Significant Changes in Delaware Business Laws

Effective July 1, 2004, the Delaware General Assembly adopted significant amendments to the Delaware General Corporation Law, 8 Del. C. '101, et seq. (the GCL), the Delaware Limited Liability Company Act, 6 Del. C. '18-101, et seq. (the LLC Act), and the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. '17-101, et seq. (the LP Act), as part of its periodic amendments to these Acts for the purpose of keeping them current and maintaining their preeminence among U.S. business laws.

The Delaware General Corporation Law added a new '102(d) to confirm Delaware law that certain provisions of the certificate of incorporation may be 'made dependant upon facts ascertainable outside' of the certificate of incorporation 'provided that the manner in which such fact shall operate up the provision is clearly and explicitly set forth therein' This language makes '102 consistent with '151 dealing with mergers and various other provisions of the GCL.

Section 141 was amended to permit certain committees of the board, such as a nominating committee to approve matters that require stockholder approval. It has been argued that a literal reading of '141 would have precluded any committee of the Board from adopting any resolution which then requires stockholder approval without first obtaining the approval of the full Board.

Sections 152, 154 and 157, which will be discussed further in this article, were amended to reflect the deletion of the Constitutional requirement that the corporation receive tangible consideration for the issuance of fully paid stock.

Section 303 was repealed and a new '303 was adopted. This section, dealing with the powers of a Bankruptcy Court, will be discussed at length.

The Delaware General Assembly, which concluded on June 30, 2004, adopted a Constitutional Amendment that repealed Article IX, Section 3, of the State Constitution titled Issuance of Stock. Article IX, Section 3, prior to the repeal read: 'No corporation shall issue stock, except for money paid, labor done or personal property, or real estate or leases thereof actually acquired by such corporation.' The repeal of Article IX, Section 3, became effective on June 30, 2004.

Section 152 of the GCL as it existed under repealed Article IX, Section 3, provided in part that:

The capital stock so issued shall be deemed to be fully paid and non-assessable stock, if: (1) The entire amount of such consideration has been received by the corporation in the form of cash, services rendered, personal property, real property, leases of real property or a combination thereof; or (2) not less than the amount of the consideration determined to be capital pursuant to '154 of this Title has been received by the corporation in such form and the corporation has received the binding obligation of the subscriber or purchaser to pay the balance of the subscription or purchase price; '

Senate Bill 272 repealed Section 152 in its entirety and inserted in lieu thereof a new Section. In relevant part, the new Section provides:

' The board of directors may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property, or any benefit to the corporation, or any combination thereof.

With the repeal of Article IX, Section 3, the consideration to be received by the corporation for its stock has been substantially broadened. Under the LLC Act, Section 18-101(3), 'contribution' which is the consideration for the LLC membership interest is defined as:

'Contribution' means any cash, property, services rendered or a promissory note or other obligation to contribute cash or property or to perform services, which a person contributes to a limited liability company in the person's capacity as a member.

The amendment to Section 152 of the GCL brings the GCL into substantially conformity with Delaware's other entity acts, as stock may now be issued for tangible consideration such as cash, or may also be issued for intangible consideration which may also include intangible consideration such as 'benefit to the corporation.' There is no longer the requirement that services be performed prior to the issuance of the stock for the stock to be fully paid and non-assessable.

Section 154, which deals with the determination of the amount of capital, capital surplus and assets was amended in subsection (2) to substitute the term 'consideration' for 'property' in describing that which the corporation must receive to issue stock and to make the subsection consistent with '153. Section 154, with its definitions of capital, surplus and assets, is important to directors as, under '174, there is an imposition of personal liability upon directors for illegal dividends or repurchase of stock.

Section 157, dealing with rights or options regarding stock, was amended to make it consistent with '152 and to clarify the consideration to be received by the corporation upon the exercise of an option need not be in the form of property or cash.

The final significant change in the GCL was the repeal and adoption of a new Section 303. Section 303 as it previously existed became operative for any corporation wherein 'a plan of reorganization of which, pursuant to any applicable statute of the United States relating to reorganizations of corporations, has been or shall be confirmed by the decree or order of a court of competent jurisdiction.'

The requirement that a plan of reorganization 'has been or shall be confirmed by a decree or order' became problematical in its application. In the case of In Re Stone & Webster, Incorporated, et al., Debtors, 286 B.R. 532 (D. Del.), J. Walsh, Bankruptcy Judge, held that Section 1123(a) of the Bankruptcy Code overrides the requirements of the GCL and cited in particular Sections 303(a) and (b). This decision made Section 303 inconsistent with federal law. The revised Section 303 has deleted the requirement that a plan be confirmed and now requires only that 'an order for relief with respect to which has been entered pursuant to the Federal Bankruptcy Code, 11 U.S.C. ”101, et seq., or any successor statute may put into effect and carry out any decrees and orders of the court or judge in such bankruptcy proceeding.' The amended Section now permits the bankruptcy court, at any time in the proceedings, to enter a decree or order to take effect without any further action by the corporation's directors or stockholders.

This year, House Bill 411 made significant improvements to the LLC Act and Senate Bill 273 made similar changes in the LP Act. Sections 18-101 and 18-302 of the LLC Act and 17-101 and 17-302 of the LP Act, which will be discussed at length, provide additional flexibility in drafting both LLC and LP Agreements.

Sections 18-209 and 17-211, which provide generally that in a merger rights, securities and other interests may be issued in the surviving entity, now provides that the agreement of merger may provide for the cancellation of such rights, securities or interests. A new subsection now authorizes the certificate of merger to amend the name of the surviving entity. Previously, the change of name had to be effected by a separate filing.

Sections 18-212-213 and '17-215-216, dealing with the domestication of a 'non-United States entity' are similar to '18-209 and '17-211, however '18-213 and '17-216 confirm that for all purposes under Delaware law when a limited liability company or limited partnership has transferred or domesticated out of Delaware, the transferred or domesticated company shall be deemed to be the same company, vested with the same rights, property and liabilities as the company which transferred or domesticated. Sections 18-214 and 18-216 of the LLC Act and 17-217 and 17-219 made similar changes regarding conversions to or from a domestic LLC or LP into 'another entity'.

Sections 18-215 and '17-218 each added a new provision that confirms existing law. The new language confirms that where the company has properly established one or more series of membership or partnership interests, that the assets associated with each series, if held and accounted for 'in separate distinct records' maintained for each series, then the assets of that series will be subject only to the liabilities of the series and not the liabilities of the company.

The safe harbor provisions of Sections 17-303(b)(1) and (9) have been further expanded to protect limited partners from being deemed to have materially participated in the management of the partnership business and thereby having general liability.

Finally, Sections 18-1101 and 17-1101, which will be addressed further, have been amended to confirm that an LLC or LP Agreement may eliminate fiduciary duties of a manger, member, partner or other person bound by such Agreement.

In the area of business lending, lenders often require that the borrower be a 'special purpose' Delaware limited liability company or limited partnership. In either the organizational certificate or the agreement, the lender will require that certain 'separateness covenants' be included, which will often include a requirement that certain actions may not be taken without the consent of the lender, or that the organizational documents themselves not be amended without the prior written consent of the lender, while any portion of the loan remains unpaid.

The amendment to Sections 18-101(c) and (17-101(12) added a new sentence, which reads:

A limited liability company [partnership] agreement may provide rights to any person, including a person who is not a party to the limited liability company [partnership] agreement, to the extent set forth therein.

Sections 18-302(e) and 17-302(f) added a new Subsection that reads:

If a limited liability company (partnership) agreement provides for the manner in which it may be amended, including by requiring the approval of a person who is not a party to the limited liability company (partnership) agreement or the satisfaction of conditions, it may be amended only in that manner or as otherwise permitted by law (provided that the approval of any person may be waived by such person and that any such condition may be waived by all persons for whose benefit such conditions were intended).

Taken together, these two sections confirm the enforceability of such lender covenants and will provide additional comfort to attorneys giving opinions in such transactions. Likewise, members or partners for whose benefit the provisions were made may waive those provisions without the need to delay the transaction to give any notice that may be required under such Agreement. Additionally, the amendment to '18-101(c) and 17-101(12)) give additional flexibility to drafters of agreements wherein certain rights, including distribution interests, are granted to non-members or non-partners.

Decisions by the Delaware Court of Chancery have in recent years raised questions as to the enforceability, under a limited liability company agreement or a limited partnership agreement, of provisions that eliminate the fiduciary duties of a manager, member or partner. Section 18-1101 of the LLC Act, as well as Section 17-1101 of the LP Act, were amended by substituting a new Subsection (c) to the LLC Act and Subsection (d) to the LP Act, which reads as follows:

To the extent that, at law or in equity, a member or manager [partner] or other person has duties (including fiduciary duties) to a limited liability company [limited partnership] or to another member or manager [partner] or to another person that is a party to or is otherwise bound by a limited liability company agreement [partnership agreement], the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided that the limited liability company [limited partnership] agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

The new section clarifies that either a limited liability company agreement or a limited partnership agreement may by its specific terms limit or eliminate fiduciary duties, however, such agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

Sections 1101(d) and (e), as well as ”17-101(e) and (f) were added. The first new subsection clarifies that unless otherwise provided in the LLC or LP agreement, a member, manager, partner or other person is not liable to the company or other persons bound by the agreement for a breach of such person's fiduciary duties if such person relies in good faith on the provisions of the agreement. This new section clarifies that the default exculpation provisions of the acts apply with respect to breach of fiduciary duties. New '18-1101(d) and '17-1101(f) take exculpation further and clarifies that the agreement may provide for the elimination of any and all liabilities for 'breach of contract and breach of duties (including fiduciary duties),' provided that the agreement 'may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.'

Effective July 1, 2004, the Delaware General Assembly adopted significant amendments to the Delaware General Corporation Law, 8 Del. C. '101, et seq. (the GCL), the Delaware Limited Liability Company Act, 6 Del. C. '18-101, et seq. (the LLC Act), and the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. '17-101, et seq. (the LP Act), as part of its periodic amendments to these Acts for the purpose of keeping them current and maintaining their preeminence among U.S. business laws.

The Delaware General Corporation Law added a new '102(d) to confirm Delaware law that certain provisions of the certificate of incorporation may be 'made dependant upon facts ascertainable outside' of the certificate of incorporation 'provided that the manner in which such fact shall operate up the provision is clearly and explicitly set forth therein' This language makes '102 consistent with '151 dealing with mergers and various other provisions of the GCL.

Section 141 was amended to permit certain committees of the board, such as a nominating committee to approve matters that require stockholder approval. It has been argued that a literal reading of '141 would have precluded any committee of the Board from adopting any resolution which then requires stockholder approval without first obtaining the approval of the full Board.

Sections 152, 154 and 157, which will be discussed further in this article, were amended to reflect the deletion of the Constitutional requirement that the corporation receive tangible consideration for the issuance of fully paid stock.

Section 303 was repealed and a new '303 was adopted. This section, dealing with the powers of a Bankruptcy Court, will be discussed at length.

The Delaware General Assembly, which concluded on June 30, 2004, adopted a Constitutional Amendment that repealed Article IX, Section 3, of the State Constitution titled Issuance of Stock. Article IX, Section 3, prior to the repeal read: 'No corporation shall issue stock, except for money paid, labor done or personal property, or real estate or leases thereof actually acquired by such corporation.' The repeal of Article IX, Section 3, became effective on June 30, 2004.

Section 152 of the GCL as it existed under repealed Article IX, Section 3, provided in part that:

The capital stock so issued shall be deemed to be fully paid and non-assessable stock, if: (1) The entire amount of such consideration has been received by the corporation in the form of cash, services rendered, personal property, real property, leases of real property or a combination thereof; or (2) not less than the amount of the consideration determined to be capital pursuant to '154 of this Title has been received by the corporation in such form and the corporation has received the binding obligation of the subscriber or purchaser to pay the balance of the subscription or purchase price; '

Senate Bill 272 repealed Section 152 in its entirety and inserted in lieu thereof a new Section. In relevant part, the new Section provides:

' The board of directors may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property, or any benefit to the corporation, or any combination thereof.

With the repeal of Article IX, Section 3, the consideration to be received by the corporation for its stock has been substantially broadened. Under the LLC Act, Section 18-101(3), 'contribution' which is the consideration for the LLC membership interest is defined as:

'Contribution' means any cash, property, services rendered or a promissory note or other obligation to contribute cash or property or to perform services, which a person contributes to a limited liability company in the person's capacity as a member.

The amendment to Section 152 of the GCL brings the GCL into substantially conformity with Delaware's other entity acts, as stock may now be issued for tangible consideration such as cash, or may also be issued for intangible consideration which may also include intangible consideration such as 'benefit to the corporation.' There is no longer the requirement that services be performed prior to the issuance of the stock for the stock to be fully paid and non-assessable.

Section 154, which deals with the determination of the amount of capital, capital surplus and assets was amended in subsection (2) to substitute the term 'consideration' for 'property' in describing that which the corporation must receive to issue stock and to make the subsection consistent with '153. Section 154, with its definitions of capital, surplus and assets, is important to directors as, under '174, there is an imposition of personal liability upon directors for illegal dividends or repurchase of stock.

Section 157, dealing with rights or options regarding stock, was amended to make it consistent with '152 and to clarify the consideration to be received by the corporation upon the exercise of an option need not be in the form of property or cash.

The final significant change in the GCL was the repeal and adoption of a new Section 303. Section 303 as it previously existed became operative for any corporation wherein 'a plan of reorganization of which, pursuant to any applicable statute of the United States relating to reorganizations of corporations, has been or shall be confirmed by the decree or order of a court of competent jurisdiction.'

The requirement that a plan of reorganization 'has been or shall be confirmed by a decree or order' became problematical in its application. In the case of In Re Stone & Webster, Incorporated, et al., Debtors, 286 B.R. 532 (D. Del.), J. Walsh, Bankruptcy Judge, held that Section 1123(a) of the Bankruptcy Code overrides the requirements of the GCL and cited in particular Sections 303(a) and (b). This decision made Section 303 inconsistent with federal law. The revised Section 303 has deleted the requirement that a plan be confirmed and now requires only that 'an order for relief with respect to which has been entered pursuant to the Federal Bankruptcy Code, 11 U.S.C. ”101, et seq., or any successor statute may put into effect and carry out any decrees and orders of the court or judge in such bankruptcy proceeding.' The amended Section now permits the bankruptcy court, at any time in the proceedings, to enter a decree or order to take effect without any further action by the corporation's directors or stockholders.

This year, House Bill 411 made significant improvements to the LLC Act and Senate Bill 273 made similar changes in the LP Act. Sections 18-101 and 18-302 of the LLC Act and 17-101 and 17-302 of the LP Act, which will be discussed at length, provide additional flexibility in drafting both LLC and LP Agreements.

Sections 18-209 and 17-211, which provide generally that in a merger rights, securities and other interests may be issued in the surviving entity, now provides that the agreement of merger may provide for the cancellation of such rights, securities or interests. A new subsection now authorizes the certificate of merger to amend the name of the surviving entity. Previously, the change of name had to be effected by a separate filing.

Sections 18-212-213 and '17-215-216, dealing with the domestication of a 'non-United States entity' are similar to '18-209 and '17-211, however '18-213 and '17-216 confirm that for all purposes under Delaware law when a limited liability company or limited partnership has transferred or domesticated out of Delaware, the transferred or domesticated company shall be deemed to be the same company, vested with the same rights, property and liabilities as the company which transferred or domesticated. Sections 18-214 and 18-216 of the LLC Act and 17-217 and 17-219 made similar changes regarding conversions to or from a domestic LLC or LP into 'another entity'.

Sections 18-215 and '17-218 each added a new provision that confirms existing law. The new language confirms that where the company has properly established one or more series of membership or partnership interests, that the assets associated with each series, if held and accounted for 'in separate distinct records' maintained for each series, then the assets of that series will be subject only to the liabilities of the series and not the liabilities of the company.

The safe harbor provisions of Sections 17-303(b)(1) and (9) have been further expanded to protect limited partners from being deemed to have materially participated in the management of the partnership business and thereby having general liability.

Finally, Sections 18-1101 and 17-1101, which will be addressed further, have been amended to confirm that an LLC or LP Agreement may eliminate fiduciary duties of a manger, member, partner or other person bound by such Agreement.

In the area of business lending, lenders often require that the borrower be a 'special purpose' Delaware limited liability company or limited partnership. In either the organizational certificate or the agreement, the lender will require that certain 'separateness covenants' be included, which will often include a requirement that certain actions may not be taken without the consent of the lender, or that the organizational documents themselves not be amended without the prior written consent of the lender, while any portion of the loan remains unpaid.

The amendment to Sections 18-101(c) and (17-101(12) added a new sentence, which reads:

A limited liability company [partnership] agreement may provide rights to any person, including a person who is not a party to the limited liability company [partnership] agreement, to the extent set forth therein.

Sections 18-302(e) and 17-302(f) added a new Subsection that reads:

If a limited liability company (partnership) agreement provides for the manner in which it may be amended, including by requiring the approval of a person who is not a party to the limited liability company (partnership) agreement or the satisfaction of conditions, it may be amended only in that manner or as otherwise permitted by law (provided that the approval of any person may be waived by such person and that any such condition may be waived by all persons for whose benefit such conditions were intended).

Taken together, these two sections confirm the enforceability of such lender covenants and will provide additional comfort to attorneys giving opinions in such transactions. Likewise, members or partners for whose benefit the provisions were made may waive those provisions without the need to delay the transaction to give any notice that may be required under such Agreement. Additionally, the amendment to '18-101(c) and 17-101(12)) give additional flexibility to drafters of agreements wherein certain rights, including distribution interests, are granted to non-members or non-partners.

Decisions by the Delaware Court of Chancery have in recent years raised questions as to the enforceability, under a limited liability company agreement or a limited partnership agreement, of provisions that eliminate the fiduciary duties of a manager, member or partner. Section 18-1101 of the LLC Act, as well as Section 17-1101 of the LP Act, were amended by substituting a new Subsection (c) to the LLC Act and Subsection (d) to the LP Act, which reads as follows:

To the extent that, at law or in equity, a member or manager [partner] or other person has duties (including fiduciary duties) to a limited liability company [limited partnership] or to another member or manager [partner] or to another person that is a party to or is otherwise bound by a limited liability company agreement [partnership agreement], the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided that the limited liability company [limited partnership] agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

The new section clarifies that either a limited liability company agreement or a limited partnership agreement may by its specific terms limit or eliminate fiduciary duties, however, such agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

Sections 1101(d) and (e), as well as ”17-101(e) and (f) were added. The first new subsection clarifies that unless otherwise provided in the LLC or LP agreement, a member, manager, partner or other person is not liable to the company or other persons bound by the agreement for a breach of such person's fiduciary duties if such person relies in good faith on the provisions of the agreement. This new section clarifies that the default exculpation provisions of the acts apply with respect to breach of fiduciary duties. New '18-1101(d) and '17-1101(f) take exculpation further and clarifies that the agreement may provide for the elimination of any and all liabilities for 'breach of contract and breach of duties (including fiduciary duties),' provided that the agreement 'may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.'