Delaware LLC ratification is an essential step for any company looking to conduct business within the state of Delaware. Not only does this protect your business from potential lawsuits, but it also serves as a safeguard against financial liability.
Delaware LLCs are one of the most popular small business structures today. Not only do they provide liability protection and tax advantages, but there’s more!
Requirements for Ratification
Keep abreast of Delaware’s corporate, limited liability company, partnership and limited partnership statutes by following our month-in-brief overviews of major amendments to the Delaware LLC Act (Senate Bill 114), Delaware Reorganization and Unites States Partnership Act (DRUPA) and Delaware Reorganization and Unified Partnership Act (RUPA). These updates provide essential insight for attorneys, owners, investors, managers and advisers who work with Delaware entities.
One important change is that the Court of Chancery now views a member’s right under Section 18-305(a) of the LLC Act to inspect LLC books and records as subject to “necessary and essential.” This standard applies both to rights granted under the LLC Act as well as default information rights granted in operating agreements.
Another significant change is Section 18-112 of the LLC Act, which gives the attorney general authority to cancel an LLC’s certificate of formation if it is being misused by its members or managers. This provision mirrors what can happen with corporations for violations under DGCL regulations.
Void or Voidable Acts or Transactions
Current law in Delaware holds that LLCs cannot ratify acts or transactions which are nullified by the express terms of their LLC agreement. The Delaware Supreme Court has upheld this position, finding that a transaction declared null by its language in a limited liability company agreement cannot be validly ratified.
The proposed amendments reverse this conclusion by creating a safe harbor procedure for ratifying void or voidable acts or transactions under the DLLCA, DRULPA and LLCA. These safe harbors permit any act or transaction that is invalid to be ratified by those whose approval would have been necessary for it to have been validly taken or amending an LLC or partnership agreement so such acts or transactions can take effect; and such ratifications are deemed valid at the time of their approval.
Under these safe harbors, conflicted members and managers of an LLC can delegate managerial authority to third parties. Furthermore, a conflicted partner or member of an LLC may delegate rights under the Alternative Entity Acts, the LLC and/or partnership agreement to another person who is independent, unconflicted and unaffiliated with them.
Requirements for Default Information Rights
When creating and reviewing Delaware LLCs and their agreements, it is essential to stay abreast of the numerous changes to the laws governing formation, management, ownership and investment in Delaware entities. This article will assist both in-house and outside counsel who advise Delaware companies as well as their owners/managers in keeping abreast of these significant legislative amendments.
One of the key requirements for limited liability company members and managers to exercise their information rights is that they have a “proper purpose” related to their membership status. This requirement has become an automatic rule under the LLC Act, so members only have access to data necessary and essential for fulfilling their stated purpose.
However, Court of Chancery precedent requires members to have an improper purpose before they can request information from an LLC. Courts, however, tend to resist rewriting contract provisions to add this precondition. As a result, partnerships may still have the “proper purpose defense” even when no contractual language was ever included regarding this subject in their agreement.
Delegation of Review and Approval Authority
Recently, the Delaware legislature enacted major revisions to their general corporation law, limited liability company act and partnership act (the “Alternative Entity Statutes”). Section 18-407 of the LLC Act and 17-403(c) of DRULPA as well as 15-401(l) of DRUPLA were added with 2021 that provide for more expansive delegation rights among members, managers and partners of an alternative entity.
Delegating management authority under Delaware statutes is a well-known feature of the Delaware statutes, yet it’s often misunderstood by lawyers or companies. Through 2021 amendments to the LLC and Partnership Acts, however, it has been made clear that any person delegating any rights, powers or duties from a Delaware LP or GP may do so regardless of any potential conflicts of interest that might arise as a result of such delegation.
Delegations of approval authority must be documented using an Approval Authority Delegation Request, certified annually and kept in departmental files. Furthermore, they should be given to the university business office responsible for overseeing the transaction (e.g., Human Resources or Financial Management).
