Entity Conversions: A Deep Dive into the Delaware LLC Act

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Annie: Hello, everyone, and welcome to today's webinar, "Entity Conversions, A Deep Dive into the Delaware LLC Act." My name is Annie Triboletti. I will be kicking things off today.

So joining us today are Mike Maxwell and Alyssa Gerace Frank, from Potter Anderson & Corroon, and Helena Ledic from CSC. And with that, I'd like to welcome in Helena, Mike, and Alyssa.

Helena: Thank you so much, Annie. This is Helena speaking. Hi, everyone. What I wanted to do was just kind of lay out our agenda over here before we get started over here.

So we're going to go into an introduction over here, and then we're going to have a general discussion about the overview of conversions. Then what we're going to pivot into is a conversion of a Delaware LLC, a conversion to a Delaware LLC, and conversions of other and to other Delaware entities, some practical considerations, and then our conclusions and then a Q&A. And of course, in the middle of there, we will have those CLE codes sprinkled in.

So with that, what I would like to do is turn things over to Mike, who's going to start us off with that general overview. Mike.

Mike: Thanks, Helena. And welcome, everyone. We're glad that you could join us today. As previously mentioned, we're going to be discussing entity conversions and more particularly conversions involving LLCs.

But before we started discussing the conversions generally, I thought it may be worth discussing why this has become a relevant topic recently. So as many of you may be aware, there have been some high-profile companies, typically they're corporations with controlling stockholders that have sought to or threatened to move out of Delaware in the wake of some recent court rulings and other hurdles that have been imposed on controlled companies. So the issues caught the attention of non-controlled companies as well, including companies that have a large amount of LLCs or what we call these alternative entities, due to the significant media and social media coverage.

And so as those controversies really have centered around typical what we call general corporation law issues, around controller conflicts and books of records demands, in the wake of that, amendments were adopted to the DGCL, the Delaware General Corporation Law to address that. Now the reason I bring that up, and it's not entirely relevant for our purposes today, as we discuss primarily conversions under the Delaware LLC Act, but a couple things I think come out of that. One, the conversion generally is one of the methods for which companies can move in and out of a jurisdiction. It's also a method by which you can change your form of entity within the jurisdiction.

But before we got into that, I also thought it would be worth talking about why so many companies incorporate or form their entities in Delaware and why Delaware has been such a popular destination and why even in the wake of some of this high-profile news, Delaware is still a choice jurisdiction. So Delaware has been the premier state of formation for entities I think since the early 1900s. Currently, we sit around I think 60% of the Fortune 500 companies are incorporated here. And the goal of Delaware law typically is to provide both managers and investors with laws that are optimal for engaging in ethical and profitable business by balancing the need for managerial flexibility with strong tools to hold managers accountable for using that flexibility to advance the best interests of the investors.

As this reincorporation competition between states has pushed forward, Delaware, according to a recent ISS article, continues to hold about over 62% of the market share, which is still by far the largest state for incorporations. And I think there's a number of factors that have led to this preeminence in business formation using Delaware. One is a sophisticated and regularly updated statutory law. As I mentioned, there was recent amendments adopted in the DGCL. They also have premier statutes for entities, such as LLCs, limited partnerships, and statutory trusts. Today, we're going to be focusing mostly on the LLCs.

The policy behind most of these or each of these statutes is to give maximum effect to the principle of freedom of contract and to the enforceability of the applicable governing agreements. And these statutes are shaped by corporate law experts and protected from the influence by special interest groups. The Delaware legislature every year reviews these statutes, along with counsels on the Delaware State Bar Association.

Another factor that's led to Delaware's preeminence is it has sophisticated business courts. Delaware is known worldwide for its judicial system. Their courts and judges are appointed through a bipartisan, merit-based selection process. The Court of Chancery is flexible and responsive. Because it's a court of equity that focuses on corporate disputes, it's able to accelerate cases and disputes much faster than most other places around the country.

Also, unlike most other jurisdictions in the U.S., Delaware has no intermediate appellate court. So cases from the Court of Chancery go directly on appeal to the Delaware Supreme Court, which has the final law on Delaware disputes and Delaware law.

Another factor is significant and robust case law, and attorneys and other professionals that are experts in corporate law. So there's well-reasoned opinions come out of the Court of Chancery. Judges, not juries decide corporate cases, giving reasoning for their rulings. Along with a sophisticated judiciary, Delaware has an ample supply of lawyers that are experts in Delaware corporate law.

And the final factor that I'll mention here is just the Delaware Secretary of State. So the Division of Corporations and the Delaware Secretary of State's office are known for their prompt and efficient service. Delaware's Division of Corporations is open 15 hours a day. Filings can be done in as little as 30 minutes up to 24-hour service. This allows for transaction planners to deal with things on a very urgent and time-sensitive basis. And the Division of Corporations in conjunction with expert lawyers and experienced supporting businesses, such as CSC providing registered agent and other services, can handle nearly any situation.

So I bring that up and I give that background just to say it's relevant in the sense that this is why we talk about Delaware, and in particular, as you may have heard in the news and with a lot of the stuff that's going on, the conversions is one of the mechanisms pursuant to which an entity can change its jurisdictional status as well as its type of entity. And we'll get into that in a little bit more detail.

But with the amendments, with things that are going on in Delaware, I would say that the primary reasons that Delaware has been a premier corporate destination, those continue to be true. And the alternative entity statutes, in particular, dealing with the LLCs today, continue to be some of the most flexible in the world. And there's robust case law that supports the interpretation of these statutes. And it's just a very flexible statute that, as we'll discuss today, allows a lot of flexibility in how you plan and deal with things.

So with that background, we'll now get into some of these materials as we're talking about the general overview of conversions and what we mean when we talk about converting from one form of conversion. So I think there's a couple ways you can look at that. One is converting from one form of business entity to the other. The other is converting from a jurisdiction, so, for example, a New York LLC to a Delaware LLC.

Throughout the presentation, we're also going to discuss some of the practical considerations that one should consider when we engage in conversions. And as Helena mentioned earlier, that we'll touch on some of the other entities, such as a corporation and other types of conversions to or from Delaware or from a Delaware type of entity.

All right. So as we mentioned, generally conversion is a change of form of business entity. So it can be an entity outside of Delaware converting to an entity in Delaware. It can also refer to an entity in Delaware changing its form, so from an LLC, for example, to a corporation or a corporation to an LLC.

When considering a conversion, attention should be given to a variety of factors, including the type of entity involved, as I mentioned, whether it's a corporation, LLC, or partnership. And primarily this is because that type of entity involved will inform the statutory regime that you have to look to, to govern the conversion process. And as I mentioned, today, we're obviously discussing primarily LLCs, but we'll touch on some of these other types of conversions.

So as I mentioned, changes can be made to the form of entity type within the same jurisdiction. Changes can also be made to a form of entity by changing the jurisdiction of formation. So, for example, a Delaware corporation to a Texas corporation, or a New York or other jurisdiction coming to Delaware. Now depending on the foreign statutes, sometimes a foreign entity can come in and do a conversion to Delaware as well. A lot of times we see those as domestications, but I've seen them also as a conversion to the extent and that's when you're coming into Delaware. A lot of that is dictated by the entity statutes of the entity that's coming in.

So the statutory requirements and the legal permissibility of these changes, these conversions depends on these previous considerations. And so I'll note here some of these states or foreign jurisdictions may not permit certain types of changes. So this may require further restructuring. So if you're trying to move into Delaware, for example, to come into Delaware as a Delaware LLC, if a Montana corporation cannot convert to a Delaware LLC, but maybe a Montana corporation can convert to a Delaware corporation, which then could become a Delaware LLC or any number of variations that you can imagine in that situation. But whatever the case, you just have to be aware that it has to work both from the other entities that basis. So whether it's the jurisdiction outside of Delaware coming in.

And that's true also if you're converting from a Delaware entity to another type of Delaware entity, so from a corporation to an LLC or an LLC to a partnership. You have to be aware of the statutes in each case and making sure that those align. And we we'll get into some more of the specifics there.

There's a couple of other business and practical considerations to be taken into account, tax and securities laws issues, and that's beyond the scope of our presentation today. But those types of things need to be addressed with as well. Consents, so what type of consents and authorizations are required. And then in some cases, fiduciary considerations. Now Delaware LLCs, you can eliminate fiduciary duties. But to the extent fiduciary duties are applicable, or if you're dealing with a corporation, for example, there may be fiduciary considerations to think through.

All right. With that, we'll go into the specifics of a conversion of a Delaware LLC. And this is pursuant to 18-216 of the LLC Act.

So there's broad flexibility under 18-216. This permits a Delaware LLC to convert to another organization or jurisdiction. So other entities, another Delaware entity, which includes a corporation, a statutory trust, a business trust, an association, partnerships, whether limited partnerships or general partnerships, or a foreign LLC. So a lot of flexibility in that.

And so one of the things to think about, as you're considering this, is so in the first instance, what are you doing? So in this case, we're talking about a conversion of a Delaware LLC moving to either a different entity or a different jurisdiction.

So in the first instance, 18-216 is the statutory basis that provides you the ability to do that. In order to effect the conversion of the LLC, if the LLC's operating agreement specifies the manner of authorizing the conversion, then you act in accordance with the operating agreement. Now a lot of times we see that conversions aren't necessarily specifically addressed in an operating agreement. And so if that's the case, then you are going to look to the default, and the default is what would be required for a merger or consolidation, so long as it doesn't prohibit a conversion. And if that is not addressed and conversions and mergers are both silent in your operating agreement, then you're going to look to the statutory default of conversions being authorized by the members who own more than the 50% of the then-current percentage or other interest in the profits of the LLC, so typically your ownership percentage in the LLC agreement.

Now one other note I'll note here is just that the Delaware LLC's operating agreement can provide a restriction on the ability of an LLC to be able to convert.

All right. And with that, we'll let Alyssa walk us through some of the specifics. So once you've authorized your conversion of a Delaware LLC, there's a couple of mechanics and formalities that need to be attended to. I'll turn it over to Alyssa to talk us through that.

Alyssa: Thanks, Mike. So Mike was just talking about sort of the backend of what you have to do when you're preparing to do a conversion. I'm going to talk a little bit about the front end, the certificate of conversion, which is filed with the Delaware Secretary of State. This is a public document. It can be publicly accessed, usually for a fee. But there are very specific requirements of what the certificate of conversion needs to contain, and those requirements are set forth, I would say pretty clearly, in the Delaware LLC Act. So you'd be looking under 18-216 of the LLC Act, and there's going to be a whole list, as shown on the screen, of information that the certificate has to contain.

One thing that you need to do is list the current name of the LLC, of the Delaware LLC, and then any name under which the LLC was originally formed. So if you have a Delaware LLC that at some point changed its name, you're going to need to list that here. And I would say part of the reasoning behind that is because this is basically creating a public record of the transformation, perhaps you could say, of this Delaware LLC.

You'll also need to include the date that the LLC's certificate of formation was filed with the Delaware Secretary of State. And something to note here is that we'll sometimes see a certificate of formation include the date that it was executed. And when you're filling out or preparing a certificate of conversion, you want to make sure that you include the actual date of filing with the Delaware Secretary of State as reflected in the timestamp. That's going to be in the corner of that certificate of formation because that's the date that they're looking for to be in the certificate of conversion, and it could be a different date from the date that the certificate was executed.

The certificate of conversion may also include a future effective date or time if desired. This is not necessary to do. If you don't include a future effective date or time, it's going to be effective as of the time that it's filed. But we do want to note that in some circumstances, it is advisable to include a future effective date or time if there are other simultaneous filings. So then in every filing that you're doing, if they're supposed to be simultaneous, you'd want to put the exact same effective date and time in all of them.

And this is something that could be relevant in a state where the date where a certificate is submitted for filing is not necessarily the date on which the filing is officially accepted or otherwise recognized. So I would say in Delaware, unless there is like a really unusual circumstance, you have a pretty good bet that if you submit something on Thursday, July 24th, the day that's going to show as the date of filing on your certificate is going to be July 24th. But there are other states we've noticed, we've come across in our practice where you might submit something on a Friday, and it doesn't really get processed and the date of processing isn't until sometime the following week. So you just need to keep that in mind when you're trying to decide if you need to do a future effective date or time.

The next requirement is for the certificate of conversion to include a statement that the statutory approval requirements have been fulfilled. And that's sort of what Mike was just talking about.

And let's see. Then the last two pieces of information are to address legal proceedings that relate to the converting LLC prior to its conversion. So as Mike sort of got into a little bit a few minutes ago, when you're dealing with a conversion out of Delaware, it's very important to keep in mind that there may be a corresponding statute applicable to the type of organization to which the company is converting that must be observed and complied with in tandem with these Delaware statutory requirements. So you should be familiar with any requirements of the state into which the Delaware LLC will become a converted entity.

And then one final point here is you may notice in the text of Section 18-216(e) of the Delaware LLC Act that it's specific to a scenario where the Delaware LLC is converting to an entity formed or organized under the laws of a jurisdiction other than Delaware, but it's silent as to what must be filed to effect a Delaware LLC into another Delaware entity. And that's because if you have a situation where, for example, a Delaware entity is converting to another Delaware entity type, you don't need to file under 18-216(e) of the Delaware LLC Act. You would look to the statute of this entity type that you're converting into. So if a Delaware LLC is converting to a Delaware limited partnership, you'd have to look at Section 17-217(b) and (c) of the Delaware Revised Uniform Limited Partnership Act, which requires the filing of a certificate of conversion to limited partnership and a certificate of limited partnership, and it sets forth the information that has to be included in those certificates. And I think we'll actually get into that a little bit more later on in the presentation as well.

So one of the requirements in Section 18-216(e) of the Delaware LLC Act relating to the certificate of conversion of a Delaware LLC to a non-Delaware entity is that it has to be executed in accordance with Section 18-204 of the LLC Act. 18-204 states that each certificate required to be filed with the Delaware Secretary of State, under the LLC Act, must be executed by an "authorized person." Authorized person is not actually a defined term under the Delaware LLC Act. It really just means what it says, a person who is authorized by the LLC. So in this context, it's advisable that any resolutions that were adopted to approve the conversion contain specific authorization for a person or entity to be the "authorized person" who executes the certificate of conversion.

All right. Now we're going to move on to filing. So Section 18-216(e) of the LLC Act requires that a certificate be filed with the Delaware Secretary of State in accordance with Section 18-206. There are a number of technical provisions in 18-206 relating to the Secretary of State's backend processes for handling the filings of a certificate, and we're not going to get into that.

So for our purposes, we're just going to note that the certificate of conversion must be signed, and there are a few options for doing so. Something that I feel like is coming up more and more in the past few years has to do with whether you need a wet ink signature. And we just wanted to note here that a facsimile signature, which is a reproduction of a manual signature, can be used along with a conformed signature, which is just basically typing in brackets /s/ and then you just type the name, or an electronically submitted signature. So there's a lot of flexibility under the Delaware LLC Act of how you can sign these certificates.

The Section 18-206 also requires that there be authorization to file the certificate of conversion with the Secretary of State. And then there's just some information in this section about effectiveness, which I touched on in terms of the contents of the certificate of conversion. So as I noted, the default under the Delaware LLC Act is that a certificate is effective at the time of its filing with the Secretary of State, but it can include a future effective date or time. One thing to know on this is that there are limits on future effectiveness, and the filing must become effective on or by the 180th day after the date the certificates are filed.

Whether the certificate is effective at the time of filing or whether it provides for future effectiveness, at the time the certificate does become effective, this functions as a cancellation of the certificate of formation of the converting Delaware LLC, without the need to file a separate certificate of cancellation.

And one last thing to note here is that the filing of the certificate with the Delaware Secretary of State will require payment of associated filing fees as set forth within Section 18-1105(a)(3) of the Delaware LLC, along with an additional fee that is charged for obtaining a certified copy of the certificate of conversion.

Mike: All right. So working through this, so what are the effects of filing a conversion of a Delaware LLC to either a different type of entity or a different jurisdiction? Upon the effectiveness of the certificate of conversion, the Delaware LLC essentially ceases to exist as a Delaware LLC, as Alyssa alluded to, with essentially a cancellation of its certificate of formation. Additionally, a copy of the certificate of conversion is a prima facie evidence of the conversion by such LLC out of the state of Delaware.

Now one other note that I think I'll note here at this point is unlike a Delaware corporation, and we'll get into the specifics a little bit more, where if you convert out of Delaware as a Delaware LLC, there are no appraisal rights granted to members who don't approve of the conversion. So if you have a multi-member LLC and let's say the minority of the interests don't approve it, there's no statutory appraisal rights. Under the LLC Act, appraisal rights are provided by contract under the LLC Act. There there's no default. And I mentioned that and we'll touch on that a little bit more here when we talk about corporations. But unlike a corporation, just it's important to note that an LLC does not have a default appraisal statute.

Moving through some additional effects of conversion, as Alyssa also mentioned, the certificate of formation is deemed cancelled pursuant to the filing of the certificate of conversion. And so typically, prior to cancelling a certificate of formation, an LLC would have to go through a dissolution and winding up process.

So what 18-216 specifies is that it does not require an LLC to wind up its affairs or pay its liabilities and distribute its assets pursuant to the winding up statutes of 18-803 and 18-804. And this is because the LLC is continuing its existence in this other form or other jurisdiction. And it's deemed to be the same entity as the converting LLC.

So another effect here, and this is important to note, is that for purposes of Delaware law, the filing of the certificate and the conversion of the LLC to a non-Delaware entity or to another Delaware entity is not deemed to affect any of the obligations or liabilities of the LLC incurred prior to that conversion, or the personal liability of any person incurred prior to that conversion.

Let me go to 17 here. Talking through the effects some more, and one of the key points here is rights, privileges, and powers of a converted LLC, all property and all debts due to that LLC, as well as all other things and causes of action belonging to the LLC, remain vested in the converted entity and should continue to be the entity's property. Again, this goes to that concept of it's a continuation of the entity.

As you see here on this slide, title of the real property that's vested is not reverting or being impaired by the conversion. Rights of creditors continue to be preserved. Debts and liabilities and duties of the converted LLC remain attached. So in a similar situation, the Court of Chancery, for example, has allowed claims to be asserted by an LLC against a former director of a Delaware corporation for allegedly breaching its fiduciary duties that were owed to the corporation where the corporation had subsequently converted to an LLC. So a little bit different than what we're talking about with an LLC converting, but the concept is the same. And I think this is an example of that that type of continuing obligations, continuing duties, continuing liabilities, continuing assets.

And another point that's important to note here is the rights, privileges, powers, interests, as well as other debts, liabilities, and duties, they're not deemed to have been transferred to the converted entity as a consequence of the conversion under Delaware law. So this is important because it can address concerns with triggering transfer restrictions in other contracts.

Now I will note here that this is for purposes of Delaware law. And so it's still important to confirm, for example, if a contract is governed by another state's law, just to run down that issue of whether, for example, if it's a New York contract, does the conversion of a Delaware LLC to a corporation or to a Wyoming LLC or something like that, does that trigger a transfer? As a matter of Delaware law, that should not be the case. Most other places will respect that. But it's something to keep in mind and to review the terms of the contract.

So as part of the conversion, one of the things that you have to deal with is what do you do with the equity interests? So when you're converting the Delaware LLC to another entity or business form, those LLC interests, the securities or interests in the LLC, which is to be converted, something needs to happen to them. And there's a lot of flexibility and options under the LLC Act that address that.

So, for example, those can be exchanged for or converted into cash, property, rights or securities or interests in the entity or business form into which the LLC is being converted. But in addition to or in lieu of that, those interests can also be exchanged or converted into rights or securities or interests in another entity or business form, so not the same one that's converting. They can remain outstanding, or they can be cancelled.

So you can imagine there's a lot of flexibility and a lot of creativity that can go along with how you structure a converting LLC. For example, an LLC converting into a corporation, do those LLC interest holders then get shares in the corporation? Do those LLC interests get cancelled? Do they get shares in another entity? Now if they get shares in another entity, there's going to be some additional hurdles or steps that need to be taken in that instance because they'll need to be admitted or receive those shares, and that other entity will have to be a party to that. But like I said, it provides a lot of flexibility.

Also, just to note as a practical perspective, this may be a point where fiduciary duties and disclosure obligations become important. And we'll talk a little bit more about this towards the end of the presentation. But for example, if you're converting from a corporation to an LLC or an LLC to a corporation, how do those interests and the rights connected with those interests align with each other? And if you're seeking consent and you've not eliminated fiduciary duties, there's a duty to lay that out as you're seeking that consent from those members or shareholders.

And as Alyssa mentioned earlier as well, when you're dealing with a conversion out of Delaware, it's important to keep in mind that there may be corresponding statutes that are applicable to the type of organization to which the company is converting that must be observed in tandem with the Delaware statutory requirements. Now, again, that could be another state's jurisdiction, or it could be another Delaware entity's statutory requirements. But you just need to be aware of those. There's usually a couple of sets of statutes that you're looking at when you're talking about converting in any situation.

All right. So now we're going to talk about the flip of instead of converting a Delaware LLC, we're going to talk about converting another entity to a Delaware LLC. So conversion of another entity to a Delaware LLC can be accomplished pursuant to 18-214. Other entities include a corporation, a statutory trust, business trust, association, real estate investment trust, common-law trusts. It can be partnerships, general or limited. There's a whole host of, again, flexibility, domestic or foreign. It does exclude, obviously, a Delaware LLC because you can't convert an LLC to a Delaware LLC. All right. So when an LLC is converted to another entity or form pursuant to . . . Sorry I lost my place here for a second.

So prior to the time that the certificate of conversion becomes effective, the conversion has to be approved. So we're going back now to our authorization point. It has to be approved in the manner provided by the document or instrument or agreement of the other jurisdiction. So this is where instead of the requirements under the LLC Act and the defaults of looking at if you are converting a Delaware LLC under 18-216, where you're talking about the LLC, then you're looking at what are the requirements under its operating agreement, what are the defaults for merger, and if not on a merger and conversion, then you look to the greater than 50% standard.

Here, by contrast, you're talking about another entity that's either not a Delaware LLC, so maybe it's another Delaware entity, or it's from another jurisdiction. So when you're talking about that, the authorization that's required, the Delaware statute is differential to those states laws. And so you'll see here, essentially quoting the language, the conversion must be approved in the manner provided for by the document, instrument, or agreement, so the governing documents of the other entity, and in accordance with their applicable laws.

Now what's important to note here is that the LLC agreement for the converted LLC must also be approved by the same authorization that's required. And we see this a lot of times in our practice, where people will approve the conversion entities coming in or changing to the Delaware LLC. They will approve the conversion, but they'll fail to approve the LLC agreement, and that needs to be corrected. The LLC agreement does have to be approved as part of this process.

So there's a couple things that have to happen when you're converting procedurally for converting to a Delaware LLC. So in addition to the certificate of conversion to LLC that you have to file, under 18-214(h), you also have to file simultaneously a certificate of formation. And as Alyssa alluded to previously, those certificates are effective upon the filing, which is why you file them simultaneous, or you can provide for a future effective date.

So execution, as mentioned here, in 18-204, it has to be the person authorized to execute the certificate on behalf of the other entity or the other non-U.S. entity. And then for a certificate formation, that's by an authorized person. And as I mentioned, they're filed simultaneously or provide for a future effective time.

All right. And with that, I think we'll let Alyssa walk us through some of the contents and the specifics of these certificates that need to be filed.

Alyssa: Yes, thank you, Mike. So Mike just mentioned there would have to be filed simultaneously a certificate of conversion to a Delaware LLC and a certificate of formation.

So turning first to the certificate of conversion to a Delaware LLC, the certificate is going to have to include the date of organization of the converting entity, along with the jurisdiction in which it was organized. If the entity has previously converted, prior to this conversion to a Delaware LLC, the certificate must also list the current jurisdiction under which the entity exists. For example, if you have an entity that was originally formed as a Pennsylvania LLC, which then converted to a Wyoming corporation, and it now desires to convert to a Delaware LLC, the certificate of conversion is going to have to state that the converting entity was formed as a Pennsylvania LLC, and that immediately prior to its conversion to a Delaware LLC, it is a Wyoming corporation. The certificate of conversion must also include the name and type of entity of the converting entity immediately prior to the filing of the certificate of conversion to a Delaware LLC.

And then the next required piece of information flips the page from historical information to forward-looking. You have to put the name of what the Delaware LLC is going to be. And this has to match exactly the name of the Delaware LLC that's going to be listed in the certificate of formation that has to be filed simultaneously with the certificate of conversion.

And one last thing that the statute requires, well, that the statute allows is that the certificate of conversion can include a future effective date or time for the conversion. And if it does not contain a future effective date or time, then the certificate will be effective when filed.

So we'll just briefly touch on the contents of a certificate of formation in the context of a certificate of conversion. It's kind of interesting because it basically just says that you have to comply with 18-201 of the of the Delaware LLC Act. So you're going to put all of the information into the certificate of formation that you would put into any certificate of formation of a Delaware LLC. So you have to have the name of the LLC. And you also are going to have to maintain a registered office and a registered agent in the state of Delaware, and the certificate of formation has to contain both the address of the registered office and the name and address of the registered agent.

And then, if desired, it's not required, but if desired, the certificate may also include a future effective date or time. And as we pre previously discussed, that has to be the same effective date or time as is listed in the certificate of conversion if you're doing that.

Let's see. So we'll now move on to execution of the certificate of conversion and certificate of formation. So Section 18-214(e) of the Delaware LLC Act requires each of these certificates to be executed in accordance with Section 18-204 of the Delaware LLC Act. And this section provides that a certificate of conversion to a Delaware LLC must be executed by one or more authorized persons authorized to execute the certificate on behalf of the other entity that's converting to a Delaware LLC. The certificate of formation, meanwhile, must be signed by the person authorized to do so on behalf of what will be the converted Delaware LLC.

And I'll just note, from a practice point, we typically will include authorization, approval, and ratification of the execution of the certificate of formation by such an authorized person directly into the limited liability company agreement that becomes effective at the time of such filing. So we just sort of build that in to our drafting whenever we work on a conversion.

So as we discussed in the context of filing a certificate of conversion of a Delaware LLC, the filing of a certificate of conversion to a Delaware LLC and of a certificate of formation of a Delaware LLC must be filed in accordance with Section 18-206 of the Delaware LLC Act. And once again, each certificate may be signed by a facsimile signature, a conformed signature, or an electronically submitted signature. Once again, there must be authorization to file each certificate. And just wanted to note again that the filing of each certificate will be accompanied by associated fees, as will the obtaining of certified copies of each certificate. So there's a lot of similarity there with conversion of a Delaware LLC out of Delaware to a different entity type.

As we as we previously touched on, the certificate of conversion and certificate of formation are companion certificates that have to be filed simultaneously and be effective simultaneously, whether at filing or by specifying the same future effective date or time. And as we've stated, the future effectiveness cannot be later than 180 days after filing. So again, that's the same as what we were discussing under 18-214 or 18-216, sorry.

So generally speaking, obtaining the desired result of simultaneous filing effectiveness can be accomplished relatively easily. You can simultaneously file certificates that are effective at filing, or you can include the identical future effectiveness provision.

And upon the effectiveness of a filed certificate of conversion to a Delaware LLC, the entity filing the certificate of conversion is converted to a Delaware LLC. And I'm going to turn it over to Mike now to talk about to talk more about the effect of such a conversion.

Mike: All right. Thanks, Alyssa. So effects of conversion, really pretty similar in overarching terms to a conversion from a Delaware LLC to another entity. The overarching idea here is that it's a continuation of the same entity. So, for example, the existence of the new Delaware LLC is deemed to have commenced on the date that the converting other entity commenced its existence. So, for example, if it's a Wyoming or Nevada LLC that comes into Delaware, converts into a Delaware LLC, or if it's a Delaware corporation that converts to a Delaware LLC, the formation of that corporation or foreign LLC is really the date of the first creation or first formation that's given to the entity. So it's a continuation of the entity.

As we've mentioned previously, the rights, the obligations, duties, liabilities, those types of things are continuing to exist and continue to be retained with the Delaware LLC, the other entity coming into the Delaware LLC and should not be affected as a matter of Delaware law. Additionally, again, as a consequence of the conversion, those rights and powers, privileges, interests, they're not deemed to have been transferred, at least for purposes of Delaware law. And then, generally speaking, again, if I had to sum it up in a broad, overarching principle, it's this idea that the Delaware entity now is a continuation of the other entity from wherever it was coming from or whatever type of entity it was.

So again, now dealing with equity interests, a lot of flexibility here on how you're dealing with the interests from the other entity coming into the Delaware LLC as part of the conversion. They can be exchanged, converted into cash, securities, or interests in the converted LLC, or remain outstanding and be canceled. So there there's a lot of flexibility in how those securities or interests are dealt with.

The one thing that I'll say here it's important to check the other jurisdiction or entity types requirements. So, for example, a corporation to an LLC or another state, it's important to understand the approval requirements, understand what you can do under those entity statutes in connection with how you're dealing with the equity interests.

And here, I'll also mention this idea of what's interesting under the LLC Act is that the LLC Act's provisions dealing with conversion. And I'll touch on domestication here briefly as well, because I think that we've seen some questions on domestication and conversion and what's the difference. And I think typically conversion is you're dealing with another entity type converting to an LLC, or you're dealing with another entity from the U.S. coming into Delaware. I think domestications typically, I don't want to say it's all the time, but typically are coming from like a non-U.S. jurisdiction to Delaware. And similarly when Delaware is moving an LLC or an entity out of Delaware to a foreign non-U.S. jurisdiction, those get classified as domestications. They're separate statutes under the LLC Act, under the DGCL and under the limited partnership statutes. Those statutes, the requirements and the mechanics are very similar to a conversion. And in fact, a lot of the principles that we're talking about here would apply just as equally to a domestication.

So as we're talking about these, the point I was kind of circling back to is for an LLC, the mechanics in these provisions for domestication and for conversion don't require a plan of conversion or a plan of domestication. And so you're really accomplishing this pursuant to either the agreements or maybe resolutions. But there needs to be some type of document that deals with the interests, the equity, and what's happening. Are they being converted, exchanged, canceled? So whatever that may be, and there's a lot of flexibility, there's usually a document that deals with that.

Now an LLC can have a plan of conversion. It can have a plan of domestication. I'll note that the DGCL was amended in the last year or two to provide specifically for plans of conversion and plans of domestication that can do certain things. So I highlight that just in the LLC context, it's not specifically mentioned as it is in the DGCL but it does permit. I think there's enough flexibility under statute and we've done this in situations where as part of the conversion documents, you've prepared a plan of conversion or a plan of domestication. But again, there's a lot of flexibility in how you deal with that, and you don't necessarily have to have one. And the LLC Act is silent on that point.

All right. The other thing to note here is that the statutory provisions are not a limitation on accomplishing a conversion or the same effect of a conversion through another means. So you can imagine possibly maybe there's a situation where you do a change of jurisdiction by amendment to the LLC agreements, a choice of law, and then file a certificate cancellation. I don't know. You can imagine other ways, and I guess the point of this is that the statute is not intended to limit other ways that you could legally do this. But it does provide the mechanics for being able to obviously accomplish conversions in a statutory manner.

All right. So now we're going to talk briefly about some of these other Delaware entities, and we've got a couple of examples here on the screen. Talking about conversions, similar dynamic as the LLC Act. So in the LP Act or the Limited Partnership Act, you're dealing with a provision, 17-217, that deals with conversion of certain entities coming in to Delaware as a Delaware limited partnership or converting to a Delaware limited partnership, I should say, not necessarily in, and then conversion of a Delaware limited partnership to another form of entity or to another jurisdiction. Recall that that dynamic, there's a number of different options that you can do.

Same thing with a corporation. 265 deals with other entities becoming a Delaware corporation. 266 deals with conversion of Delaware corporations to other entities.

And interestingly here, we have series. So several years ago, the series concept of the Delaware LLC Act, and this would apply to LP Act as well, but series LLCs have become more popular over the last decade or so. Still a lot of uncertainty and ambiguity around certain things. But one of the things that we did with our statutes is we updated them to provide for a concept of protected and registered series. And a protected series is a series that doesn't require a filing of a certificate of registered series. So it still has series treatment as long as you've met the statutory requirements, but it's not as formal as a registered series. And so it doesn't have some of the same treatment.

But then you have a registered series that provides that you can file a certificate of registered series. You can get a certificate of good standing in connection with that. So it provides some flexibility when dealing with financings and other arrangements dealing with these series entities or series of LLCs.

And so one of the things that's important to note here, for purposes of our conversation today about conversions, is that you can convert a protected series to a registered series, and you can convert a registered series to a protected series under the LLC Act and the LP Act. So just important to note that here.

When we're talking about limited partnership conversions, I think, at a high level, these essentially largely align with the provisions we've been discussing in the LLC Act, with some conforming changes, approvals by general partners and limited partners instead of members. It's a certificate of a limited partnership instead of certificate formation. And then dealing with a partnership agreement instead of an LLC agreement or an operating agreement.

And I just touched on the series concepts here, and I will note an important caveat here is when we're talking about converting a registered series to a protected series or vice versa, that's of the same LLC, right? So it's a protected series of an LLC that converts to a registered series of that same LLC versus you can't convert to another type of entity type or another jurisdiction. So it is significantly more narrow in that concept, but it does allow you to kind of flip between the protected and registered series concepts. Similar approval processes, except it's specified with the respect to the series themselves.

All right. So then we're coming to the corporations statutes, and as I mentioned 265 deals with conversion of other entities to a Delaware corporation. Those other entities are defined as domestic or foreign, excluding a Delaware corporation. As I mentioned, this concept of a plan of conversion was introduced in the last couple of years, that allows you to put together a plan that is adopted and that can facilitate a lot of the mechanics for the conversion and lay out what's happening with respect to the equity and other types of things that can be addressed in this.

All right. Alyssa, can you take us through some of the mechanics or what's required to convert to a Delaware corporation?

Alyssa: Absolutely. So there's a lot of similarities here for a Delaware corporation conversion as to what we discussed when it comes to an entity converting to a Delaware LLC. So similar to what we have already discussed, there have to be two certificates that are filed with the Delaware Secretary of State — a certificate of conversion and a certificate of incorporation.

The contents of the certificate of conversion to a Delaware corporation, it's generally the same as what you would need to put in other types of Delaware conversions. You need to list the date that the converting entity was first organized, the jurisdiction in which it was organized, the jurisdiction of the converting entity immediately prior to conversion if such jurisdiction is different than the original jurisdiction of organization, the name and type entity of the converting entity immediately prior to the filing of the certificate of conversion. And you'll need to also include the name of the corporation exactly as it is included in the certificate of incorporation of the Delaware corporation.

On the certificate of incorporation piece, you'll need to include all statutorily required information that you would include in any certificate of incorporation of a Delaware corporation. So just because it's in the conversion context doesn't mean that there's anything different.

So as with LLC and LP conversions, both the certificate of conversion and the certificate of incorporation must be filed simultaneously. And as we've gone over many times at this point, that's because the conversion contemplates not the creation of a new and separate entity, but the continuation of an existing entity in a new form. So because that certificate of incorporation is what you would see if you were just going to incorporate a brand-new Delaware corporation, it's very important that it's filed simultaneously with the certificate of conversion to make it clear that this Delaware corporation is a continuance of what it was prior to its conversion into a Delaware corp.

So on that note, we want to just highlight that the failure to coordinate the filing of the two certificates can have unintended consequences. For example, if you have a Delaware LLC that intends to convert to a Delaware corporation and the certificate of incorporation gets filed and it's effective, but, for whatever reason, the certificate of conversion of a Delaware LLC to a Delaware corporation is not simultaneously filed and/or effective, the result is that you have a new Delaware corporation and the Delaware LLC remains in existence. So again, I know we've touched on it a lot during this presentation, but it's just a very important component of properly effecting a conversion.

And then we'll just quickly touch on authorization. So the DGCL was recently amended to provide more flexibility as to when authorization must occur. And ideally, you'd want a conversion to be authorized before any certificates are filed, just to sort of make sure that all of your ducks are in a row. And that formerly was the required timing. But now, there's been some amendments that provide some greater flexibility. And the DGCL provides that the conversion must be approved prior to the effectiveness of the certificate of conversion.

As with other types of Delaware conversions, the conversion has to be approved as dictated by the converting entity's governing documents or by applicable law. So, for example, if a Delaware LLC is converting to a Delaware corporation, the Delaware LLC agreement, if it has requirements for effecting a conversion, those requirements have to be complied with. If the LLC agreement is silent, then the conversion must be approved as set forth in 18-216(b) of the Delaware LLC Act, i.e., by the members owning the requisite level of LLC interest in the converting LLC. And the authorization for the conversion itself must also extend to the certificate of incorporation.

So again, when you're preparing resolutions, for example, and you're approving and authorizing the conversion, you just want to make sure that you're also approving and authorizing the certificate of incorporation. I think I'm going to, let's see, turn it back over to Mike to discuss the effects of a conversion to a Delaware corporation.

Mike: Great. Thanks. Thanks, Alyssa. All right. So high level, the effects are similar to what we've been discussing from the LLC partnership perspective. A couple of components here is obligations and liabilities incurred prior to the conversion are not affected. The same thing with rights and duties.

There's no need to wind up your affairs. So it doesn't constitute a dissolution of the other entity, but rather constitutes a continuation of their existence in the form of a Delaware corporation And like I said, the overarching principle here in a lot of these, at least from a Delaware law perspective, is that the conversion is deemed to be the same entity as the converting other entity.

In dealing with respect to the equity interests, a lot of flexibility as we've noted. Whether you're exchanging or converting it into rights in the Delaware corporation or exchanging for rights in another entity or another Delaware corporation or cancelling, there's just a lot of flexibility in how you structure that.

Now the next topic we're going to talk about is under 266. This is dealing with a Delaware corporation that's converting to another form of entity or to a different jurisdiction. So as noted on the slide here and as we've discussed previously, of course, it can't be a Delaware corporation that you convert to. That does not work.

So on the authorization component, here, this is where you're now back in the Delaware statute, and you're dealing with the DGCL for approving the conversion of the Delaware corporation to another entity. So the board of directors first has to adopt a resolution to approve the conversion, specifies the type of entity or jurisdiction or both, which would include obviously both if you're going to a foreign jurisdiction, into which the corporation will be converted, and then recommending the approval of that conversion to the stockholders of the corporation.

As I mentioned, now the statute has been amended to permit a plan of conversion. And so that can state, among other things, the terms and conditions of the conversion, other details or provisions that are related to the conversion as are desirable. And it's to be adopted in accordance with that provision. It has to be approved together with the board resolution approving the conversion.

So then once the board resolution has been approved, then you're moving then to approval by the stockholders. And what's important to note here is there could be timing issues depending on what's required here. So if you're getting approval at a meeting, there are certain notice requirements. Also, the other thing, and we'll touch on this on the practical considerations a little bit, is when you are dealing with now a corporation, as I noted, previously the authorization used to be unanimous approval by the stockholders. That's been amended so that it's a majority or it's not unanimous. And so if you are a stockholder that does not approved, you're entitled to appraisal rights. And so there are certain notice requirements and timing requirements related to the appraisal statutes as well. So just keep that in mind as you're seeking stockholder approval.

The other thing is, from a fiduciary perspective, this is when you're seeking stockholder approvals to consent to a conversion, you have to provide full and material information, and that includes typically laying out what's the difference between I used to hold shares in this corporation, now I'm going to be an LLC interest holder or a member of an LLC. What does that mean for me? What are the distinctions there?

Alyssa: So we're going to very briefly touch on the contents of a certificate of conversion of a Delaware corporation. We've included on this slide the required contents of the certificate, and I don't think that we need to go through them in any particularity, especially because there really is a lot of overlap in some of the other types of certificates of conversions that we've already discussed today.

One thing we do just want to note is that this requirement for this certificate of conversion only applies to Delaware corporations that are converting to a non-Delaware entity. And that's because, as we discussed in the LLC context, there are other Delaware statutes that govern the filing requirements if a Delaware corporation were to convert into another Delaware entity. So you would just look at, for example, what you would need to do to convert into a Delaware LLC, for example, or a Delaware limited partnership. You would look at the LLC Act or the LP Act to get those requirements for how to do so.

I think with that, we can probably keep going. I'll turn it back over to Mike.

Mike: Thanks, Alyssa. Know sounding like a broken record. The effects of the conversion are very similar. Your obligations and liabilities are not affected by the conversion. There's no need to wind up the affairs. It's not considered a dissolution. And following the conversion, the entity to which the Delaware corporation has converted is deemed to be the same entity as the Delaware corporation. So again, like Alyssa mentioned, a lot of overlap in between the way that those entities or the effects of conversion whether it's an LLC, limited partnership, or a corporation.

Similarly, a lot of overlap in how you treat the equity interests. So pursuant to the conversion to a Delaware corporation, conversion of a Delaware corporation, you can take interest in the entity which they're converting another Delaware corporation or another entity. There's a lot of flexibility in how you structure that. But important to look at the statutes and just make sure that what you're contemplating is covered. But like I said, there's a lot flexibility and a lot of overlap of what we've discussed already.

We won't touch on these miscellaneous things. We'll let you read those slides. If you have questions on those, feel free to reach out to us.

And I should note that generally if f there are questions, I know we've covered a lot of material in a very short time frame. So if there are questions that arise that we've not answered or not dealt with throughout the presentation, feel free to reach out to Alyssa or myself on that.

All right. Dealing with some of the practical considerations here. It's a couple things. One is the substance of the applicable non-Delaware law. So like I said, there's always usually going to be at least two statutes or regimes that are involved, right? So you've got the entity with which you're starting, whether it's corporation or LLC. And then if you're converting to another Delaware entity, it's that Delaware statute. If you're converting to another foreign jurisdiction, for example a Nevada corporation or Nevada LLC, then you need to look at those requirements as well. So you're always going to be looking at other non-Delaware law or even other Delaware law, but other statutes on that. So you need to be aware of what those are.

In particular, if you're dealing with a conversion of another entity coming to Delaware or Delaware going to another entity or another jurisdiction, being aware of whether those jurisdictions permit the type of transaction you're doing. In some cases, they don't. And like I said, there may be multiple steps to get to the ultimate end result that you're looking to accomplish.

Coordination across borders and then timing issues as to filing and effectiveness, we've touched on that in a number of different ways. Just making sure that, for example, if you're deregistering in a Cayman, that you're coming into Delaware as an LLC, timing those filings so that they work together so that you don't have a gap in time and that the conversion or in that case maybe a domestication is functioning the way it's supposed to.

Same thing with authorization, making sure that you're getting the authorizations that you need, making sure you're approving all the documents. So, for example, if you're coming into Delaware as an LLC, you need to make sure that the LLC agreement is approved.

Alyssa, any other points that you want to talk about on the forms for filing or availability of name for the converted entity? Alyssa, if you're talking, you're on mute.

Alyssa: Oh, sorry about that. Thanks, Mike. I was just going to say I think this is going to be my plug for if you are going to engage in a conversion, that we do highly recommend hiring a firm like us, Potter Anderson, because the forms that are available online, even if they're the forms that are actually up on, for example, a secretary of state's website as being the forms to use, are not necessarily statutorily compliant. So we do have our own forms that we know comply with the statute and will be accepted for filing with the Delaware Secretary of State. And I just think that that's really the way to go to make sure that you get that right. The last thing you want is to be ready to file these certificates and then have them be rejected for not having the correct information. And that's something that we can help with.

And then something else too, like another service that is available, you can check to see if you're converting and you're changing the name or coming into Delaware, you can look ahead of time to make sure that the name that you want to use is actually available. And there is actually an ability to reserve a name if you are not going to be effecting the conversion until at some point down the road.

So I think those are the only things I wanted to add there, Mike.

Mike: Okay, great. One or two other final points. We've touched on the appraisal point. I've touched on the disclosures point. Again, if you're seeking consent for a conversion from stockholders or members or limited partners, whoever it may be, then you owe fiduciary duties as a default matter. And so backing up for a second, LLCs and partnerships, these alternative entities, you can eliminate or modify your fiduciary duty. So depending on what you've done in that sense with your fiduciary duties, but if you're seeking consent, just keep that overlay. If you do owe fiduciary duties, if you've not eliminated them or modified them when you're disclosing and seeking consent, there's a duty to disclose and essentially make the people that you're asking or seeking consent from aware of what the differences are between the converted entity and the new entity, the continuing entity, whether that's a different type of Delaware entity or an entity in a foreign jurisdiction.

So that's something to keep in mind, and that kind of dovetails nicely with the fiduciary duties, keeping that in mind. And there's been some recent cases where it's been clarified, at least in the corporate context, that absent trying to get away from additional liability or something like that, changing your business form is typically a business judgment. But there are nuances to that that could implicate other fiduciary duty challenges. So just keeping that in mind in the sense that there's the legal and then there's the twice tested rule and there's the equitable, which would bring the fiduciary duties into play.