Update: Newly Passed Delaware Law Will Necessitate Important Updates to Credit Agreements

Financial Industry Alert

The following client alert is an update of the Orrick alert sent on June 14, 2018. Since then, the proposed amendment to the Delaware Limited Liability Company Act was signed into law by the governor of the state. 

On July 23, 2018, the State of Delaware amended the Delaware Limited Liability Company Act to allow a Delaware limited liability company to divide itself into two or more LLCs (effective as of August 1, 2018). The original LLC will have the ability to allocate its assets, liabilities, rights and duties among the newly divided LLCs pursuant to a "plan of division" and then terminate or continue its own existence. Following the division, each LLC would own the assets and be obligated on the liabilities of the original LLC only to the extent they are allocated to it by the plan of division (unless the plan of division constitutes a fraudulent transfer). The amendment provides that if an LLC formed prior to August 1, 2018 is a party to any agreement entered into prior to that date containing a restriction on mergers, consolidations or transfers of assets by such LLC, then such restriction will be deemed also to apply to any division by such LLC.

Loan agreements typically restrict mergers, asset sales and similar transactions, but most do not currently contemplate divisions. When entering into new loan agreements or amending existing loan agreements, lenders should consider: (1) changing the definition of "Asset Sale" to incorporate the effective transfer of assets via division, (2) expanding the negative covenant related to mergers and other fundamental changes to include divisions as a type of fundamental change, and (3) modifying the collateral covenants to ensure that future LLCs formed by division will be required to pledge assets and equity to support the obligations owed to such lenders to the same extent as existing entities.