Formation of registered series of Delaware LLCs
to be permitted August 1, 2019

Delaware has allowed for the creation of a series LLC since 1996. Under the Delaware Limited Liability Company Act (the "DLLCA"), an LLC can create series of members, managers, interests and/or assets by providing for such series structure in the LLC agreement. If certain statutory conditions are met – in particular, maintaining separate records for each series and providing notice of series in the certificate of formation – the particular series' assets are shielded from claims that creditors may have against other series of the LLC or against the LLC as a whole. While series LLCs have been useful tools in limiting liabilities and segregating assets, series LLCs have faced increasing difficulties with complying their activities under other laws, specifically the Delaware Uniform Commercial Code (the "UCC").

Amendments to the DLLCA aimed to alleviate some of these concerns. The amendments relating to registered series will become effective August 1, 2019. Once the amendments take effect, there will be two types of series that can be established in Delaware; a "protected series" and a "registered series."

A protected series is the type that can currently be formed, and the requirements to form such a series remain the same. The LLC's certificate of formation must provide notice of such series structure and the LLC agreement must permit the formation of series. Proper records must also be maintained that account for the segregation of assets and liabilities among the series. As the name suggests, these protected series will continue to protect against liabilities and obligations of the LLC itself and other series, whether such other series are protected or registered. No new action is required for any existing series LLC to follow the protected type.

The concept of a "registered series" has been introduced through the amendments. A registered series is established similarly to a protected series. The LLC agreement must allow for it, and the certificate of formation must provide notice of the series structure. However, a registered series must also file a certificate of registered series with the Delaware Secretary of State. The certificate of registered series sets forth the LLC's name and the name of the registered series. The name of a registered series does not need to include the word "series" but must begin with the name of the LLC and must also be distinguishable upon the records of the Secretary of State from the names of other series and domestic and qualified business entities. Registered series names can be reserved ahead of time similarly to how the DLLCA already permits the reservation of LLC names. A certificate of registered series does not need to identify a registered agent because the registered series will use the same agent as the LLC that formed the series.

A registered series will have the same rights, powers and obligations as a protected series as long as the same statutory requirements of notice and recordkeeping are met. A registered series, however, will be able to obtain a certificate of good standing from the Delaware Secretary of State. Because a registered series will have many of the same attributes of a separate entity (but not actually be a separate entity), the state is required to maintain a record for registered series, and registered series will have an annual Delaware tax, initially set at $75 per series. Protected series will not have to pay this annual fee.

One of the key issues the amendments aim to address is how a series LLC is recognized under the UCC. Previously, series LLCs did not meet the UCC definition of a "registered organization" because each series was not formed or organized "by the filing of a public organic record" with the state. It was also unclear whether a series LLC met the definition of "person" under the UCC. This created issues in perfecting a security interest against a specific series' assets. The amendments provide that a registered series is an "association" and has the required characteristics of a "registered organization" for purposes of the UCC. This will allow a secured party to be able to file a financing statement in Delaware and perfect such security interest in the assets of a particular series without raising issues of its impact on other series or the LLC as a whole. Registered series may become a key tool in secured financing transactions.

Another limitation of the existing series structure that the amendments address was the inability of a series to obtain a good standing certificate. If the registered series is in good standing, a party can now simply request a good standing certificate from the Secretary of State in the same way a certificate of good standing is obtained for the LLC itself.

There were additional limitations regarding the inability of an existing series to merge with another series of the same LLC. The amendments now provide for conversion of a protected series into a registered series, the conversion of a registered series into a protected series and the merger or consolidation of two or more registered series. An existing protected series can convert into a registered series by filing a certificate of conversion and a certificate of registered series with the Secretary of State. Similarly, a registered series can convert into a protected series – a certificate of conversion is filed with the Secretary of State and the previously filed certificate of registered series will be cancelled. Unless otherwise provided in the LLC agreement, conversion requires the approval of members holding 50 percent of the profits of such series. A merger or consolidation of one or more registered series of the same LLC must also be approved by members holding more than 50 percent of the interest in profits of each merging series, unless otherwise provided in the LLC agreement. This could be a more efficient and practical way to consolidate the assets and liabilities of two series instead of potentially having to deal with transferring all assets and liabilities between entities.

While the amendments provide clarity and offer solutions to longstanding issues in financing transactions, it is yet to be seen to what extent these increasingly "separate" structures will be respected by courts outside Delaware and whether similar issues will still arise in the bankruptcy context. Furthermore, many of the secured transactions issues addressed by these amendments deal with the Delaware UCC. It remains unclear whether other states will recognize a registered series as a registered organization under the uniform commercial code as enacted in those states.

The below chart depicts the similarities and differences between a protected series and a registered series following the amendments in Delaware.