Understanding the Division of Delaware Limited Liability Companies

Introduction to the Delaware LLC Division Amendment

The State of Delaware amended the Delaware Limited Liability Company Act (“Act”) to create a new form of transaction called a “Division.”  The newly enacted Section 18-217 of the Act allows an existing limited liability company (“Dividing Company”) to divide into two or more separate and distinct domestic limited liability companies (each a “Resulting Company”), with the Dividing Company allocating its assets, rights and liabilities among the Resulting Companies, with the further option of either terminating or continuing its own existence.  

What is a Division?

The Division of a limited liability company may be used to facilitate the sale of one or more lines of business, or the sale of assets, rights and properties, along with the related liabilities which would eliminate the need to transfer assets and liabilities, or assign contracts or licenses, to newly formed limited liability companies.

To utilize a Division, the Dividing Company’s assets and liabilities are allocated to, and vested in, the Resulting Companies, as specified in a plan of division, without the need for any further action by any party.  

The Significance of a Plan of Division

All limited liability companies formed prior to August 1, 2018, shall be governed by this section; provided, that if the dividing company is a party to any written contract, indenture or other agreement entered into prior to August 1, 2018, that, by its terms, restricts, conditions or prohibits the consummation of a merger or consolidation by the dividing company with or into another party, or the transfer of assets by the dividing company to another party, then such restriction, condition or prohibition shall be deemed to apply to a Division as if it were a merger, consolidation or transfer of assets, as applicable.

All limited liability companies formed on or after August 1, 2018, shall be governed by the amendment to the Act and the following shall apply:  

1. A limited liability company that desires to restrict, condition or prohibit a Division, should specifically state in its operating agreement that the company does not have the power to effectuate a Division.

2. If the operating agreement of the Dividing Company specifies the manner of adopting a plan of division, the plan of division shall be adopted as specified therein.

3. If the operating agreement of the Dividing Company does not specify the manner of adopting a plan of division and does not prohibit a division of the limited liability company, the plan of division shall be adopted in the same manner as is specified in the operating agreement for authorizing a merger or consolidation that involves the limited liability company as a constituent party to the merger or consolidation.

4. If the operating agreement of the Dividing Company does not specify the manner of adopting a plan of division or authorizing a merger or consolidation that involves the limited liability company as a constituent party and does not prohibit a division of the limited liability company, the adoption of a plan of division shall be authorized by the approval by members who own more than 50 percent of the then current percentage or other interest in the profits of the Dividing Company owned by all of the members.

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A plan of division shall set forth: (1) the terms and conditions of the Division including the conversion or exchange of the interest of the Dividing Company into or for interest in the Resulting Companies; (2) the allocation of assets, property, rights, series, debts, liabilities and duties of the Dividing Company among the Resulting Companies; (3) the name of each Resulting Company and, if the Dividing Company will survive the Division, the name of the surviving company; (4) the name and address of a division contact which shall have custody of a copy of the plan of division; and (5) any other matters that the Dividing Company determines to include therein.

It shall not be necessary for a plan of division to list each individual asset, property, right, series, debt, liability or duty of the Dividing Company to be allocated to a Resulting Company so long as the assets, property, rights, series, debts, liabilities or duties so allocated are reasonably identified by any method where the identity of such assets, property, rights, series, debts, liabilities or duties is objectively determinable.

Upon the Dividing Company adopting a plan of division, the Dividing Company shall file a certificate of division in the office of the Delaware Secretary of State along with a certificate of formation for each Resulting Company.  While a certificate of division is required to be filed with the Delaware Secretary of State in order to effectuate the division, the underlying plan of division is not required to be filed or otherwise be made public.

Effects of a Division on Assets, Liabilities, and Duties

Once the Dividing Company has been divided into the distinct and independent Resulting Companies named in the plan of division then:

1. All of the rights, privileges and powers, and all the property, real, personal and mixed, of the Dividing Company and all debts due on whatever account to it, as well as all other things and other causes of action belonging to it, shall without further action be allocated to and vested in the applicable Resulting Company in such a manner and basis and with such effect as is specified in the plan of division, and the title to any real property or interest therein allocated to and vested in any Resulting Company shall not revert or be in any way impaired by reason of the division.

2. Each Resulting Company shall, from and after effectiveness of the certificate of division, be liable as a separate and distinct domestic limited liability company for such debts, liabilities, and duties of the Dividing Company as are allocated to such Resulting Company pursuant to the plan of division.

3. Each of the debts, liabilities and duties of the Dividing Company shall without further action be allocated to and be the debts, liabilities and duties of such Resulting Company as is specified in the plan of division as having such debts, liabilities and duties allocated to it, in such a manner and basis and with such effect as is specified in the plan of division, and no other Resulting Company shall be liable therefor, so long as the plan of division does not constitute a fraudulent transfer under applicable law, and all liens upon any property of the Dividing Company shall be preserved unimpaired, and all debts, liabilities and duties of the Dividing Company shall remain attached to the Resulting Company to which such debts, liabilities and duties have been allocated in the plan of division, and may be enforced against such Resulting Company to the same extent as if said debts, liabilities and duties had originally been incurred or contracted by it in its capacity as a domestic limited liability company.

4. In the event that any allocation of assets, debts, liabilities and duties to Resulting Companies in accordance with a plan of division is determined by a court of competent jurisdiction to constitute a fraudulent transfer, each Resulting Company shall be jointly and severally liable on account of such fraudulent transfer notwithstanding the allocations made in the plan of division; provided, however, the validity and effectiveness of the Division are not otherwise affected thereby.

5. Debts and liabilities of the Dividing Company that are not allocated by the plan of division shall be the joint and several debts and liabilities of all of the Resulting Companies.

Tax Implications of Undergoing a Division

A Division may be treated as a tax-free transaction in certain circumstances.  The amendment to the Act specifically provides that the allocation of assets in a Division is not deemed a transfer or assignment, so transfer taxes may not be imposed, though the laws of each applicable jurisdiction would need to be reviewed to confirm such treatment.

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