Every year the Corporate Law section of the Delaware State Bar Association submits proposed amendments to the General Assembly of Delaware, seeking to improve the corporate law in our state. 1999 was no exception. Several laws were enacted which helped keep Delaware’s progressive approach in the area of corporate law on the forefront. This memo mentions only one of the changes, but one which should have interest to our RAL clients and friends.Sections 265 and 266 of the General Corporation Laws were amended. The amendment to Section 265 permits limited liability companies to convert into Delaware corporations. The other side of that coin is found in Section 266 which permits Delaware corporations to convert into limited liability companies.
Until these recent amendments, the traditional method by which a non-corporate Delaware entity became a Delaware corporation (or vice versa) was by a merger. The problem with that however was that a merger could create change-of-control provisions regarding the entity’s contracts with third parties, or might bring about undesirable tax consequences.
The amendments to the Delaware Law now permit the conversion to or from a Delaware corporation or LLC to avoid triggering change of control provisions or creating adverse tax consequences. This is because the original entity’s existence remains unaffected by the conversion.
In order to accomplish a Section 265 conversion, the limited liability company must approve the conversion and a proposed certificate of incorporation as provided for by the governing instrument, and then must file both a certificate of conversion and a certificate of incorporation with the Secretary of State.
Under a Section 266 conversion (from corporation to LLC) the corporation’s board of directors must recommend and approve the conversion, all of the outstanding shares of stock including non-voting shares must vote in favor of the conversion and a certificate of conversion must be filed with the Secretary of State.