Delaware Business Law Report

Court of Chancery Rules on Retirement From LLC

Jonathan Strauss — Wed, 07 Sep 2011 12:00:02 -0500

By: Nicholas J. Caggiano, Jr.
Shannon S. Frazier
Jonathan G. Strauss

Court of Chancery holds that where majority LLC members agreed to allow a member to retire, the member was not entitled to “fair value” for his interest under 6 Del.C. §18-604.

Glenn B. Showell v.William H. Pusey et al, CA No. 3970-VCG (September 1, 2011).

This case involves a Sussex county accounting firm organized as a Delaware limited liability company (“LLC”). The LLC was governed by an operating agreement and a supplemental agreement (collectively, the “LLC Agreement”) that provided, among other things, for the LLC’s repurchase of a member’s interest upon a “Retiring Event”, which was defined as the member’s death, bankruptcy or disability. The repurchase price following a Retiring Event was based on the member’s percentage interest applied to the LLC’s liquidation value. The LLC Agreement expressly prohibited voluntary retirement or withdrawal by any member, which the court found to be consistent with the statutory default rule in 6 Del.C. §18-603. Notwithstanding this prohibition, the retiring member, Mr. Showell, and another member, Mr. Pusey, who together held 90% of the LLC interests, agreed that Mr. Showell could voluntarily retire as a member of the LLC. Importantly, although they agreed on Mr. Showell’s retirement, they did not reach an agreement regarding the value Mr. Showell should receive for surrendering his 29% LLC interest. Litigation then ensued to determine what Mr. Showell should get.

The current “default rule” in Section 18-603 of the Delaware LLC Act is that members may not voluntarily resign prior to the dissolution and winding up of the limited liability company unless the limited liability company agreement provides otherwise. This rule only applies to LLCs formed after July 31, 1996. Prior to that time, §18-603 permitted members to resign upon not less than 6 months' prior written notice and receive “fair value” for their interests under §18-604. Section 18-604, if applicable, compensates the resigning member for his “right to share in distributions” from the LLC – i.e. the “enterprise value” -- unless the LLC Agreement “provides otherwise”. Section 18-604 has remained essentially the same since 1996.

Mr. Showell argued that, since the parties agreed to his retirement, he should receive the “fair value” for his interest under §18-604. The defendants countered that he was due nothing since he had no contractual or statutory right to retire voluntarily. Alternatively, they argued that he should receive his share of the liquidation value of the LLC. The Court agreed with the defendants, finding that the LLC Agreement did not permit voluntary retirement, and had its own formula for Retiring Events, hence the “fair value” obligation in Section 18-604 was not applicable. The Court reasoned that the members’ agreement to permit Mr. Showell’s retirement was effectively a modification of the LLC Agreement to treat this as a “Retiring Event”. Hence, the LLC Agreement’s liquidation value method “provided otherwise” negating the “fair value” default rule in §18-604.

The moral of this story is, as always, when dealing with Delaware LLCs, “the contract is king.” The “default rules” of the Delaware LLC Act will not apply if the LLC agreement “provides otherwise”. In this case, the LLC Agreement did not precisely contemplate the situation, but the Court nevertheless found a way to apply the provisions of the LLC Agreement “in an attempt to harmonize Showell’s ‘retirement’ with the intent of the parties”. Thus, the parties’ intent trumped the statute.

Court of Chancery Rules on Transfer of Membership Interest

Jonathan Strauss — Thu, 11 Aug 2011 15:11:51 -0500

By: Nicholas J. Caggiano, Jr.
Shannon S. Frazier
Jonathan G. Strauss

Court of Chancery holds that LLC membership interest can be assigned by 30% member to 20% member without consent of 50% member; Resulting deadlock to be resolved by anology to corporate law.

Achaian, Inc. v. Leemon Family LLC et. al, CA No. 6261-CS (August 9, 2011).

This case involves a dispute among the members of Omniglow, LLC, a Delaware limited liability company that manufactures glowsticks. Founded in 2005, the LLC originally had a single member, Omniglow Corporation, but in 2006, the LLC was sold which resulted in the LLC having three members: Leemon Family LLC (“Leemon”) owned 50%; a trust (the “Holland Trust”) owned 30%; and Achaian, Inc. (“Achaian”) owned the remaining 20%. All were admitted as members, however from a reading of the case it is evident that the limited liability company agreement (or “operating agreement”) was never properly amended to reflect the fact that the LLC no longer had a single member. A dispute as to control of the LLC emerged, with Leemon allegedly trying to assert control. The Holland Trust sold its membership interest to Achaian. Achaian then sued for judicial dissolution claiming that it held 50% of the voting interests and asserting a deadlock with Leemon.

There are 2 interesting aspects of this case. First, the Court considered the issue of whether one member could sell its voting interest to another member without the consent of the third member. Under the LLC Act, unless otherwise provided in the operating agreement, the sale by a member of its LLC interest does not entitle the assignee to become a member or have any voting power – it is purely an assignment of economic rights such as the right to receive distributions and tax allocations. Leemon claimed that the Holland Trust’s assignment to Achaian only conveyed economic rights, not voting power. Vice Chancellor Strine disagreed, reasoning that since the operating agreement defined “Interest” broadly to mean “entire ownership interest”, and provided that a Member may transfer “all or any portion of its Interest” to any person at any time, the Holland Trust could transfer its voting power to Achaian. In essence, the operating agreement modified the statutory default rule. Leemon countered that such a transfer was not possible without its consent, since the operating agreement provided that no person shall be admitted as a Member without the written consent of all members. The plaintiff, Achaian, argued that since it was already a member, it need not be re-admitted. Leemon argued that, given the statutory default rule, and no provision of the operating agreement dealing specifically with this situation, Achaian should not be able to change the voting structure of the LLC without Leemon’s consent. In other words, Leemon wanted Achaian to be separately admitted as a member with respect to its additional 30% Interest acquired from the Holland Trust. Vice Chancellor Strine agreed with Achaian and found that the operating agreement, taken as a whole, allowed the members to transfer voting power amongst themselves, and that Holland Trust had transferred voting power to Achaian. The take aways are that, in the world of Delaware limited liability companies, (i) the “contract is king” – the operating agreement will normally prevail over the statute (with certain exceptions – as there are provisions of the LLC Act that may not be altered or waived), and (ii) a limited liability company interest normally represents an economic interest only but an operating agreement may explicitly provide for a transfer of more than an economic interest. Thus, care must be taken to make sure that the operating agreement clearly and adequately addresses the needs of all members.

The second interesting aspect is that the Court stated that since Achaian had successfully obtained 50% voting power, the judicial dissolution of the LLC would be treated like a dissolution of a 50/50 joint venture corporation under Section 273 of the Delaware General Corporation Law. Vice Chancellor Strine originally took this approach in Haley v. Talcott. Under Section 18-802 of the LLC Act, the test for judicial dissolution depends only on a finding that it is “not reasonably practicable to carry on the business in conformity” with the operating agreement. However, by incorporating the corporate test, the Court seems to be requiring that in the case of a deadlocked 50/50 LLC joint venture, a plaintiff seeking judicial dissolution must plead the three elements of DGCL 273: that there are (1) two 50% stockholders; (2) engaged in a joint venture; (3) who are unable to agree upon whether to discontinue the business or how to dispose of its assets.

American Securitization Forum 2012 Conference-- Las Vegas

Shannon S. Frazier — Tue, 03 May 2011 12:05:30 -0500

The American Securitization Forum has announced that its 2012 conference will take place January 22-25, 2012 at the ARIA hotel in Las Vegas, Nevada.

It is anticipated that over 4,500 participants will attend the 2012 event, and with the gradual resurgence being experienced in the securitization market, the conference promises to be replete with industry experts, legislators, issuers and investors.

Fitch: Princeton Deemed Acceptable as CDO AM for Prudential CBO

Shannon S. Frazier — Tue, 05 Apr 2011 11:35:00 -0500

In a press release today, Fitch announced the following:

Fitch Ratings has reviewed Princeton Advisory Group (Princeton) as a potential replacement collateralized debt obligation (CDO) asset manager for Prudential Structured Finance CBO I, and determined the manager's capabilities to be consistent with Fitch's criteria for credit asset managers.

On Oct. 4, 2010, Fitch was notified of a proposal to transfer the CDO asset management responsibilities for Prudential Structured Finance CBO I to Princeton. Fitch's review procedure for potential replacement CDO asset managers is outlined in the special report titled 'CDO Asset Managers: U.S. Replacement Activity Update', dated Dec. 9, 2010, available on the Fitch Ratings website.

Established in 2002 as a structured credit asset management firm, Princeton is a Securities and Exchange Commission (SEC) registered investment advisor headquartered in Princeton, New Jersey. Princeton is owned exclusively by active employees and currently has a staff of 10 professionals managing approximately $4 billion through its asset-backed securities (ABS) CDO platform. Princeton currently manages seven ABS CDOs, none of which are rated by Fitch.

Fitch emphasizes that the scope of its review was solely to determine that Princeton meets Fitch's minimum guidelines to manage Prudential Structured Finance CBO I within the context of Fitch's stated review procedure for replacement managers. Fitch is not a party to the transactions and therefore does not provide consent or approval, as that remains the sole preserve of the transaction parties. Fitch expects to be notified by the trustee when or if the proposed transfer of asset management responsibilities is completed.

DSBA Corporate Counsel Section Meeting March 28, 2011

Shannon S. Frazier — Tue, 22 Mar 2011 09:24:37 -0500

The Corporate Counsel Section of the Delaware State Bar Association will hold a meeting on Monday, March 28, 2011 at 12:00 p.m. at the DSBA office.

Based on the deadlines set forth in the Section By-Laws, it is necessary to have the Section Officer Elections at the March meeting instead of the June meeting as originally planned. If you are interested in volunteering for an Officer's position and please plan to attend the March meeting if possible.

The current list of Officers is as follows:

Co-Chairpersons: Lisa Passante, Laura Beth Taylor
Co-Vice Chairpersons: Cathy Reese, Daniel Horowitz
Secretary: Shannon Frazier

Any Section member interested may run for election for any of the positions posted above. Current Officers have expressed interest in running again but we want to give you the opportunity to run as well. The fiscal year begins on July 1 giving new Officers time to review the roles and responsibilities of the position.

We look forward to seeing you there!

SEC Approves New Rules Regulating Asset-Backed Securities

Shannon S. Frazier — Thu, 20 Jan 2011 15:04:27 -0500

The Securities and Exchange Commission today voted to adopt two sets of new rules designed to help revitalize the asset-backed securities (ABS) market by encouraging better disclosure for investors.

One set of rules that requires issuers of asset-backed securities to disclose the history of the requests they received and repurchases they made related to their outstanding asset-backed securities. The second set of rules requires issuers of asset-backed securities to conduct a review of the assets underlying those securities, and to disclose to investors the nature, findings and conclusions of the issuer's review of the assets.

In a press release today, SEC Chairman Mary L. Schapiro is quoted as stating:

"At one time, the securitization market provided trillions of dollars of liquidity to virtually every sector of the economy. However, during the financial crisis, ABS investors suffered significant losses, causing the market for securitization to rapidly decline. These rational measures are designed to help revitalize the important asset-backed securities market by encouraging better disclosure for investors."

Will these rules bring stability to the ABS market? Will investors and issuers react favorably? What do you think?

ASF 2011 Agenda Announced

Shannon S. Frazier — Wed, 22 Dec 2010 15:47:01 -0500

The American Securitization Forum has published the agenda for the ASF 2011 Conference taking place in Orlando, Florida on February 6-9, 2011.

This year's topics will include securitization legislative and regulatory reform, risk-based capital regulations, Regulation AB II, loan servicing and loss mitigation initiatives and GSE reform, among others. Current business developments and the outlook for all securitization asset classes and product types, including RMBS, credit card ABS, auto loan ABS, student loan ABS, and re-emerging sectors and business opportunities will also be examined.

Speakers have not yet been announced, but ASF is soliciting suggestions.

Morris James LLP is Named a "Go-To Law Firm" for the Nation's Fortune 500 Companies

Morris James Delaware — Tue, 23 Nov 2010 16:24:10 -0500

Recognizing the firm's strength in intellectual property litigation, Corporate Counsel magazine has named Morris James a “Go-To Law Firm for the Top 500 Companies.” Go-To Law Firms are chosen from an American Lawyer Media national survey of general counsel from the top Fortune 500 companies and through research in various key databases. The firm’s recognition will be published in the 8th Annual Edition of In-House Law Departments at the Top 500 Companies.

The Morris James Intellectual Property Litigation Group provides out-of-state firms and their clients help in navigating the Delaware court system. The Group combines its on-the-ground, technical and trial experience to address the complex intellectual property protection issues moving global markets today. They represent clients in complex disputes involving patents, trade secrets, trademarks, copyrights, unfair competition, and antitrust issues and have successfully litigated cases in all areas of technology in the Delaware District Court, the Delaware Court of Chancery and Superior Court, and federal courts throughout the country, including the Court of Appeals for the Federal Circuit.

American Securitization Forum Releases Study on Mortgage Loan Transfers in Securitizations

Shannon S. Frazier — Tue, 16 Nov 2010 08:23:43 -0500

The American Securitization Forum today has released a detailed study on the principles of valid mortgage loan transfers in securitization transactions.

This project began in the wake of recent concerns expressed by commentators questioning whether securitization trusts (both private and government-sponsored) have valid legal title to the trillions of dollars of mortgage notes in those trusts. The initial response by the securitization industry indicated that the methods for conducting these transfers were "adequate and appropriate" and "in accordance with applicable law." The study results released today provide ample support for this position.

In a statement released to members, the American Securitization Forum stated that the study "...finds that traditional legal principles and processes, including the common law rule that “the mortgage follows the note,” are fully consistent with today’s complex holding, assignment and transfer methods for mortgage loans and those methods are legally effective for participants in the secondary mortgage market to transfer mortgage loans."

This is good news for the securitization industry and all its participants, and hopefully the study will provide reassurance to issuers and investors alike, such that the still sluggish securitization market can continue to improve.

Four Morris James Attorneys Selected By Their Peers As "Top Lawyers" In Delaware Today Magazine

Morris James Delaware — Thu, 04 Nov 2010 15:32:14 -0500

Morris James is pleased to congratulate the lawyers listed below who were the most recommended by their professional peers, as determined by a Delaware Today survey of Delaware attorneys.

Gretchen S. Knight
Divorce
Family Law

Mary M. Culley
Elder Law

Keith E. Donovan
Personal Injury
(Dover Office)

Jill S. Di Sciullo
Family Law

To view the entire list of "Top Lawyers", please click here.

Morris James LLP Receives "Award of Excellence" From The Marvin S. Gilman Superstars in Business Awards Sponsored by the DSCC

Morris James Delaware — Thu, 04 Nov 2010 15:28:11 -0500

We are very pleased to receive this honor from the Delaware State Chamber of Commerce," said David H. Williams, Managing Partner of Morris James LLP, "Our firm is deeply rooted in Delaware and we are committed to providing our community with top-tier legal services.”

The Marvin S. Gilman Superstars in Business Award, named for one of Delaware’s leading small business entrepreneurs, honors businesses and non-profit corporations for their outstanding achievements and model approaches to business and management. The awards are presented to companies that have been in business for at least three years, are small businesses based on number of employees, and are members of the Delaware State Chamber of Commerce. Awards of Excellence are also granted to deserving companies.

The “Superstars in Business” winners include Laura Novak Photography & Little Nest Portraits (Category of up to 25 employees), SSD Technology Partners (Category of 26 to 64 employees), IG Burton and Company, Inc. (Category of over 65 employees), and Habitat for Humanity of New Castle County (Non-profit organization category).

In addition to Morris James LLP (Category of over 65 employees), the “Award of Excellence” winners include Bramhall & Hitchen, Inc. (Category of up to 25 employees), Gunnip & Company LLP (Category of 26 to 64 employees), and Children & Families First (Non-profit organization category).

Click here to learn more about the awards and the Delaware State Chamber of Commerce.

American Securitization Forum Says Transfers of Residential Mortgage Loans to Securitization Trusts Are Valid

Shannon S. Frazier — Mon, 18 Oct 2010 09:19:42 -0500

On Friday, the American Securitization Forum issued a press release in response to rumors that transfers of residential mortgage loans to securitization trusts were not valid.

Specifically, in recent days, concerns had been raised as to whether the standard industry methods of transferring ownership of residential mortgage loans to securitization trusts were sufficient and appropriate. After consulting with various ASF member law firms, it was determined that these concerns are without merit, "as the conventional process for loan transfers embodied in standard legal documentation for mortgage securitizations is adequate and appropriate to transfer ownership of mortgage loans to the securitization trusts in accordance with applicable law. This process is sufficient to establish ownership by the securitization trusts."

Look for more information from the ASF on this topic over the coming weeks!

Treasury Department Issues Proposed Series LLC Regs

Shannon S. Frazier — Mon, 27 Sep 2010 15:13:05 -0500

Earlier this month, the Treasury Department issued the long-awaited proposed regulations regarding the Federal tax classification of series limited liability companies.

In a nutshell, the proposed regs provide that, regardless of whether a series of an LLC is considered a "person" for local law purposes, such series will be treated as a separate entity for Federal tax purposes.

Given the similarity under Delaware law between series LLC's and series trusts, it will be interesting to see if the regs are ultimately expanded to apply to series trusts, as well. It will also be interesting to see how far the "separate entity" theory with respect to the individual series can stretch-- can an individual series stand as a debtor in bankruptcy, for instance? Based on this recent article in the Delaware Journal of Corporate Law, that may well be the case.

2010 Amendments to the Delaware Statutory Trust Act

Shannon S. Frazier — Tue, 07 Sep 2010 10:26:56 -0500

The Delaware Legislature, as part of the ongoing effort to maintain the national preeminence of the Delaware Statutory Trust Act (the "DST Act"), has once again enacted amendments to expand, change and clarify certain provisions of the Act.

Once of the nicest things about using a Delaware statutory trust (and this is true for all of the Delaware entity statutes, actually) is the responsiveness of the Delaware Legislature in making changes to the statute as the need arises.

So, for instance, as businesses more frequently engaged in transactions involving the merger or consolidation of a Delaware statutory trust, it became evident that the language of the DST Act relating to the dissolution of a Delaware statutory trust which was not the survivor in a merger or consolidation was troublesome to practitioners. In response, the new amendments to the DST Act have clarified that a non-surviving statutory trust is not considered to have dissolved and does not need to wind-up its affairs. Likewise, when practitioners were faced with the question of whether the doctrine of independent legal significance, a traditionally corporate concept, applied to statutory trusts, the Legislature was able to swiftly resolve the issue by a statutory amendment.

The new amendments also remedy the distinction between a corrected certificate of trust (which is retroactive in nature) and a certificate of correction of a certificate of trust (which previously was not retroactive). That both types of corrective filings have a retroactive effective time certainly simplifies matters.

This responsiveness of the Legislature to the concerns of businesses and to the practical realities of working within the statutory trust framework really is one of the stand-out characteristics of the DST Act.

American Securitization Forum Responds to Regulation AB Proposals

Shannon S. Frazier — Wed, 11 Aug 2010 08:55:17 -0500

On August 2, 2010, the American Securitization Forum (“ASF”) filed two comment letters in response to the SEC’s recent proposals relating to Regulation AB. The first comment letter focused on ASF members’ views on the proposed revisions to Regulation AB, while the second comment letter focused on and set forth a specific alternative disclosure regime for asset-backed commercial paper transactions.

Reg AB, as it has come to be known, became effective on January 1, 2006, and set forth registration, disclosure and reporting requirements for asset-backed securities (“ABS”) under the Securities Act of 1933 and the Securities Exchange Act of 1934. In April 2010, the SEC, intending to improve investor protection and streamline the asset-backed market in the aftermath of the present financial crisis, proposed major revisions to Reg AB. If these proposals become effective, filing deadlines for ABS offerings would be revised, new shelf-eligibility criteria would be imposed, and prospectuses would be required to contain specified asset-level information about each of the assets in a pool.

The ASF, while concurring that additional investor protection is necessary and offering support for the new regulations, expressed a few concerns about the practicality of the SEC proposals and suggested alternative solutions. Whether the SEC is receptive to the suggestions of the ASF remains to be seen, but it seems certain that Reg AB will be amended in one fashion or another. What is also certain is that the securitization market, already on shaky ground, will be forced to adapt to these new regulations. Will these changes have a further chilling effect on the ABS market? Or will the new rules, in whatever form they are adopted, bring more investor confidence and result in a resurgence of asset-backed deals? Only time will tell, but it looks like the ABS market still has a bumpy road ahead of it.

Trustee Representation in Structured Finance Transactions

Shannon S. Frazier — Thu, 29 Jul 2010 15:56:12 -0500

The Journal of Structured Finance has published an article written by Shannon Frazier entitled "Trustee Representation in Structured Finance Transactions."

The article provides an overview of certain fundamental trustee issues that arise in virtually all financing arrangements involving a trust structure. Some of the topics discussed include capacity, indemnification and limitations on trustee liability, among others. Hopefully, the article will prove to be a valuable resource for parties to structured financings.

Class Voting Rights in the DGCL

Jonathan Strauss — Tue, 27 Jul 2010 12:49:43 -0500

Under Delaware law does a class of stock have voting rights other than those set forth in the certificate of incorporation?

Yes. Regardless of the voting limitations imposed on a class of stock in the certificate of incorporation, a class of stock is entitled to vote on certain proposed amendments to the certificate of incorporation that affect them adversely but such right does not extend to mergers that affect the class adversely.

Unless otherwise provided in the certificate of incorporation, a stockholder is entitled to one vote per share of capital stock. A corporation may issue one or more classes of stock with such voting powers, full or limited, or no voting power, and such restrictions as shall be stated and expressed in the certificate of incorporation. However, even stock that does not otherwise have any right to vote has the right to a vote by class by statute with respect to specified categories of amendments to the certificate of incorporation. The statute creates a right to a class vote when a proposed amendment to the certificate of incorporation would:

(1) increase or decrease the number of authorized shares of the class,

(2) increase, decrease or eliminate the par value of the shares of the class, or

(3) alter or change the powers, preferences or special rights of the shares of the class so as to affect them adversely.

However, Delaware courts have held that the right given to preferred stockholders to vote as a class on charter amendments which affect their rights and privileges adversely does not carry with it a right to class votes on mergers unless such right is expressly provided in the charter.

LLC's and Default Fiduciary Duties

Jonathan Strauss — Tue, 27 Jul 2010 12:22:29 -0500

While the majority of case law in Delaware suggests that a Delaware court will apply default fiduciary duties when a limited liability company agreement (an “LLC agreement”) is silent as to the existence and application of fiduciary duties, the Delaware Supreme Court has not yet weighed in and therefore this issue is not settled law.

Can an argument be made that default fiduciary duties violate the strong policy favoring freedom of contract established by Delaware’s legislature, and that Delaware courts should not apply default fiduciary duties even if the parties have not specifically provided for the elimination of fiduciary duties?

In an article for the American Business Law Journal, Chief Justice Steele contends that “default fiduciary duties violate the strong policy favoring freedom of contract established by Delaware’s legislature,” and “Delaware courts should not apply default fiduciary duties even if the parties have not specifically provided for the elimination of fiduciary duties.” See Myron T. Steele, Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 223-224 (2009). He argues that courts “should not read any default fiduciary duties into an LLC agreement because the parties’ prescribed and proscribed conduct in their operating agreement contains the entire agreement that the parties intend and expect.” The Chief Justice also reasons that the court should “favor the contracting parties’ ex ante calculation of costs and benefits of fiduciary duties, and courts should not, on their own, endeavor to reassess that decision ex post.” In his article, Chief Justice Steele asserts that the Court of Chancery itself is split on the issue of default fiduciary duties, and points to two decisions by Chancellor Chandler which support not applying default fiduciary duties.

I wonder how likely it is that Chief Justice Steele could persuade his fellow Justices to support this theory?

The Dodd-Frank Wall Street Reform and Consumer Protection Act

Shannon S. Frazier — Tue, 20 Jul 2010 10:21:07 -0500

In July, the U.S. Senate passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), a 2,000 page bill containing what may be the most sweeping financial reforms since the Great Depression.

The Act itself proclaims that it is “An Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” With these goals in mind, the Act sets forth major overhauls of virtually every aspect of business, from the regulation of swaps, derivatives, and hedge funds to the fiduciary duties of brokers to executive compensation to the creation of the Bureau of Consumer Financial Protection and the Financial Stability Oversight Council, and more.

The task now facing the business and legal communities is a daunting one: to delve into the substance of the Act and come to understand the subtleties and nuances this new law, to find a way to transact business within the confines of these new regulations.

What this all means for the finance industry is unclear. On one hand, there is no doubt that the market hates uncertainty. It can be hoped that the certainty brought to the economic landscape by the passage of the Act will lead to greater stability and long-term growth. On the other hand, the complexity of the legislation and the new requirements of the Act may deter businesses from participating in the financing transactions that are so important to the movement of money within our economy. In either circumstance, the latter part of 2010 should be an interesting time for investors, attorneys, and Wall Street financiers alike.

New Legislation Removes LLC Agreements from the Statute of Frauds

Shannon S. Frazier — Mon, 19 Jul 2010 13:41:30 -0500

One of the hallmarks of the Delaware Limited Liability Company Act (the "Delaware LLC Act") is its flexibility. Indeed, the Delaware LLC Act seeks “to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” To that end, the Delaware LLC Act expressly permits “written, oral or implied” LLC agreements, and generally allows parties to enforce unwritten, unsigned LLC agreements.

In October 2009, however, the Delaware Supreme Court was called upon in the case of Olson v. Halvorsen to review of the application of the statute of frauds to LLC agreements. Construing the Delaware LLC Act and the statute of frauds together, and finding that the General Assembly did not clearly intend the Delaware LLC Act to render the statute of frauds inapplicable, the Delaware Supreme Court held that the statute of frauds does, in fact, apply to LLC Agreements. As a result, according to the Delaware Supreme Court, the statute of frauds prevents enforcement of oral LLC agreements that require more than one year to complete.

It appears that this outcome is not the one intended by the Delaware legislature in drafting the Delaware LLC Act. In light of the Olson decision, on June 10, 2010, the Governor signed House Bill No. 372, which (in part) amends Section 18-101(7) of the Delaware LLC Act to provide “[a] limited liability company agreement is not subject to any statute of frauds…” (emphasis added).

Furthermore, although the Olson decision related solely to limited liability companies, the legislature made similar amendments to the Delaware Partnership Act and the Delaware Limited Partnership Act, clarifying that the operating agreements of such entities are likewise exempt from any statute of frauds.

These amendments will go into effect on August 2, 2010.