Delaware is the go-to state for business incorporation and formation. This state offers many key advantages that make Delaware an excellent location, including no double taxation on income and unparalleled contractual flexibility.
The Corporate Section monitors LLC statutory and case law developments nationwide. With their extensive expertise in business organization law and creativity in developing amendments to the Delaware LLC act each year, they propose several changes.
Registered Office
The LLC Act requires both foreign and domestic LLCs to establish registered offices within each state they do business in, as well as appointing a registered agent who acts on their behalf to receive legal service of process, notices or any other legal correspondence on behalf of their business entity.
The Delaware Act’s mandatory provisions provide an expansive and detailed statutory foundation compared to most U.S. jurisdictions’ LLC acts for creative LLC operating agreement arrangements and legal opinions validating them, making the Delaware Act an often preferred choice in high-stakes private equity investments, including appraisal rights issues.
Registered Agent
Delaware requires that domestic and foreign LLCs and business corporations authorized to do business within its borders maintain a registered agent to facilitate service of process on them and act as an address for communication with them.
Section 18-109(d) serves two crucial purposes. First, it permits and validates virtually all LLC agreement provisions that do not conflict directly with the mandatory provisions of the Delaware Act or with Delaware public policy; secondly, it provides members of an LLC an accessible forum for third-party appraisal of their rights within their own LLCs.
Managers
Unlike many LLC acts, the Delaware Act contains numerous “covert” default provisions which provide a more in-depth legal basis than ever for creative operating agreement arrangements and legal opinions validating them. Such statutory provisions often have significant ramifications when engaged in high-stakes private equity deals.
However, one mandatory provision – Section 18-110(a), which grants nonexclusive subject matter jurisdiction to the Court of Chancery to decide disputes regarding manager elections and removals as well as other management matters – could pose a barrier. Promoters can overcome such potential hurdles by crafting their LLC agreements to take account of such dispute resolution matters.
Members
Delaware Act provisions that mandate investor membership reduction may provide at least temporary respite to participants involved in high-stakes private equity deals who wish to limit investor membership involvement and challenge management initiatives and actions through limited liability company (LLC) membership participation and challenge of initiatives or actions by management. For instance, Section 18-109(d) prohibits any provision in an LLC agreement that would restrict member’s ability to seek third-party review of matters concerning internal affairs of an entity.
Though these and other Delaware LLC law provisions may dissuade investors from choosing it as their operating entity law, no other state’s LLC act provides anywhere near as many provisions pertaining to dispute resolution issues as Delaware.
Dissolution
Domestic or foreign limited liability companies may change their registered agent by filing with the Secretary of State a Notice of Change of Registered Agent, according to Section 18-111(b). Such action also have an impact on designating its place of business.
One of the Delaware Act’s key benefits for participants in high-stakes private equity investment deals is its expansive statutory authority to permit LLC managers and members to delegate management rights and powers, even to third parties, even though most other state LLC acts don’t allow for this practice. Furthermore, SS 18-109(d) gives members of LLCs a mandatory right to bring derivative suits against their LLCs.
Taxes
Delaware Franchise Tax – Annual and Fees Certificate of Good Standing Fees Based on Share Value
At the hands of sophisticated investors, investees, and their counsel, a comparison of default, mandatory, and permissive provisions between competing LLC acts will often lead to the Delaware Act being chosen in high-stakes private equity deals. Although this may reflect an inherent pro-Delaware bias in some individuals, its selection can often be objectively justified by three key merit-based considerations.
