First State Update: 2017 Case Law DevelopmentsUpdates to Delaware LLC ActOctober 24, 2017

November 21, 2017

Matthew J. O’ToolePotter Anderson Corroon LLP

Christopher N. KellyPotter Anderson Corroon LLP

Michael P. MaxwellPotter Anderson Corroon LLP

Speakers

The views expressed by the presenters are not necessarily the views shared or endorsed by their respective firm, Lexis Nexis®, or CSC®. This presentation is for informational purposes only and does not constitute legal advice.

Case Law Developments

November 21, 2017

In re GR BURGR, LLC, 2017 WL 3669511 (Del. Ch. Aug. 25, 2017).

• Background

o LLC creation, governance, and business

o Member-manager felony tax-related conviction

o Petition for judicial dissolution

• Judicial dissolution of LLC pursuant to 6 Del. C. § 18-802

o “Not reasonably practicable” standard:

1. members’ vote is deadlocked at board level

2. operating agreement gives no means of navigating around deadlock, or

3. due to financial condition of company, there is effectively no business to operate

o Insurmountable deadlock warranted dissolution

o No basis in equity to deny dissolution

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Recommended Photo SlideCase Law Developments

CelestialRX Invs., LLC v. Krivulka, 2017 WL 416990 (Del. Ch. Jan. 31, 2017).

• Background

o The parties and transactions

o Procedural history of case

o The LLC agreement and amendment thereto

• Elimination of common-law fiduciary duties

o The LLC Act and default fiduciary duties

o Replacement of default fiduciary duties with contractual duties and liability standards

o Adoption of contractual safe harbors for conflict transactions

Case Law Developments

November 21, 2017

In the Matter of Dissolution of Arctic Ease, LLC, 2016 WL 7174668 (Del. Ch. Dec. 9, 2016).

• Background

o LLC creation, governance, and business

o Need for additional capital; loan default; foreclosure sale

o Dissolution action and third-party complaint

• Personal jurisdiction under 6 Del. C. § 18-109

o Two types of managers for personal jurisdiction purposes:

§ 18-109(a)(i) – managers as defined in LLC agreement

§ 18-109(a)(ii) – persons who “participate[] materially in the management” of LLC

o Material participation in management requires “necessary control or decision-making role” akin to corporate director

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2017 Amendments:Delaware Limited Liability Company Act(the “Act”)

Substantial Compliance

November 21, 2017

• Formation of a Delaware limited liability company (“LLC”) requires the filing of an executed certificate of formation, containing the information required under the Act, with the office of the Secretary of State of the State of Delaware.

• The Act provides that an LLC is formed at the time the filing of the applicable certificate is effective if there has been "substantial compliance" with the requirements of Section 18-201 of the Act.

• Section 18-201(a)(2) of the Act requires that the certificate of formation of an LLC set forth (i) the address of the registered office of the LLC in the State of Delaware, and (ii) the name and address of the registered agent for service of process on the LLC in the State of Delaware.

• The Act was amended by adding subsection 18-201(e) to confirm and clarify that a certificate of formation of an LLC is in substantial compliance with the requirements set forth in the Act if it contains the name of the registered agent and the address of the registered office, even if the applicable certificate does not expressly designate such person as the registered agent or such address as the registered office or the address of the registered agent.

Substantial Compliance

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Recommended Photo SlideDelegation of Rights, Powers and Duties

• The Act contains default provisions that permit members and managers to delegate managerial authority.

• In Obeid v. Hogan, C.A. No. 11900-VCL (Del. Ch. June 10, 2016), the Delaware Court of Chancery analyzed and discussed the general default provisions of the Act addressing the delegation of managerial authority.

• Background

o Corporate / manager-managed LLC

o Litigation

o Special litigation committee comprised of non-director

• Delegation of Management Rights

o Analogies to corporate law committee delegations

o Intent to imitate corporate structure by LLC resulted in application of corporate law principles to the LLC agreement

• In light of Obeid, the Act was amended to confirm and clarify the broad default power and authority of a member or manager of an LLC to delegate any or all of such member's or manager's rights, powers and duties to manage and control the business and affairs of an LLC, including any core governance functions.

• The amendments further make clear that no other provision of the Act shall be construed to restrict such power and authority to delegate.

Delegation of Rights, Powers and Duties

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Recommended Photo SlideFundamental Transactions

• The Act contains provisions that enable limited liability companies to enter into certain fundamental transactions such as mergers, consolidations, domestications, and conversions.

• The Act was amended to confirm the broad scope of such provisions with respect to the type of business or entity that may be involved in these fundamental transactions.

• The amendment to Section 18-209(a) of the Act relating to merger and consolidation confirms that the term “other business entity” as used in Section 18-209 includes any incorporated or unincorporated business or entity (other than a domestic limited liability company).

• Section 18-212(a) relating to domestication of a “non-United States entity” as a limited liability company has been amended to confirm that “non-United States entity” includes any incorporated or unincorporated non-United States business or entity.

• The amendment to Section 18-214(a) of the Act relating to conversion of an “other entity” to a limited liability company confirms that “other entity” includes any incorporated or unincorporated business or entity (other than a domestic limited liability company).

• Section 18-216(a) of the Act, relating to conversion of a limited liability company, as amended confirms that a limited liability company may convert to any incorporated or unincorporated business or entity (other than a domestic limited liability company).

Fundamental Transactions

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Distinction Between a Delaware Limited Liability Company and a Foreign Limited Liability Company

Distinction Between a Delaware Limited Liability Company and a Foreign Limited Liability Company

November 21, 2017

• The Act distinguishes between domestic limited liability companies and foreign limited liability companies.

• Sections 18-101(4), 18-101(11), 18-102(5), 18-104(g), 18-104(i)(4) and 18-1107(a) of the Act were amended to clarify and confirm distinctions between domestic limited liability companies and foreign limited liability companies and to make certain other conforming changes.

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Amendments became

effective August 1, 2017

Questions?November 21, 2017