The New Divisive Merger Provisions under Delaware Law

By Brett Melson Monday, October 22, 2018

MergersWhen a business partnership turns angry or bitter the consequences to the business can be extreme and may even lead to its bankruptcy or termination. At the outset of a business partnership, however, when the documents governing the operation of the business are being drafted, partners often do not put sufficient thought into what will occur in the event of a deadlock in decision-making or some other break-down in the business relationship. Even when options governing a breakup are put in place, however, they often involve one partner buying out the other or otherwise continuing the business without the other. A new provision under Delaware law, however, provides for a “divisive merger.” Under this provision, members of a limited liability company can develop a plan to divide a business and its assets and liabilities among two or more newly-created entities, with each business continuing independently.

The divisive merger provision, Section 18-217 of the the Delaware Uniform Limited Liability Company Act, became effective on August 1, 2018. Under the provision, a limited liability company must develop a written plan of division, which need not be filed publicly. This written plan must state, among other things:

  • The terms of the division, including the allocation of any securities of a new company involved in the division and the specific assets and liabilities that are to be allocated among the one or more entities operating after the division;
  • The name of each new entities and the surviving entity (if there is a surviving entity); and
  • The contact information that will have custody of the written plan.

The written plan must be adopted in the same manner as required as a merger under the original entity’s limited liability company agreement. If such a vote or other authorization process is not specified, then the plan must be adopted by at least 50% of the dividing entity’s members.

To affect the division, the surviving limited liability company or another entity involved in the division must file a Certificate of Division of the office of the Secretary of State of the State of Delaware. In addition, any new limited liability company created as part of the division must file a a Certificate of Formation and be created as any other newly-formed limited liability company.

Once the Certificate of Division is effective, the debts, liabilities and obligations of the initial limited liability company will be divided as set forth in the internally held written plan of division, and no other company involved in the division will have liability for such debts, liabilities and obligations. One of the key concerns with the new provision is the effect of a division upon the rights of creditors in the event of a division. Some are concerned that creditors who lend money to a company based on its assets and its operations as a going concern may be defrauded by a division of liabilities which leaves the liability with a weaker, less capitalized entity.

The new Divisive Merger filing is just another example of how the state of Delaware continues to keep its legal infrastructure on the cutting edge through consistent judgments, enacting of new corporate laws and by keeping a reasonable and fair legal environment for Delaware corporate entities.

Disclaimer

THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE'S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.

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