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Some California Implications Of Delaware's New LLC Division Statute

When I first heard about Delaware's new statute establishing a procedure for dividing a limited liability company, I immediately flashed back to High School Biology class and meiosis.  In meiosis 1, a single cell divides into two cells with each resulting cell having half the number of the number of chromosones as the original cell.  Delaware's new statute, Section 18-217, authorizes a Delaware LLC to divide into 2 or more Delaware LLCs.  For more information on this new law, see this Q&A with Tarik J. Haskins, a partner at the Delaware Law firm of Morris, Nichols, Arsht & Tunnell LLP.  From a California perspective, several issues come to mind. 

If the resulting company will continue to be engaged in intrastate business in California, it will need to register with the California Secretary of State as a foreign LLC pursuant to Cal. Corp. Code § 17708.02.  If the dividing company will no longer be engaged in intrastate business in California, it will want to cancel its registration pursuant to Cal. Corp. Code § 17708.06.

If the dividing corporation owns real property in California, it will need to consider whether the division will constitute a change in ownership triggering reappraisal and reassessment for property tax purposes (Cal. Const., art. XIII A, § 2) or a transfer for purposes of California's Documentary Transfer Tax Act, Cal. Rev. & Tax Code § 11901 et seq.  See California Supreme Court Affirms Novel M&A Tax.  In this regard, the Delaware statute provides:

"The rights, privileges, powers and interests in property of the dividing company that have been allocated to a division company, as well as the debts, liabilities and duties of the dividing company that have been allocated to such division company pursuant to a plan of division, shall remain vested in each such division company and shall not be deemed, as a result of the division, to have been assigned or transferred to such division company for any purpose of the laws of the State of Delaware."

18-217(l)(8).  

Finally, it may be that a division pursuant to the Delaware statute will be subject to qualification requirements of the California Corporate Securities Law of 1968 as either an issuer or reorganization transaction.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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