Even though most US jurisdictions permit LLC mergers, each has unique rules regarding freeze-outs. Some require them to serve a business purpose while others, including Delaware, do not impose such criteria.
Control stockholders often must comply with the highest standard of review in their challenges to going-private mergers, known as entire fairness; this may not always apply for Delaware LLCs.
Mergers and Acquisitions
Mergers occur when two companies join together to form one new one. Mergers can help streamline operations and accomplish other strategic objectives while often leading to tax savings as a side benefit.
Potter Anderson has earned an exceptional national and international reputation in Delaware corporate law, serving as principal outside counsel on numerous high-profile mergers, tender offers, acquisitions, divestitures and spinoffs involving public and private entities of varying size ranging from several million dollars up to billions in value. Our firm has provided guidance for transactions from as little as one dollar up to over one billion dollars worth.
Effective August 1, 2018, the Delaware LLC Act was modified to add Section 18-217, enabling existing Delaware limited liability companies (Dividing LLCs) to split themselves up into multiple new LLCs by allocating assets, rights, liabilities and duties among them. Lenders and contractual parties should consider including specific language regarding Divisions when entering contracts involving Delaware LLCs resulting from this amendment.
Appraisal Rights
As part of any merger between entities, shareholders have the legal right to review any proposed compensation that might come from such a merger. Dissenting shareholders can either accept the purchase price agreed upon between both entities or take legal action to seek an increase.
No matter if a transaction is structured as a merger or exchange offer, controlling stockholders must meet the stringent MFW framework in order to avoid challenges from stockholders under Delaware General Corporation Law (DGCL). To do this, they must ensure an independent, adequately empowered, disinterested special committee is in place which fulfills its duty of negotiating fair merger price negotiations and receives informed votes from majority minority disinterested independent stockholders who vote without coercion and force.
Recent rulings by the Delaware Supreme Court established that an agreement by common stockholders to waive prospective statutory appraisal rights is fully enforceable, regardless of how the parties structure their merger. This decision will have far reaching ramifications on M&A transactions as well as other types of business dealings involving Delaware LLCs.
Dissolution and Liquidation
All good things must come to an end, including business ventures. To close one legally and put it beyond creditors’ reach, companies must undergo the dissolution or cancellation process – either involuntarily through court order, or voluntarily by members themselves.
When an LLC dissolves voluntarily, its first steps should include satisfying all debts and obligations as well as satisfying any creditor claims against it. Close all company accounts and file final tax returns. When this has been accomplished, state officials will then issue a Certificate of Dissolution; for your own protection it would also be wise to document this action with company records; most states require that members vote in favor of dissolution by majority vote (the exact number required may differ depending on state laws); it is also essential that an effective plan for liquidating its property, cash assets before dissolution takes place.
Member Buyouts
Controlling members may have the power to force minority members out through governance arrangements in their operating agreement and legal precedents regarding what constitutes proper fiduciary duties. As suggested by Blaustein’s court decision, however, such power does have its limits – either via merger or liquidation of the LLC.
Negotiated merger of a Delaware LLC into a Delaware corporation may provide economies of scale, the removal of duplicate costs, as well as greater financial resources and flexibility for the new entity.
Short-form mergers under DGCL allow an acquiring company to use this method without needing the consent of all shareholders of merging firm; however, this option typically only available to them; long-form mergers typically require majority vote from members in each registered series and take longer.
