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Credit Agreements Will Require Important Updates If a Proposed New Delaware Law Is Passed


June.14.2018

The Delaware legislature is currently contemplating an amendment to the Delaware Limited Liability Company Act that, if passed, would go into effect on August 1, 2018 and would allow Delaware limited liability companies to divide themselves into two or more LLCs.[1] Under the proposed changes, the original LLC would 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).[2] The proposed 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.

Leveraged 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.

[1] The Delaware Senate passed the proposed amendment on June 5, 2018 and assigned it to the Judiciary Committee in the Delaware House of Representatives. A committee hearing should take place by the end of June.

[2] The new law will apply with similar effect to limited partnerships as well.