This article summarizes key amendments to the Delaware General Corporation Law (DGCL), Delaware Limited Liability Company Act (DLLCA), Delaware Revised Uniform Partnership Act (DRUPA) and Delaware Revised Uniform Limited Partnership Act (DRULPA, and, together with the LLC Act and GP Act, the Alternative Entity Acts) that became effective on August 1, 2021.
Voting Rights of Stock Held By Non-Corporate Entity
Section 160(c) of the DGCL was amended by Senate Bill 113 to clarify that shares of a corporation’s capital stock are not entitled to vote or be counted for quorum purposes if such shares are held by (a) the corporation, (b) another corporation, if the corporation directly or indirectly holds a majority of the shares entitled to vote in the election of directors of such other corporation or (c) any other entity if a majority of the voting power of such other entity is held, directly or indirectly, by the corporation or if such other entity is otherwise directly or indirectly controlled by the corporation. Senate Bill 113 states in its synopsis that that the above amendment to Section 160(c) should not be construed to create any negative implication with respect to the inclusion or exclusion of non-corporate entities in connection with any other section of the DGCL.
Ratification of Void or Voidable Acts
Section 18-106 of the DLLCA, Section 17-106 of the DRULPA, and Section 15-202 of the DRUPA were amended to provide that any act or transaction that may be taken under the Alternative Entity Acts or under a limited liability company agreement or partnership agreement (a Governing Agreement) by limited liability company (LLC), limited partnership (LP) or partnership (a Permitted Action) that is void or voidable when taken may be ratified by the members, managers, partners or other persons (the Approving Persons) whose approval would be required under the entity’s Governing Agreement (a) for such act to be validly taken or (b) to amend the entity’s governing agreement in such a manner that would permit the act to be validly taken, in each instance at the time of such ratification.
The above Sections were also amended to provide that failure to comply with requirements of the Governing Agreement making a Permitted Action void or voidable may be waived by the Approving Persons.
If the void or voidable act or transaction was the issuance or assignment of any limited liability company interests or partnership interests, then the interests purportedly issued or assigned are deemed not to have been issued or assigned for purposes of determining whether the void or voidable act or transaction was ratified or waived.
Any act or transaction ratified, or with respect to which the failure to comply with any requirements of the limited liability company agreement is waived, as provided above is deemed validly taken at the time of such act or transaction.
The amendments are not to be construed to limit the accomplishment of a ratification or waiver of a void or voidable act by other means permitted by law. Upon the application of a LLC, LP or partnership, any member, any manager or any person claiming to be substantially and adversely affected by a ratification or waiver pursuant to the above amendments, excluding any harm that would have resulted if such act or transaction had been valid when taken, the Court of Chancery may hear and determine the validity and effectiveness of the ratification of or waiver with respect to any void or voidable act or transaction effected pursuant to the above amendments.
Right to Obtain or Examine Information
Section 18-305 of the DLLCA, Section 17-305 of the DRULPA, and Section 15-403 of the DRUPA were amended to allow a member, limited partner or partner who is entitled to obtain information under the Governing Agreement or the applicable Alternative Entity Act for a purpose reasonably related to such person’s interest or other stated purpose to also be entitled to any information that is necessary and essential to achieving such purpose. Under the amendments, the right to obtain or examine information pursuant to the above sections may be expanded or restricted in a Governing Agreement.
Broadened Ability to Delegate Authority
Section 18-407 of the DLLCA, Section 17-403 of the DRULPA and Section 15-401 of the DRUPA provide for the ability of a member, manager or general partner to delegate authority unless otherwise provided in the Governing Agreement. These sections were amended to provide that such delegation of any or all of the rights, powers and duties to manage and control the business and affairs of the LLC, LP or partnership may be made regardless of whether the member, manager or general partner has a conflict of interest with respect to the matter as to which its rights, powers or duties are being delegated. The person(s) to whom such rights, powers or duties are delegated is not deemed conflicted solely by reason of the conflict of interest of the member, manager or partner. This broadens the authority to delegate management rights and alters the rule applied in Wenske v. Bluebell Creameries, Inc., 214 A.3d 958 (Del. Ch. 2019), in which the Court of Chancery held that a conflicted principal is legally disabled from delegating authority over the subject matter to which the principal is conflicted, even where the delegatee is otherwise independent.
Delaware business owners are advised to familiarize themselves with the 2021 amendments to the DGCL and Alternative Entity Acts. For example, if a LLC or partnership does not want a member, manager or general partner to have the rights granted in the above amendments to delegate its authority to manage and control the LLC or partnership, then the Governing Agreement of the entity should be examined to determine if such delegation authority is prohibited. For further reading, please refer to Senate Bill 114, Senate Bill 116, and Senate Bill 115, which amended the DGCL and Alternative Entity Acts.