Most financing agreements have covenants limiting the ability of a borrower to merge, consolidate, create subsidiaries, declare and pay dividends or other “restricted payments,” or transfer assets. However, certain states, most recently Delaware, have created a new type of corporate action that permits certain borrowers to reorganize in a way that may not be captured by existing covenants.
Section 18-217 of the Delaware Limited Liability Company Act went into effect on Aug. 1, 2018. This section allows a Delaware limited liability company to divide into two or more separate Delaware limited liability companies, and is intended to facilitate asset transfers without requiring separate asset transfer agreements. The statute contains fairly clear and straightforward steps to accomplish a “division” (often counter-intuitively referred to by commentators as a “divisive merger”). It also raises a number of questions.
