment to an LLC or partnership agreement must be approved by all of the members or partners or by satisfying the applicable requirements in the LLC or partnership agreement. Accordingly, if the LLC or partnership agreement permits amendments to the LLC or partnership agreement by less than unanimous consent, then unanimous consent will not be required to amend the information access rights of members or partners. Rather, such an amendment need only be approved by the vote required under the LLC or partnership agreement.

    II. Proposed Personal Durable Power of Attorney Act

    In response to a perceived need to protect individuals, particularly senior citizens and disabled persons, from fraud in connection with the granting of powers of attorney, the Delaware legislature is considering a bill that, if adopted, would impose a series of requirements in connection with the granting of certain durable powers of attorney, and would impose duties and obligations on those acting as agents pursuant to such powers. The proposed Act, however would apply only to powers of attorney that are durable (i.e., those that expressly provide that they are not affected by the subsequent incapacity of the principal). In addition, unlike the New York statute referred to in Section I.C. above, the proposed Act would only apply to those durable powers of attorney that are executed primarily for personal purposes.

    Accordingly, the proposed Act contains a list of those powers of attorney that, even if durable, are not subject to the provisions of the Act, including powers of attorney given primarily for business or commercial purposes and powers that are coupled with an interest. In addition, the proposed Act would not apply, among other things, to proxies, powers given to creditors, powers given to authorize the execution and filing of a document with a governmental entity (such as a registration statement) and powers given by an individual who is, or is seeking to become, a director, officer, stockholder, partner or member of other equity holder of any legal entity (including any power given in a subscription agreement). As such, the requirements of the Act, which include required disclosures, notarization and the imposition of fiduciary duties on the agent, do not apply to any of the business or commercial powers which were affected by the adoption of the New York statute.