In the Summer of 2004, Delaware’s Governor Minner signed into law bills amending the renowned Delaware Revised Uniform Partnership Act, 6 Del. C. §§ 15-101, et seq. (“DRUPA”), Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101, et seq. (“DRULPA”), Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et seq. (“DLLCA”), and Delaware Statutory Trust Act, 12 Del. C. §§ 3801, et seq. (“DSTA”). These amendments become effective on August 1, 2004. A number of these amendments are technical in nature, while others represent a continuing effort by the State of Delaware to create a progressive environment for business organizations. This article will touch upon some of the more significant amendments to DRUPA, DRULPA, DLLCA and DSTA.
GOVERNING AGREEMENTS AND INSTRUMENTS
Flexibility in Drafting Governing Agreements under DRUPA, DRULPA and DLLCA
Each of DRUPA, DRULPA and DLLCA states that it is the policy of such Act to give the maximum effect to the principle of freedom of contract. In furtherance of that policy, the recent amendments to DRUPA, DRULPA and DLLCA confirm the flexibility permitted in drafting partnership agreements and limited liability company agreements. Specifically, the new legislation confirms that a partnership agreement or limited liability company agreement, as applicable, may provide rights to any person, including a person who is not a party to such agreement, to the extent set forth therein. Such legislation also confirms that if the partnership agreement or limited liability company agreement, as applicable, provides for the manner in which it may be amended, including by requiring the approval of a person who is not a party thereto or the satisfaction of conditions, it may be amended only in that manner or as otherwise permitted by law. Both of these sets of amendments are particularly helpful for financings, securitizations and other structures where enforceable rights need to be given to third parties or where the satisfaction of external conditions as a prerequisite to the amendment of an organizational agreement may be critical. 6 Del. C. §§ 15-101(12), 15-407(e), 17-101(12), 17-302(f), 18-101(7), 18-302(e).
Contents of the Governing Instrument under DSTA
Section 3806 of DSTA was amended by the 2004 amendments to deal with the contents of the governing instrument of a statutory trust. Section 3806(b) sets forth a non-exclusive list of provisions that may be contained in the governing instrument of a statutory trust. That list was expanded to include the accomplishment of a conversion and, similar to the amendments to DRUPA, DRULPA and DLLCA, the manner in which the governing instrument itself may be amended, including by requiring the approval of a person who is not a party thereto or the satisfaction of conditions. 12 Del. C. § 3806(b). Section 3806 was also amended to include a new subsection (i), based on existing provisions in DRUPA, DRULPA and DLLCA, which permits the governing instrument of a statutory trust to provide for the imposition of specified penalties or specified consequences on a beneficial owner for failing to perform in accordance with such governing instrument or to comply with the terms and conditions thereof at the time or upon the happening of events specified therein. 12 Del. C. § 3806(i).
MERGER OR CONSOLIDATION, DOMESTICATION, TRANSFER OR DOMESTICATION AND CONVERSION
Cancellation of Rights, Securities or Interests under DRUPA, DRULPA, DLLCA and DSTA
The 2004 amendments confirm the flexibility permitted in DRUPA, DRULPA, DLLCA and DSTA regarding the cancellation of rights or securities of, or interests in, the applicable entity that is a party to a merger or consolidation, domestication of a non-United States entity to a Delaware partnership, limited partnership, limited liability company or statutory trust, as the case may be, transfer or domestication of a Delaware partnership, limited partnership, limited liability company or statutory trust, as the case may be, to a non-United States entity or conversion. In connection with any such merger or consolidation, domestication, transfer or domestication or conversion, the applicable sections of the relevant Acts, as so amended, provide that rights or securities of, or interests in, the partnership, limited partnership, limited liability company, statutory trust or other business entity which is the non-surviving entity in such a merger or consolidation, the non-United States entity domesticating to a Delaware entity in such a domestication, the Delaware entity transferring or domesticating to a non-United States entity in such a transfer or domestication or the converting entity in such a conversion, as the case may be, may be cancelled. While Delaware practitioners have advised as to the permissibility of such cancellation for some time, these amendments provide comfort to those who were uneasy about the ability to simply cancel such rights, securities or interests. 6 Del. C. §§ 15-901(i), 15-902(b), 15-903(d), 15-904(j), 15-905(f), 17-211(b), 17-215(j), 17-216(f), 17-217(i), 17-219(d), 18-209(b), 18-212(j), 18-213(f), 18-214(i), 18-216(d); 12 Del. C. §§ 3815(a), 3820(i), 3821(d), 3822(j), 3823(f).
Name Change upon Merger under DRUPA, DRULPA, DLLCA and DSTA
When a Delaware partnership, limited partnership, limited liability company or statutory trust is the surviving entity in a merger, DRUPA, DRULPA, DLLCA and DSTA, as amended, permit such surviving Delaware entity to effect an amendment to the statement of partnership existence (in the case of a partnership), certificate of limited partnership (in the case of a limited partnership), certificate of formation (in the case of a limited liability company) or certificate of trust (in the case of a statutory trust) to change such entity’s name by setting forth such amendment in the certificate of merger. These amendments obviate the need to make a second filing after a merger merely to effectuate a name change. 6 Del. C. §§ 15-902(c)(4), 15-902(f), 17-211(c)(4), 17-211(f), 18-209(c)(4), 18-209(e); 12 Del. C. §§ 3815(b)(4), 3815(e).
Treatment Under Delaware Law Upon Transfer or Domestication or Conversion
In an effort to confirm the treatment under Delaware law of Delaware partnerships, limited partnerships, limited liability companies and statutory trusts that have transferred or domesticated out of the State of Delaware, or converted to another business form, as applicable (each such entity, the “Delaware entity”), DRUPA, DRULPA, DLLCA and DSTA were amended to add new subsections that provide as follows:
- When the Delaware entity has transferred or domesticated out of the State of Delaware, or converted to another business form, as applicable, the transferred or domesticated or converted business form, as applicable, shall, for all purposes of the laws of the State of Delaware, be deemed to be the same entity as the Delaware entity.
- When any transfer or domestication of the Delaware entity out of the State of Delaware, or conversion to another business form, as applicable, shall have become effective, for all purposes of the laws of the State of Delaware, all of the rights, privileges and powers of the Delaware entity, and all property, real, personal and mixed, and all debts due to the Delaware entity, as well as all other things and causes of action belonging to the Delaware entity, shall remain vested in the transferred or domesticated or converted business form, as applicable, and shall be the property of such transferred or domesticated or converted business form, as applicable, and the title to any real property vested by deed or otherwise in the Delaware entity shall not revert or be in any way impaired by reason of DRUPA, DRULPA, DLLCA or DSTA, as applicable.
- All rights of creditors and all liens upon any property of the Delaware entity shall be preserved unimpaired, and all debts, liabilities and duties of the Delaware entity that has transferred or domesticated out of the State of Delaware, or converted to another business form, as applicable, shall remain attached to such transferred or domesticated or converted business form, as applicable, and may be enforced against it to the same extent as if said debts, liabilities and duties had originally been incurred or contracted by it in its capacity as the transferred or domesticated or converted business form, as applicable.
- The rights, privileges, powers and interests in property of the Delaware entity, as well as the debts, liabilities and duties of the Delaware entity, shall not be deemed, as a consequence of the transfer or domestication out of the State of Delaware, or conversion to another business form, as applicable, to have been transferred to the transferred or domesticated or converted business form, as applicable, for any purpose of the laws of the State of Delaware.
6 Del. C. §§ 15-903(h), 15-905(g), 17-216(g), 17-219(h), 18-213(g), 18-216(h); 12 Del. C. §§ 3821(h), 3823(g).
Additional Conversion Amendments under DSTA
In an effort to confirm the treatment under Delaware law of Delaware statutory trusts that have converted to other business forms, the Delaware legislature substantially amended Section 3821 of DSTA. In addition to the amendments noted above with respect to the conversion of a Delaware statutory trust to another business form, the 2004 amendments to Section 3821 of DSTA provide, among other things, that a Delaware statutory trust may convert to an other business entity upon compliance with such Section, provide default rules regarding the manner of authorizing such a conversion and the necessity (or lack thereof) to wind up the statutory trust’s affairs under Section 3808 of DSTA and provide details regarding the filing of a certificate of conversion. 12 Del. C. § 3821.
Provision for Transfer or Domestication of Delaware Statutory Trusts under DSTA
It is important to note that, while certain amendments with respect to transfer or domestication of or to a Delaware statutory trust are highlighted above, such amendments are merely part of entirely new sections which the 2004 amendments add to DSTA (Sections 3822 and 3823) to provide for the transfer or domestication of Delaware statutory trusts and other business entities in and out of the State of Delaware. Prior to such additions, neither the transfer or continuance of Delaware statutory trusts out of the State of Delaware nor the domestication of non-United States entities to Delaware statutory trusts was provided for in DSTA. These additional relevant sections of DSTA are substantially similar to the current provisions, as amended, on transfer or domestication, as the case may be, contained in DRUPA, DRULPA and DLLCA. 12 Del. C. §§ 3822, 3823.
DUTIES AND EXCULPATION UNDER DRUPA, DRULPA AND DLLCA
Perhaps the most significant 2004 amendments to DRUPA, DRULPA and DLLCA address the modification of duties (including fiduciary duties), default exculpation provisions and the flexibility permitted in each Act regarding such modification and exculpation.
These amendments were enacted, in part, as a legislative response to various court decisions interpreting provisions in partnership agreements of Delaware limited partnerships that attempted to modify default fiduciary duties. Section 17-1101(d) of DRULPA, prior to the 2004 amendments to DRULPA, provided that a partner’s or other person’s duties could be expanded or restricted in the provisions of the partnership agreement (Section 18-1101(c) of DLLCA, prior to the 2004 amendments to DLLCA, provided similarly with respect to Delaware limited liability companies). Primarily based on this provision, Delaware courts recognized that fiduciary duties could be modified by contract by supplanting such duties with contractual standards. However, such Delaware courts held that in order to modify default fiduciary duties one needed to do so expressly and unambiguously in the written organizational agreement. See Miller v. American Real Estate Partners, L. P. , 2001 WL 1045643 (Del. Ch. 2001). Once established that fiduciary duties could be supplanted with contractual standards, the question arose as to the extent to which fiduciary duties could be restricted, including being eliminated entirely, by contract. The Delaware Court of Chancery stated in Gotham Partners, L. P. v. Hallwood Realty Partners, L. P. , 795 A. 2d 1 (Del. Ch. 2001), that fiduciary duties could be eliminated under Section 17-1101(d) of DRULPA by the agreement governing the limited partnership. Similarly, in Sonet v. Timber Company, 722 A. 2d 319 (Del. Ch. 1998) the Delaware Court of Chancery suggested that parties could eliminate fiduciary duties, but also noted that such ability could be limited by the equitable principles of good faith and fair dealing. Most recently, the Delaware Supreme Court weighed in on the issue in dicta stating that a plain reading of the relevant statutory provisions did not confirm that fiduciary duties could be completely eliminated, and suggested that the implied covenant of good faith and fair dealing, while inherent in every contract, exists outside the context of fiduciary duties. See Gotham Partners, L. P. v. Hallwood Realty Partners, L. P. , 840 A. 2d 641 (Del. 2003). These court decisions, among others, have raised important questions regarding the extent to which parties can contractually restrict or eliminate default fiduciary duties.
Consequently, the 2004 amendments to DRUPA, DRULPA and DLLCA confirm what many practitioners already believed to be the case, which is that duties (including fiduciary duties) may not only be expanded or restricted, but may in fact be eliminated in a partnership agreement or limited liability company agreement, as applicable; provided, however, that such agreements may not eliminate the implied contractual covenant of good faith and fair dealing. 6 Del. C. §§ 15-103(b)(3), 17-1101(d), 18-1101(c).
These amendments also clarify the default exculpation provision in DRUPA, DRULPA and DLLCA by providing that it only applies with respect to breaches of fiduciary duties, as opposed to breach of contract in general. As amended, such default exculpation provision provides that a partner or other person (in the case of a partnership or limited partnership) or a member, manager or other person (in the case of a limited liability company) shall not be liable to a partnership, limited partnership or limited liability company, as the case may be, or to another partner (in the case of a partnership or limited partnership) or to another member or manager (in the case of a limited liability company) or to an other person that is a party to or is otherwise bound by a partnership agreement or limited liability company agreement, as the case may be, for breach of fiduciary duty for such person’s good faith reliance on the provisions of the partnership agreement or limited liability company agreement, as the case may be. 6 Del. C. §§ 15-103(e), 17-1101(e), 18-1101(d).
Finally, such 2004 amendments confirm the flexibility permitted in DRUPA, DRULPA and DLLCA regarding exculpation beyond the default rule referred to above. Such amendments provide that a partnership agreement or limited liability company agreement, as the case may be, may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a partner or other person (in the case of a partnership or limited partnership) or member, manager or other person (in the case of a limited liability company) to a partnership, limited partnership or limited liability company, as the case may be, or to another partner (in the case of a partnership or limited partnership) or to another member or manager (in the case of a limited liability company) or to an other person that is a party to or is otherwise bound by a partnership agreement or limited liability company agreement, as the case may be; provided, however, that a partnership agreement or limited liability company agreement, as applicable, may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing. 6 Del. C. §§ 15-103(f), 17-1101(f), 18-1101(e).
HOLDING OF ASSETS IN A SERIES UNDER DRULPA, DLLCA AND DSTA
DRULPA, DLLCA and DSTA have been amended to confirm the manner in which assets may be held and accounted for in the context of a Delaware series limited partnership, series limited liability company or series statutory trust. These changes confirm that to the extent assets are held (either directly or indirectly, including through a nominee or otherwise) and accounted for in the separate and distinct records of a particular series of a limited partnership, limited liability company or statutory trust, as the case may be, and all other requirements of Section 17-218(b) of DRULPA, 18-215(b) of DLLCA or 3804(a) of DSTA, as the case may be, are met, then the debts, liabilities, obligations, and expenses incurred, contracted for or otherwise existing with respect to a particular series (or general partner in the case of a limited partnership) shall be enforceable against the assets of such series only (or a general partner associated with such series in the case of a limited partnership), and not against the assets of such limited partnership, limited liability company or statutory trust, as the case may be, generally or any other series thereof (or any general partner not associated with such series in the case of a limited partnership), and, unless otherwise provided in the partnership agreement, limited liability company agreement or governing instrument, as the case may be, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to such limited partnership, limited liability company or statutory trust, as the case may be, generally or any other series thereof shall be enforceable against the assets of such series (or a general partner associated with such series in the case of a limited partnership). 6 Del. C. §§ 17-218(b), 18-215(b); 12 Del. C. § 3804(a).
PROTECTION OF LIMITED PARTNERS UNDER DRULPA
The policy of Section 17-303 of DRULPA is to limit the liability of limited partners in a limited partnership. In general, a limited partner is not liable for the obligations of a limited partnership unless such limited partner is also a general partner or, in addition to the exercise of the rights and powers of a limited partner, such limited partner participates in the control of the business of such limited partnership. Section 17-303 of DRULPA sets forth a safe harbor list of actions that do not constitute participating in the “control of the business. ”The 2004 amendments to Section 17-303 of DRULPA expand the safe harbor protections by allowing a limited partner of a limited partnership to be a partner of a partnership that is a general partner of such limited partnership and to be a partner of any person in which such limited partnership has an interest or any person providing management, consulting, advisory, custody or other services or products for, to or on behalf of, or otherwise having a business or other relationship with, such limited partnership or a general partner of such limited partnership, all without such limited partner being deemed to be participating in the control of the business of such limited partnership. 6 Del. C. §§ 17-303(b)(1), 17-303(b)(9).
CONCLUSION
By clarifying existing law where the clarifications were deemed beneficial and creating more flexibility where additional latitude was viewed as advantageous, the recent amendments to DRUPA, DRULPA, DLLCA and DSTA continue Delaware’s leadership as the jurisdiction of choice for the formation of all types of business entities.
This article was prepared by Scott E. Waxman, Nicholas I. Froio, Eric N. Feldman, Ross E. Antonacci, and John D. Wallen. Mr. Waxman is a partner with Potter Anderson & Corroon LLP and is the chair of the firm's Structured Finance and Alternative Entity practice. Mr. Waxman has been with Potter Anderson & Corroon LLP for 14 years and represents his firm on the Partnership Committee and the Statutory Trust Committee, the two committees of the Delaware Bar Association responsible for drafting the Delaware Revised Uniform Partnership Act, the Delaware Revised Uniform Limited Partnership Act, the Delaware Limited Liability Company Act and the Delaware Statutory Trust Act. Messrs. Froio, Feldman, Antonacci and Wallen are associates with Potter Anderson & Corroon LLP whose practices are all devoted to Delaware alternative entities and structured finance transactions. The views in this article are those of the authors and may not reflect the views of Potter Anderson & Corroon LLP or its clients.