“Protected” versus “registered” series LLCs
Delaware has allowed for the creation of "series LLCs" since 1996.
Sixteen US states, the District of Columbia and Puerto Rico have statutes that allow limited liability companies to create different pockets or cells of investments, each potentially with different owners, a different managing member and different assets. In some of the states, each series can have a separate right, in its own name, to sign contracts, hold title to assets and grant liens and security interests in the assets belonging to that series. The debts of a particular series may be enforceable only against the assets of that series. (For earlier coverage of series LLCs, see "LLCs with Separate Series" in the January 2009 NewsWire and "Series LLCs" in the June 2015 NewsWire.)
Under the Delaware limited liability company statute, an LLC can create different combinations or series of members, managers, interests or assets by providing for such series in the LLC operating agreement.
If certain statutory conditions are met — in particular, maintaining separate records for each series and providing notice of the series in the certificate of formation — then each series' assets are shielded from claims that creditors may have against other series or against the LLC as a whole.
While series LLCs have been useful tools for limiting liabilities and segregating assets, they have had mounting difficulty complying with other laws like the Delaware Uniform Commercial Code or UCC.
New amendments to the Delaware LLC statute took effect on August 1 and should address some of these issues.
After the amendments, two types of series can be established in Delaware: a "protected series" and a "registered series."
The phrase "protected series" describes the type of series that can be formed currently. The requirements to form such a series remain unchanged. The LLC certificate of formation must provide notice of the series structure, and the LLC agreement must permit the formation of the different 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 be shielded from liabilities and obligations of the LLC itself and of other series, whether the other series are protected or registered. No new action is required for any existing series LLC to follow the protected format.
A "registered series" is a new concept. The requirements to establish such series are the same as for protected series. The LLC agreement must allow for such series, 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 name of a registered series does not have 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 other business entities registered to do business in the state. Registered series names can be reserved ahead of time. A certificate of registered series does not have 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. However, unlike a protected series, a registered series will be able to obtain a separate 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 will maintain records for registered series, and registered series will be subject to an annual Delaware tax, set initially at $75 per series. Protected series are not subject to this tax.
A key question 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 when trying to perfect 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 a security interest in the assets of a particular series without leaving questions about the effect on other series or the LLC as a whole. Registered series may become more common in secured financing transactions.
Another limitation of the existing series structure was the inability of a series to get a good standing certificate. As already mentioned, good standing certificates will now be issued to separate registered series in the same way that a certificate of good standing is obtained for the LLC itself.
Another problem was that existing series could not merge with other series of the same LLC. The amendments allow 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 Delaware 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% 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% of the profits interests in 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 a 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.