DELAWARE’S BUSINESS ENTITY LAWS 2016

PRESENTED BYLORI ANN FOX, ESQ.

Seminar Overview

• Why is Delaware the leading formation state?

• Delaware General Corporation Law

• Delaware Limited Liability Company Act

• Paying Annual Franchise Taxes

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WHY IS DELAWARE THE LEADING FORMATION STATE?

3

4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

34,997 35,083 35,586 30,358 25,114 28,716 32,176 32,875 34,886 37,084 38,485

87,35296,191

110,447

82,093

69,416

82,09992,899

103,489109,552

122,126127,993

8,726

9,852

9,659

7,574

5,395

6,292

7,203

7,9898,120

9,63510,384

3,266

3,954

4,501

2,654

1,374

1,326

1,382

1,4641,353

1,3021,641

Statutory TrustsLPs / LLPsLLCsCorporations

New Entity Formations

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

298,501 300,101 300,915 295,245 280,993 273,370 274,057 278,573 283,900 291,032 299,232

333,665401,569

466,146 504,061 525,099 555,345 585,510631,634

676,856730,695

784,06258,245

63,971

68,78070,786 71,217 71,729

73,92676,580

80,21482,442

87,907

14,442

17,885

20,82122,909 23,205 23,911

23,70023,157

23,34023,157

23,353

Statutory Trusts

LPs / LLPs

LLCs

Corporations

Delaware Corporations & Alternative Entities

Why Delaware?

• The Business Entity Statutes

• The Court System

• The Body of Case Law

• The Division of Corporations

It is not always inexpensive

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Delaware’s Business Entity Statutes

• Modern

• Flexible

• Liberal

• Non-restrictive

• Efficient

• Predictable

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Guiding Principles of DE Entity Law

• Allow management to act quickly

• Freedom of contract

• Bias against regulation

• Laws must be adaptable to new developments

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Law Adaptable to Business Climate

• Impetus

– Change in business environment

– Unpopular court decision

• Annual amendments drafted by Corporate Law Council

• Input from lawyers, professors, management, investors, etc. nationwide

• Requests from SOS

• Enacted by legislature

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Delaware’s Court System

Supreme Court

Court of Last Resort

Court of Chancery Superior Court

Equity and Law Courts

Justice of the Peace Courts Alderman’s Court

Court of Common PleasFamily Court

Courts of Limited Jurisdiction

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Three Ways to Chancery Court

• Equitable Remedy

• Equitable Claim

• Statute confers jurisdiction

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Mass. Mutual Life Insurance Co. v. Certain Underwriters at Lloyds of London

• C.A. No. 4791 (Chancery Court, 9/24/2010)

• Pl lost money entrusted to Bernie Madoff

• Filed suit in Ch Ct seeking equitable apportionment of defense costs between bond underwriters and D&O insurers

• All litigants wanted case heard by Ch Ct

• Ch Ct raised subject matter jurisdiction issue on its own

• Held that Ch Ct lacked jurisdiction

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Mass. Mutual Life Insurance Co. v. Certain Underwriters at Lloyds of London

• Ct stated that at heart, claim is that defs did not fulfill obligations under insurance policies

• Claim is fundamentally a breach of contract action for money damages

• Such a claim is province of Superior Court

• Rejected argument that D&O coverage issue resembles indemnification issue Ct can hear under Sec. 145 of GCL

– Sec. 145 authorizes DE corp to buy D&O insurance

– Does not give Ch Ct jurisdiction over enforcement of policies

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Benefits to Business Entities

• Expertise

• Speed

• Thoroughness

• Flexibility

• Consistency

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Delaware’s Case Law

• Largest body of corporate case law in US

• Most sections of GCL have been interpreted

• Extensive precedents

– fiduciary duties

– director liability

– takeover defenses

– merger fairness

• Now has extensive LLC case law too

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Delaware Division of Corporations

• Division of Secretary of State’s Office

• Processes all business entity filings

• Maintains official records

• Assesses and collects franchise taxes

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Delaware Division of Corporations

• Modern, technologically advanced filing systems

• Filings can be completed within half hour

• Generates 25-30% of state’s revenue

• Meets and works with user community

• Unique role of service companies

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Expedited Services and Cut Off Times

• Five Levels of Expedited Service– 30 Minute ($1500)– One Hour ($1000)– Two Hour ($500)– Same Day– 24 Hour

• Cut Off Times– 30 Minute – 8:45pm ET– One Hour - 8:30pm ET– Two Hour - 6:00pm ET– Same Day - 1:30pm ET

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Filing Documents With Division

• State forms are not mandatory

• One copy of document

• Correction filings allowed

– If document was inaccurate when filed

– If document was defectively executed

– Effective date - same as document being corrected

• Effective date - upon filing or later date or time set forth in document

– Up to 90 days after filing for corporations

– Up to 180 days after filing for LLC, LP, LLP, ST

– Prior effective date not acceptable except for extraordinary condition

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Retroactive Dating Ban

• Liebermann v. Frangiosa

– Incumbent Board vs. New Board

– New Board valid since no preferred stock authorized

• even though New Board members were part of Incumbent Board at time of approval of preferred stock

• incumbent Board had not properly approved certificate of designation for stock

– Chancery Court held that administrative practice to allow requested time and date was in conflict with the statute 103(c)(3) since statute contemplates actual time at which document is filed

– Potential for abuse as shown by this case

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Execution of Documents

• Signatures may be

– Facsimile

– Conformed

– Electronically transmitted

• Corporation - Generally, any officer

• LLC - Any authorized person

• LP - Some documents signed by one general partner; some by all general partners

• LLP - At least one general partner or other authorized person

• ST - Some documents signed by one trustee; some by all trustees

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Document Prints In Service Co’s Office

Document Sent To Service Co.

(Email, Fax, FedEx)

Document Scannedinto State Imaging

System

State Views Images in Order of Priority

and Checks for Accuracy

State Approves Filing and Releases Evidence to Service

Co Electronically

Document Reviewed For Accuracy by

Staff (franchise tax balance verified)

Order Created in DCIS and

Information Entered

Entity In Suspense(No document copies, good

standings, or additional filings can be processed until pending

item is approved or rejected)

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Filing Cycle When Using Service Co.

Document Ordering

• Certificates of good standing

– Long form

– Short form

• Certified copies of documents

• Certificates in re

• Expedited or standard service

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Document Request sent to service co.(web, email, fax)

State reviews request and releases

documents to service co

Order Created in DCIS and request is made

Check DCIS to determine if entity is in

Good Standing

Documents sent to Customer

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Retrieval Cycle When Using Service Co

Service Companies

• Access to state computer system

• Immediate filing capabilities

• Immediate document retrieval

• Public/private partnership

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Top 10 Filing Errors

• Name and title of signer not indicated

• Registered agent’s name and address

• DCLA Section # missing

• Co. name does not agree with State’s computer

• Stock information incorrect

• SOP information missing or incorrect in mergers

• Failure to verify tax due prior to filing

• Failure to check names for availability

• Copy quality of document

• Attempts to assume Charter of Non-Survivor

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DELAWARE’S GENERAL CORPORATION LAW

Brief History of GCL

• GCL of 1899 based on NJ GCL

• 1913 - NJ passed antitrust acts & DE became top incorporation state

• July 3, 1967 - new statute effective

• Publicly traded DE corporations – subject to federal securities laws

– Traditionally federal law did not govern internal affairs

– SOX, Dodd-Frank – regulate corps in areas formerly left to states

• Makeup and duties of board committees• Prohibition on loans to executives • Say on pay

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General Corporation Law

• Formation

• Stockholders

• Directors & Officers

• Amendment, Merger, Conversion, Dissolution

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Steps in the Formation Process

• Prepare and file Certificate of Incorporation

• Protect the desired name

• Hold organizational meeting

• Elect directors and adopt bylaws

• Issue stock

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Incorporation Fees

• Incorporation fees consist of:

– Filing fee - based on authorized shares (minimum - $15, no maximum limit)

– $25 receiving & indexing fee

– $5 fee for entering into database

– $20 municipality fee

– County assessment - $6 plus $9 per page

• Certification page counts as one page

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Filing Fee Table

Stock With No Par Value Rate Per Share

First 20,000 shares 1 cent

Shares from 20,001 to 2 million 1/2 cent

Shares over 2 million 2/5 cent

Stock With Par Value (each $100 of capital stock = 1 share) Rate Per Share

First 20,000 shares 2 cent

Shares from 20,001 to 200,000 1 cent

Shares over 200,000 2/5 cent

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State Filing Fees

Practice Pointer

• Annual franchise tax - based on # of authorized shares

• Corporation with high # of authorized shares & low PV may owe only the minimum filing fee but high annual tax

• Care should be taken in deciding on the capital structure of a new Delaware corporation to avoid surprise on first annual report

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ATP Tour, Inc. v. Deutscher tennis bund

• No. 534, 2013, Del S Ct, decided 5/8/2014• Issue – is a bylaw adopted by board shifting atty fees to unsuccessful

plaintiffs in intra-corporate litigation valid?• Del S Ct says it is valid– No provision of GCL, other DE law, common law prohibits it– Enforceable even if board’s intention is to deter legal challenges to corporate

action as that is not an improper purpose

• Decision led to introduction of bill to prohibit fee shifting bylaws for stock corporations – SB 75 passed in 2015– Secs. 102(f), 109(b) & 114: prohibit fee shifting for internal corp claims

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STOCKHOLDERS: MEETINGS, VOTING AND OTHER RIGHTS

Stockholder Meetings

• Annual meeting required

• Special meetings may be called by board or any authorized person

• Meetings may be held by “means of remote communication”

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Action By Consent

• Action may be taken without a meeting, notice or vote

• Voting requirements same as meeting

• May be denied in Certificate of Incorporation

• Election of directors requires unanimous consent

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Voting

• One vote per share

• Classes or series may have greater, lesser or no voting rights

• Cumulative voting may be authorized

• Most voting in publicly traded corporations done by proxy

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Dividends

• Payable if and when declared by board

• May be paid out of surplus or net profits

• Stockholder approval not needed

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Inspection of Books and Records

• Stockholders may inspect

• Written demand and proper purpose required

• Burden of proof for proper purpose

– Stockholder list - on corporation

– Other records - on stockholder

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King v. Verifone Holdings, Inc.

• No. 330, 2010 (DE. Supreme Ct. 1/28/2011)

• Pl filed deriv suit after co announced it was restating earnings and income. Three other suits were then filed.

• Counsel wanted to be 1st to file to be named lead pl

• Fed ct dismissed for failure to meet pleading burden. Granted leave to amend and suggested pl seek an inspection in DE

• Ch Ct dismissed inspection complaint on grounds that pl’s purpose – to seek information to show that making a demand in previously filed derivative suit was futile – was not proper

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King v. Verifone Holdings, Inc.

• Del S Ct reversed Ch Ct

• Held that Ch Ct’s bright line rule, barring stockholders from pursuing inspection solely because they filed a derivative action first, did not comport with DE law or sound policy

• Held that it is a proper purpose under DE law to inspect books to aid Pl in pleading demand futility where derivative action was dismissed with leave to amend and w/o prejudice

• S Ct stated it was sensitive to Ch Ct’s concerns about wasting resources repeatedly litigating issue of demand futility

• But bright line rule was overly broad. Narrower remedies are available to address concerns

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Derivative Suits

• Contemporaneous ownership required

• Procedural rules - found in Chancery Court Rule 23.1 and case law

• Demand may be excused if futile

• Plaintiff must be adequate representative

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Louisiana Municipal Police v. Pyott

• No. 380, 2012 (Del. Supr. 4/4/2013)

• Addresses issue of “fast filers” – stockholders rushing to court to file derivative suit to control litigation before investigating if demand is futile

• Allergan pled guilty to promoting “off-label” uses of Botox

• Derivative suits filed first in Cal fed ct, then in Del. Ch.Ct.

• Fed ct dismissed for failure to plead demand futility

• Del. Ch. Ct denies defendants’ motion to dismiss on collateral estoppel grounds

– Under DE law Cal pls lack privity until DE ct dismisses

– Cal pl were inadequate reps bec they filed suit shortly after settlement without reviewing bks and records under Sec. 220

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Louisiana Municipal Police v. Pyott

• DE Supreme Court reversed• Cal law applied to determine preclusive effect of the Cal federal ct’s

dismissal– Required by Full Faith and Credit Clause– Federal ct’s judgment satisfied requirements of collateral estoppel under CA

law• Cal plaintiffs were adequate representatives– Rejected Ch Ct’s irrebutable presumption against pls who file derivative suits

shortly after a corporate trauma without first demanding inspection of books and records

– No record support for such a presumption– Remedies for fast-filer problems should be directed at the lawyers, not the

stockholder plaintiffs

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When Demand is Excused

• Demand can only be excused when facts allege board’s decision not entitled to the protections of the business judgment rule

• Purpose of demand requirement is to give corporations ability to rectify an alleged wrong prior to litigation

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DIRECTORS & OFFICERS

Board of Directors

• Manages business and affairs

• May have one or more members

• Term - one year unless staggered

• May be removed by majority vote of stockholders

• May be removed by Chancery Court

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Election of Directors

• Elected by plurality of votes cast by stockholders

– Director with most votes is elected w/o regard to votes withheld, not cast or voted against

• “Plurality plus” bylaw may be adopted

– Requires director receiving less than majority of votes to resign

– Bylaw may give board discretion to reject the resignation

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Directors’ Fiduciary Duties

• Defined by case law, not GCL

• Owe duty of loyalty

– May not be on both sides of transaction

– May not compete with corporation

– Corporate opportunity doctrine

– Good faith is not an independent duty but part of the duty of loyalty (Stone v. Ritter, 911 A.2d 362 (Del. 2006))

• Owe duty of care

– Must make informed decisions

• Actions protected by business judgment rule

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Americas Mining Corp. v. Theriault

• 51 A.3d 1213 (Del Supr. 2012)

• DE SCt affirms awards of $2 billion in damages and $300 million in attorneys’ fees

• Southern Peru (SP) buys Minero for $3 billion from its controlling stockholder Groupo Mexico

• Stockholders claim price too high; sue for breach of duty

• Ch Ct finds SP special committee breached duty of loyalty

– Was controlled by Groupo

– Only wanted to find way to approve Groupo deal

– Was not free to negotiate or look for other strategies

– Changed financial analysis to make Groupo bid look better

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Americas Mining Corp. v. Theriault

• Del SCt holds that burden of proving entire fairness of deal stayed with defs because special committee was not well functioning

• Holds $2 billion award was reasonable estimate of difference between price paid and what price would have been had process been fair

• Approves Ch’s use of “percentage of common fund” to determine attorneys’ fee award

• Holds that 15% of fund awarded in this case was reasonable

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Freedman v. Adams

• 58 A.3d 414 (Del Supr. 2013)

• Derivative suit alleging board of directors committed waste by failing to adopt a plan that would have made its executive bonus payments tax deductible

• Chancery Court - complaint did not adequately allege that a demand on the board of directors would have been futile

• Delaware Supreme Court affirmed

– To state a claim for waste a stockholder must allege with particularity that the board authorized an action no reasonable person would consider fair

– Board’s decision to sacrifice some tax savings to retain flexibility in compensation decisions was a classic exercise of business judgment and not unconscionable or irrational

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Statutory Protections

• Sec. 102(b)(7) - Eliminate liability for breach of duty of care

• Sec. 141(e) - Directors protected if they rely in good faith on expert opinions

• Sec. 144 - “Safety harbor” for conflict transactions

• Sec. 122 - Corporation may renounce interest in business opportunities

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Officers

• Titles and duties stated in bylaws or board resolution

• Any number of offices may be held by same person

• Chosen as prescribed in bylaws or as determined by board

• Owe same fiduciary duties as directors

– Gantler v. Stephens, 965 A.2d 695 (Del. 2009)

• Section 103

– Corporate charter cannot limit or eliminate personal liability for breach of fiduciary duties

– Difference from directors

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Indemnification & Advancement

• Sec. 145(a) - Permissive indemnification– Pays expenses, attorney’s fees, judgments, amounts paid in settlement – Person must have acted in good faith & in corporation’s best interests

• Sec. 145(b) - Indemnification not permitted in derivative suit if defendant found liable

• Sec. 145(c) - Mandatory indemnification – Director or officer must be successful on merits in defense of claim

• Sec. 145 (e)– Attorney fees and other expenses incurred by officer or director in defending him

or herself may be paid by corporation in advance of final disposition– Conditioned upon receipt of undertaking by officer/director to repay if determined

he or she is not entitled to indemnification

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Items of Interest

• Sec. 145 is nonexclusive

• Corporations may have bylaws and agreements providing indemnification and advancement, rather than relying on statutory scheme

• Many Delaware corporations include a provision in their bylaws making indemnification and advancement mandatory under circumstances where they would only be permissive under Sec. 145

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AMENDMENT, MERGER, CONVERSION & DISSOLUTION

Amendments

• Sec. 242 specifically lists the following amendments

– Change of name

– Change of purpose

– Increase or decrease authorized shares

– Change stockholders’ rights to dividends

– Create new classes of stock

– Change period of duration

• Other amendments may be made

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Amendment Procedure

• Board adopts resolution

• Stockholders vote

• File a certificate of amendment

• Amendments before payment of capital

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Restated Certificate of Incorporation

• Advisable where corporation has filed several amendments

• Single instrument containing all provisions of Certificate of Incorporation in effect

• Amendment may be made at same time as restatement

• If no new amendments are made, stockholder vote not needed

• Can dramatically reduce certification costs

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Corporations May Merge With:

• Domestic & foreign corporations Secs. 251, 252

• Parent or subsidiary Sec. 253, 267 (2010 amendment)

• Joint stock or other associationsSec. 254

• Domestic & foreign nonstock corporations Sec. 256-258

• Domestic & foreign GP, LP, LLP, LLLP Sec. 263

• Domestic & foreign LLC Sec. 264

Consolidations and Share Exchanges

• DE corporations may also enter into consolidations

• DE GCL does not authorize share exchanges

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General Merger Procedure

• Board adopts resolution approving agreement of merger

• Stockholders vote

– Survivor’s stockholders do not vote if their interests are not materially changed

– Default rule - majority vote

– Supermajority vote may be required

• Agreement of Merger or a Certificate of Merger is filed

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Parent-Subsidiary Mergers

• Short form merger - Sec. 253 (Corps only)

• 90% ownership requirement

– 2013 amendment – exception for tender offer for public corp

• Parent or sub may survive

• File Certificate of Ownership and Merger

• Sub survives - parent’s stockholders must approve merger

• Parent survives - stockholder approval not necessary

• Short form merger – Sec. 267

– Noncorporate parent & 1 or more corp subs

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Appraisal Rights

• Statutory right given to stockholders of corporations involved in merger

• Fair value of stock may be appraised by chancery court

• Stockholder must not vote for or consent to the merger

• Not available for stockholders not entitled to vote under 251(f) or (g)

• Market out exception

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Domestication

• Non-US entity may domesticate in DE

• DE corporation may transfer to, or continue in, non-US jurisdiction

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Conversion

• DE corporation may convert to any other DE or foreign entity

• All outstanding stock of converting corporation must vote in favor

• File Certificate of Conversion

• If converting to DE entity also file formation document of new entity

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Conversion

• Any other DE or foreign entity may convert to a DE corporation

• Approval of other entity as provided for in governing document

• File Certificate of Conversion and Certificate of Incorporation

– 2011 amendment required simultaneous filing or same future effective dates

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Dissolution

• Approved by board and majority of stockholders

• May be approved by unanimous written consent

• Incorporators or initial directors may dissolve before business begins

• After approval, file Certificate of Dissolution

• No corporation may be dissolved before all franchise taxes are paid

• SOS requires all annual franchise tax reports to be filed before corporation may be dissolved

• Revocation of dissolution allowed within three years

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Public Benefit Corporations

• PBC defined as a for-profit corporation organized under the GCL that is intended to produce a public benefit and operate in a responsible and sustainable manner

• PBC shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit

• PBC’s certificate of incorporation must identify the public benefit to be promoted

• An existing Delaware corporation may become a PBC by amending its certificate of incorporation or by a merger approved by 2/3 of the outstanding shares of each class of stock

• PBC must provide periodic notices to stockholders regarding the efforts taken to achieve the public benefits it was formed to promote

• No appraisal rights available if publicly held

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Ratification of Defective Acts

• HB 127, effective April 1, 2014

• New Sec. 204

– Establishes procedure for corp to ratify an overissue of stock, election of directors or act or tansaction that due to a lack of compliance with GCL, cert of inc., bylaws, or other agreement is void or voidable

– Board of directors adopts resolution

– Stockholders approve (if act being ratified required approval)

– File certificate of validation with SOS (if act being ratified would have required a filing)

• New Sec. 205

– Ch Ct can ratify if Sec. 204 not available

– Ch Ct can rule on the validity of a Sec. 204 ratification

• 2015 Amendments

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DELAWARE’S LIMITED LIABILITY COMPANY ACT

DLLC Act - An Overview

• Effective October 1, 1992

• Modeled after LP Act, not GCL

• Mostly default provisions

• Policy of Act - “give the maximum effect to the principle of freedom of contract and the enforceability of LLC agreements”

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FORMATION

Formation

• File Certificate of Formation

• Required contents

– Name of LLC

• Requires entity indicator

• Must be distinguishable

• Check availability; reserve name

– Address of registered office, name of registered agent

• $70 filing fee + $20 municipality fee

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Purposes and Powers

• May carry on any lawful business, purpose or activity

• May be for profit or not for profit

• May not be in business of banking

• Possesses all powers granted by law and LLC agreement

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LLC Agreement

• Called Operating Agreement in most states

• LLC Act states that

– LLC agreement shall be entered into or otherwise existing before, after or upon filing of the certificate of formation

– LLC agreement may be written, oral, or implied

– 2010 amendment – LLC agreement not subject to statute of frauds

• Covers matters found in corporation’s Certificate of Incorporation, bylaws, and shareholder agreements

• Used to opt out of default provisions

• Used to fill in gaps where there are no default provisions

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LLC Agreement

• Typical matters dealt with include:

– Term of existence and purposes

– Power and authority of members, managers, officers

– Admission of members

– Indemnification

– Allocation of profits and losses

– Dissolution and winding up

– Assignment and transfer of interests

– Meeting formalities

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Practice Pointer

• Far fewer default provisions in the DLLCA than in GCL

• LLC Agreement must be carefully drafted to provide for those issues not provided for in the Act

• Issues include place and time of meetings, quorum, notice and voting requirements

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Series LLC

• LLC agreement may establish designated series of members, managers, LLC interests or assets

• Each series may have separate rights, powers, duties with respect to property or obligations of the LLC or profits or losses associated with such property or obligations

• Debts incurred by the series are payable only from the assets of that series if Series LLC is properly formed and maintained

• Separate records & accounts must be kept

• Certificate of Formation must contain notice of liability limitation

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Series LLC - Diagram

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Series A(Hotel)

Series D(Apt)

Series C(Mall)

Series B(Land)

Series E(Gas Station)

MEMBERS & MANAGERS

Members

• LLC may have one or more members

• Members have limited liability

• New members admitted upon unanimous consent unless LLC agreement provides otherwise

• May have classes of members with different rights, powers, etc.

• Member may not resign unless LLC agreement provides otherwise

• Contribution may be cash, property services, future obligations

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Member Voting Rights

• Voting may be on per capita, number, financial interest, or any other basis

• Member or class of members may be denied voting rights

• May have members or classes with greater or lesser voting rights than others

• Voting by separate groups may be provided

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Member Meetings

• Few default provisions

• LLC agreement may address

– Place & date

– Notice & waiver

– Record date

– Quorum

– Proxy voting

• Action may be taken without a meeting upon consent

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Right to Profits, Losses, Distributions

• Members share in profits, losses and distributions

• Allocated as provided in the LLC agreement

• Default rule - allocation on the basis of the agreed value of the contributions of the members

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Other Statutory Rights

• Right to inspect LLC records

– Business and financial information

– Tax returns

– List of members

– Right may be restricted in LLC agreement

– May apply to Ch Ct if LLC does not provide records following demand

• Right to bring derivative suit

– Members or managers must refuse to bring

– Or effort to have them bring suit not likely to succeed

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Assignment of LLC Interest

• LLC interest is assignable

• Assignee

– May share in profits, losses, distributions, allocations

– Has no right to participate in management

– May become member upon consent or as provided in LLC agreement

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Management

• Default rule - management vested in members

• Decision of members owning more than 50% profits controls

• Management may be vested in managers (LLC agreement)

• Members/managers may delegate authority to officers, agents, employees

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Managers

• Chosen in manner provided in LLC agreement

• Hold offices accorded them in LLC agreement

• Have responsibilities accorded them in LLC agreement

• Meeting details may be set forth in LLC agreement

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Items of Interest

• Managers may act without a meeting upon consent of the number of managers necessary to take action at a meeting

• Managers may vote by proxy

• Directors of corporations cannot act without a meeting on less than unanimous consent, or vote by proxy

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Fiduciary Duties

• No statutory standard of conduct for members or managers

• Act states any fiduciary duties owed may be limited or eliminated in LLC agreement

– Ch Ct - any such provision must be clear and unambiguous

– Covenant of good faith and fair dealing may not be eliminated

• 2013 amendment – “In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern

– Resolved split between DE Supr and Ch Cts over whether, in absence of such provision, managers and members owe fiduciary duties of loyalty and care

• No statutory indemnification; may be provided for in LLC agreement

• Protected for good faith reliance on expert opinions and LLC records

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Gatz Properties, LLC v. Auriga Capital Corp.

• 59 A.3d 1206 (Del Supr. 2012)

• Case creating split over default fiduciary duties

• Minority members sued manager alleging breach of fiduciary duties after he bought them out for price well below market value

• Ch Ct holds that managers owe default fiduciary duties of care and loyalty

• S Ct states that Ch Ct’s ruling that managers owe default fiduciary duties was dicta and had no precedential value

– Where there is a contractual provision imposing fiduciary duties there is no need to decide if there are default duties

– No party asked the Ch Ct to decide the issue

– Reasonable minds can differ so it is up to General Assembly to clarify

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AMENDMENT, MERGER, CONVERSION & DISSOLUTION

Amending Certificate of Formation

• Required upon change in information set forth in Certificate of Formation

• Certificate of Formation may be amended for any other purpose

• File Certificate of Amendment

• Certificate of Amendment sets forth LLC’s name and amendment

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Merger

• DE LLC may merge with one or more DE or foreign corporations or unincorporated business entities

• Members must vote in favor

• Survivor files Certificate or agreement of merger

• Short form merger authorized between LLC parent and corporate sub Consolidations authorized

• Appraisal rights not granted by statute

– May be provided for in LLC agreement or

– Agreement of merger

• LLC agreement may provide that LLC shall not have the power to merge or consolidate

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Conversion

• Other domestic or foreign entity may convert to DE LLC

• Approval as provided in other entity’s governing documents and applicable law

• File Certificate of Conversion & Certificate of Formation

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Conversion

• DE LLC may convert to other DE or foreign entity

• Default rule - approval by members owning more than 50% of interest in profits

• If converting to DE entity file:

– Certificate of Conversion

– Formation document

• If converting to foreign entity file Certificate of Conversion to Non-Delaware Entity

• LLC agreement may provide that LLC shall not have the power to convert

100

Domestication

• Non-US entity may domesticate as DE LLC

• DE LLC may transfer to or domesticate in a non-US jurisdiction

• Approval as provided in LLC agreement

– Default – approval by members owning more than 50% of interest in profits

• LLC agreement may provide that LLC shall not have the power to domesticate

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Dissolution & Cancellation

• LLC is dissolved upon the first to occur of

– Time/event specified in LLC agreement

– Vote or consent of members

– Time there are no members

– Entry of judicial decree

• Manager/members must wind up LLC

• File Certificate of Cancellation

• Revocation allowed before filing Certificate of Cancellation

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PAYING ANNUAL FRANCHISE TAXES

Annual Franchise Tax - Corporations

• Significant revenue producer for DE

• March 1 due date

• Electronic filing is mandatory

• Charter voided if tax not paid within 1 year of due date

• Charter voided if complete report not filed within 1 year of due date

• Two methods provided for calculating tax; lesser tax is payable

• Minimum tax – Method 1 -$175 (increased from $75 effective July 1, 2014); Method 2- $350

• Maximum tax -$180,000

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Calculating Franchise Tax

• Method 1 - Based on authorized shares

– 1 to 5,000 shares = $175 (increased from $75 effective July 1, 2014)

– 5,001 to 10,000 shares = $150

– For each additional 10,000 or part thereof add $175 (increased from $75 effective July 1, 2014)

• Method 2 - Based on assumed par value capital

– Tax = $350 per $1 million or portion thereof of assumed par value capital

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Method 1 – Based on Authorized Shares

Method 2 – Based on Assumed Par Value Capital

Annual Taxes for Other Entities

• LLC & LP - Owe annual tax of $300 (increased from $250 effective July 1, 2014)

• LLP - Annual report fee of $200 per partner

• June 1 due date

• LLC, LP or LLP failing to pay by due date loses good standing status

– State will not file documents for entity

– Entity may not maintain lawsuit in state courts

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Recap

• Why Delaware?

• GCL

• LLCA

• Annual Taxes

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THANK YOU FOR ATTENDING

DELAWARE’S BUSINESS ENTITY LAWS – 2016