Divisive Merger Provisions under Delaware Law

When 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.

What is a Divisive Merger?

Under these new provisions, members of a limited liability company or partners in a limited partnership 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. In effect, a divisive merger is the opposite of a merger.

The written plan of division need not be filed publicly with the state of Delaware or any other party. The 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 entity 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 is required by a merger under the original entity’s limited partnership 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 or partners.

In order to effect the division, the surviving entity involved in the division must file a Certificate of Division with the Office of the Secretary of State of the State of Delaware. In addition, any new company created as part of the division must be filed and created as any other newly-formed entity.

Once the Certificate of Division is effective, the debts, liabilities and obligations of the initial 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. Some are concerned that creditors who lend money to a company based on its assets and operations 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.