Last year, Delaware LLC and LP Acts were amended to permit dividing Delaware entities to include additional information in a certificate of division for division proceedings, providing essential flexibility when protecting members’ rights in regard to divisions.
State corporate law permits shareholders to receive cash payment for their shares when company management engages in major transactions with which they don’t agree or oppose, thus protecting dissenters’ rights as an integral part of shareholder protection.
Statutory Appraisal Rights
Delaware law grants shareholders the right to demand cash payment when company management pursues major transactions they oppose, such as stock-for-share mergers, acquisitions or liquidations of the company. However, this right may be limited due to certain exceptions such as “market out” provisions and exemptions related to interested party transactions.
This year’s amendments to the Delaware General Corporation Law (DGCL) addressed several issues pertaining to Delaware limited liability companies (LLCs), Delaware limited partnerships (LPs) and statutory public benefit LLCs, including amendments pertaining to appraisal rights. For instance, these amendments clarify that an advance agreement granting waiver of prospective statutory appraisal rights can be fully enforceable.
When merging an LLC, legal advice should closely review both its Limited Liability Company Agreement and any agreements among members to see whether appraisal rights have been adopted through contract. Counsel should also research each constituent entity’s statutes for any potential differences in appraisal rights regulations by state.
Contractual Appraisal Rights
The Delaware General Corporation Law (DGCL) gives stockholders appraisal rights when considering mergers of corporations, protecting those who do not consent to an action from being forced out at an unfair price.
Recently, the Delaware Supreme Court upheld an express agreement by an informed stockholder to waive their statutory appraisal rights during a proposed sale of their company is fully enforceable – this was the situation in Manti Holdings LLC vs Authentix Acquisition Company Inc.
Recently amended DGCL and DLLC laws now enable an LLC, LP or GP to contractually waive statutory appraisal rights when splitting into multiple entities or changing forms, so parties involved in M&A transactions should review the governing documents to identify whether any contractual waivers exist. Additionally, amendments allow an LLC, LP or GP to keep records in an unwritten format capable of conversion into written form within an acceptable time.
Mergers of LLCs
Under Delaware law, stockholders have the right to be compensated the fair value of their share when there is a merger of domestic and foreign corporations, otherwise known as appraisal rights.
This year’s amendments to the DGCL include:
One of the key implications of the new legislation is that companies may now choose to divide into multiple LLCs without receiving prior consent from shareholders. When contemplating transactions involving mergers or sales of assets or conversions into other kinds of entities – be it corporations or limited liability companies – this consideration becomes particularly crucial. New York law does not specifically address such transactions and would normally require a merger that triggers appraisal rights to accomplish it. A detailed plan of division would need to be drawn up that outlined the specific terms, conditions and allocation of assets and liabilities across resulting entities.
Dissenters’ Rights
State corporate (or business entity) laws provide shareholders the right to demand payment equal to the fair value of their shares in the event that company management undertakes a major transaction without their approval, such as merger, sale of assets or conversion into another type of business entity. Delaware allows companies to waive these statutory rights through stockholders agreements or other documents; those who disagree, such as dissenting judges in this case, believe such waiver should be determined by legislative bodies rather than courts.
The majority opinion shared this view and upheld the appraisal right.
