As a general rule, many US business organizations and sophisticated transactions opt for Delaware law as the governing law for their operations. This holds true regardless of whether participants are public companies, private equity firms, investment funds or others.
One reason high-stakes private equity deals often choose Delaware LLC acts over other states’ is that Delaware LLCs provide more permissive provisions. These more permissive rules apply to important LLC arrangements like transfers, domestications and series LLCs.
Limitations on Restrictive Sale of LLC Assets
The Delaware LLC act imposes strict limits on the sale of most assets owned by a Delaware limited liability company to members and managers. Furthermore, it prevents members from making distributions to persons other than themselves.
Although buyers should be aware that Delaware courts may not uphold or even “blue pencil” overly broad restrictive covenants in acquisition agreements.
Therefore, it is imperative for acquiring companies to thoroughly review the restrictive covenants in their transaction documents and related employment agreements. These should be tailored specifically to safeguard interests that the buyer needs to protect based on the geographic scope and sphere of activities in which the seller operated.
Restrictive Sale of LLC Assets to Members
Delaware recognizes the members of a limited liability company (“DLLC”) as owners and permitted to participate in its management. This provides investors with an important advantage.
In contrast to other states, Delaware allows its owners to elect who will manage their business. This freedom has an impact on both judicial decisions and the language used in LLC acts.
The Delaware LLC act forbids the sale of substantially all assets of an LLC to its members. This rule shields members from creditors of the business and limits personal liabilities of LLC members.
Restrictive Sale of LLC Assets to Managers
Delaware has long been a favorite state for limited liability companies (LLCs) due to its lax organizational structure, taxation system and owner liability provisions. However, there are some areas in Delaware where the law differs from other states.
One notable distinction of the LLC Act is that it permits members to contractually agree that managers will not be held liable for any of the LLC’s actions or debts. This can be especially advantageous in cases where owners of an LLC may feel dissatisfied with a manager’s performance.
The major distinction is that, unlike corporate law, which holds directors and officers to a liability framework established through common law judicial decisions, the LLC Act gives members almost complete discretion in structuring liability provisions within their governing agreement.
Drafting an operating agreement that accurately reflects the parties’ understanding of what they are agreeing to is much simpler. Recent Delaware court decisions regarding directors and officers liability have underscored the significance of including clear language in governing agreements to accurately reflect both parties’ contractual bargain.
Restrictive Sale of LLC Assets to Non-Members
Delaware’s LLC Act is unique in that it permits businesses with multiple assets to create protected divisions within an LLC, known as “series”. This enables assets to be segregated into separate cells that cannot share liabilities, allowing businesses with multiple assets to continue functioning even if one fails.
Due to this trend, business owners are increasingly forming multiple businesses under one limited liability company (DLLC) structure. This alternative to C-corporations or S-corporations is popular due to its ease of formation, versatility and propensity for contracting.
Recently, amendments to the Delaware LLC Act have made significant improvements in regards to protecting Series LLCs. These amendments address various aspects of the Act, such as those related to Series LLCs and public benefit LLCs. They include a new section on division of a Delaware LLC and chapters covering “protected series” provisions and “registered series” concepts introduced by the Delaware LLC Act.
