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Editorial 6 MIN READ

Delaware's 2017 LLC Act amendments, read in plain English

What Senate Bill 72 actually changes, why Obeid v. Hogan is on every Delaware lawyer's desk, and what takes effect August 1

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. The Obeid problem, and what Section 18-407 now says
  2. The rest of the bill, in one paragraph
  3. The Chancery point, and why it matters more than the amendments
  4. What is not in this bill
  5. One closing note
  6. Sources

n August 1, the Delaware Limited Liability Company Act gets its annual polish. This year's bill — Senate Bill 72 of the 149th General Assembly, signed by Governor Carney as part of the 2017 alternative-entity package — is short. Twelve substantive sections, most of them conforming fixes, and one that matters: an amendment to Section 18-407 that responds to a Court of Chancery opinion practitioners have been arguing about for a year.

If you have a Delaware LLC, nothing you need to do changes. If you draft or litigate operating agreements, the delegation language is worth a careful read.

The Obeid problem, and what Section 18-407 now says

The opinion that drove this year's headline amendment is Obeid v. Hogan, C.A. No. 11900-VCL (Del. Ch. June 10, 2016). Vice Chancellor Laster, working with an LLC operating agreement that mirrored corporate governance, held that a special litigation committee investigating derivative claims had to be composed of actual managers of the entity. The members could not delegate that function to a retired judge sitting outside the governance structure the agreement itself set up. The decision was careful and textually grounded, and it read LLC governance through a corporate-law lens in a way that surprised a number of practitioners who had been drafting around the assumption that Delaware LLCs could delegate almost anything to almost anyone.

Section 11 of SB 72 rewrites Section 18-407 to settle the question. The new language — effective August 1, 2017 — confirms that, unless the operating agreement says otherwise, a member or manager "has the power and authority to delegate to 1 or more other persons any or all of the member's or manager's, as the case may be, rights, powers and duties to manage and control the business and affairs of the limited liability company." The delegation can go to agents, officers, and employees; it can go by management agreement; and — this is the new teeth — "No other provision of this chapter shall be construed to restrict a member's or manager's power and authority to delegate any or all of its rights, powers and duties to manage and control the business and affairs of the limited liability company."

The synopsis to SB 72, authored by Senator Townsend, is explicit that the amendment "confirm[s] and clarif[ies] the broad power and authority of a member or manager to delegate any or all of the member's or manager's rights, powers and duties to manage and control the business and affairs of a limited liability company, including any core governance functions." "Core governance functions" is the phrase to note. It is a direct reply to the Obeid reading.

The practical effect: a Delaware LLC can, by operating-agreement design, hand off even board-like functions to a committee, a third party, or a management company, and the statute now forecloses an argument that some other provision of the Act implicitly reserves those functions to formally designated managers. The contractarian reading of the LLC Act — that the agreement governs and the statute fills gaps — gets a small but pointed reinforcement.

The rest of the bill, in one paragraph

Sections 1 through 5 and Section 12 clean up the definitional seam between domestic and foreign LLCs across §§ 18-101(4), 18-101(11), 18-102(5), 18-104(g), 18-104(i)(4), and 18-1107(a). Most of the edits are conforming: making clear that a "member" of a foreign LLC is defined by the law of the jurisdiction of formation, and that a foreign LLC operating in Delaware has the same communications-contact and registered-agent obligations as a domestic one. Section 6 adds a new § 18-201(e), which states that a certificate of formation "substantially complies" with § 18-201(a)(2) if it contains the name of the registered agent and the address of the registered office — even if the certificate does not expressly label them as such. This fixes a narrow but real issue for filers who left off the word "registered" and later had a filing challenged. Sections 7 through 10 expand the definitions of "other business entity," "non-United States entity," and "other entity" in the merger, domestication, and conversion provisions (§§ 18-209, 18-212, 18-214, 18-216) to include "incorporated or unincorporated" businesses — again, mostly conforming language aimed at interstate and cross-border transactional work.

None of these changes requires any LLC to amend its operating agreement, refile its certificate, or notify its members. They take effect on August 1, 2017 by their own terms.

The Chancery point, and why it matters more than the amendments

The reason Delaware bothers to clarify § 18-407 is the same reason Delaware is Delaware: Section 18-111 of the Act vests the Court of Chancery with jurisdiction over "any action to interpret, apply or enforce the provisions of a limited liability company agreement." That sentence is why operating-agreement disputes in Delaware LLCs get litigated in front of judges who do nothing but equity, write reasoned opinions, and build a body of law the rest of the country cites. Obeid is a Chancery opinion; SB 72's § 18-407 fix is the legislative response. The loop is short and the loop is deliberate.

For a founder forming a Delaware LLC this quarter, the Chancery feature is abstract until it isn't. Most single-member and small multi-member LLCs never see § 18-111. Venture-scale LLCs, joint ventures, sponsor-led funds, and any structure with a committee inside it — those are the entities that will feel the § 18-407 amendment. If your operating agreement delegates investigation authority to a non-manager, or parks day-to-day management with an outside manager-in-fact, the 2017 fix removes a litigation argument you would otherwise have had to brief.

What is not in this bill

Two things practitioners have been watching for are not in SB 72.

The first is blockchain. The blockchain amendments getting press this summer are to the Delaware General Corporation Law, not the LLC Act. SB 69 of the 149th General Assembly — the DGCL package — authorizes Delaware corporations to maintain stock ledgers and related records on "distributed electronic networks or databases." The LLC Act already permits electronic records in a more permissive form; no corresponding distributed-ledger amendment was added for LLCs in 2017. Drafters hoping for a matched pair will have to wait.

The second is a comprehensive rewrite of the Series LLC provisions in § 18-215. The Act still contemplates "series" of members, managers, interests, or assets, and still conditions inter-series liability segregation on separate accounting and notice in the certificate of formation. But the long-discussed move to a filed, UCC-registrable "registered series" — the one the Corporation Law Section has been workshopping — is not in this bill. If it arrives, it will come in a future annual package.

One closing note

The annual amendment cycle looks dull from outside: a handful of section numbers, an August 1 effective date, press releases from the usual firms. The dullness is the point. Delaware's advantage is not any one statute; it is the reliability with which the statute gets patched within a year of a Chancery opinion that surfaces an ambiguity. Obeid came down in June 2016. The fix is effective in August 2017. That's the loop. If you are deciding whether to form in Delaware this quarter for a deal that might end up in front of Chancery, the existence of the loop is most of what you are paying for.

Sources

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