Entity Conversions: A Deep Dive into Operative Provisions Under the Delaware LLC Act

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Annie: Hello, everyone, and welcome to today's webinar, "Entity Conversions: A Deep Dive into Operative Provisions Under the Delaware LLC Act." My name is Annie Triboletti, and I will be your moderator.

Joining us today are guest speakers Matt O'Toole, Mike Maxwell, and Alyssa Frank from Potter Anderson & Corroon. And with that, let's welcome Mike, Alyssa, and Matt.

Matt: Hello, everyone. This is Matt O'Toole. Thank you to CSC for inviting me and my colleagues, Mike and Alyssa, to talk to you this morning, and thank you for joining us.

We'll start with a brief overview of what we'll cover today, and as the program title suggests we're going to begin by setting the table and discussing conversion in general, and then we'll focus on Delaware LLCs and relevant provisions of the Delaware LLC Act as illustrative of overarching principles applicable to conversions under Delaware law. Therefore we'll address in some depth conversion of a Delaware LLC to another entity as well as conversion of an other entity to a Delaware LLC. Then in somewhat more cursory fashion we'll talk about other sorts of conversions under Delaware law.

We're not purporting to exhaustively cover all Delaware statutes regarding conversion. Again, the idea being that the overarching basics of conversion transactions apply across the board. That's the reason for our focus on Delaware LLC conversions. They're illustrative of those overarching principles.

Finally, we'll review some issues that might not be apparent on the face of the various conversion statutes that arise in practice applying the conversion laws. And if and as time permits, we'll take some questions at the end.

Conversion generally. The term "conversion" can be used in a generic sense to denote a fundamental change in an entity's organizational structure. In that general sense, the term is not transaction specific, and it really focuses on the end result of a transaction that radically alters the entity's structure.

Conversion, in the generic sense, could be used to describe a merger, for example. A Pennsylvania corporation that merges with and into a Delaware corporation might be said to have converted to a Delaware corporation. Similarly, a Delaware limited partnership, for instance, might dissolve and have a new newly formed Delaware LLC assume all of the partnership's assets and liabilities by contract. And in that sense, again the limited partnership has converted to the LLC.

This sort of general use of the term "conversion," the generic sense of the term is not our focus today. What we're talking about here is a conversion under Delaware law in a technical sense. It's a technical term involving the change of a business entity's organizational form and/or its jurisdiction of formation and the laws that govern it pursuant to specified statutory procedures. It is a particular type of statutory transaction that we're talking about here, conversion. And we're focusing on Delaware LLCs really as a gateway to the to the overall topic of statutory conversion.

And as I mentioned earlier, the LLC Act in Delaware provides both for conversion of a Delaware LLC to another entity or business form and also for conversion of a different type of organization to a Delaware LLC. Other Delaware statutes have similar provisions applicable to different entity types. For example, the Delaware Limited Partnership Act has parallel provisions, and the Delaware General Corporation Law similarly provides for conversion to and conversion of a Delaware corporation. Just very briefly, there are also conversion provisions in the Delaware Statutory Trust Act and in the Delaware Revised Uniform Partnership Act that governs general partnerships.

On the other hand, there are other entities under Delaware law that might be implicated in a conversion transaction. And just by way of example, those can include a common-law trust, a cooperative agricultural association, or an unincorporated non-profit association. And the laws governing those types of business structures have no provision for statutory conversion. And as we'll discuss briefly further along, this could create questions about the manner of effecting a particular statutory conversion. Although as a practical matter, the likelihood of such questions arising is more theoretical than real.

I will note very briefly another type of statutory transaction under Delaware law that bears some resemblance, even a strong resemblance to conversion, and that is a transaction known as a transfer or a domestication or a continuance. And those types of transactions are similar in the manner of their effectuation and their effects. But the availability of those transactions is somewhat narrower, considerably narrower in that they involve non-U.S. entities exclusively, so a transfer or a domestication of a Delaware LLC, for example, as a non-U.S. entity and likewise the importation from abroad of another entity into Delaware.

So we'll talk briefly about types of conversions. Conversions involve a single entity, and a conversion amounts to the continuation of the "same" entity existing in a different form and/or under the laws of a different jurisdiction. It amounts to a statutory metamorphosis of a business organization. And as we've mentioned and as we'll talk about further, business entities can convert within, out of, or into Delaware. And there are a few examples of different types of conversion transactions there on the screen.

So at this point, I'll invite Mike to talk specifically about converting a Delaware LLC to another business. Mike.

Mike: Yeah, great. Thanks, Matt. So as we've just discussed, the LLC Act provides broad flexibility regarding the types of organizations and jurisdictions to which a Delaware LLC may convert. And so first we're going to talk about conversion of a Delaware LLC to another entity, and that could be another entity that becomes formed and existing in Delaware, so like a Delaware corporation, an LLC to a Delaware statutory trust or to a Delaware limited partnership. But that also includes conversions of a Delaware LLC to an entity form that is outside of the laws of the state of Delaware, outside the state of Delaware, for example, if you were to convert to a Texas LLC or a Texas corporation. So there's a lot of flexibility in conversions of a Delaware LLC to another entity.

In permitting a conversion of a Delaware LLC, this is done under Section 18-216 of the LLC Act. And one thing I'll note is Section 18-216, as a matter of Delaware law, does not require that there be a corresponding statute applicable to the type of organization to which the company is converting that permits such a conversion. That said, it's advisable to consider this issue.

So with respect to an LLC's conversion to another type of Delaware entity or business form, Delaware statutes, other than the LLC Act, may set forth steps for accomplishing the transaction and specify its effects. For example, if you're converting to a Delaware corporation, you want to look at the Delaware Corporate statutes to understand how and what the effects of converting a Delaware LLC to a Delaware corporation, how that's going to work. So not only the considerations under the LLC Act but also considerations under the DGCL.

In the context of a conversion to an entity or a business form existing under the laws of another jurisdiction, also need to consider the statutory provisions under those laws because those may address matters such as the manner of effecting the transaction and the consequences of the conversion, but also may bear on fundamental questions relative to the very existence and status of the converted entity under such laws. Do they treat a conversion as a continuation of the same entity? There's different questions that one who's engaging in these types of transactions would need to run down, not only in the Delaware side, but also in the jurisdiction to which you are converting the Delaware LLC.

Matt: Mike, can I just add there? So the breadth of the Delaware statute in 18-216 really sort of provides for no uncertainty in terms of the ability of a Delaware LLC to convert. But as you know, you certainly need to consult, particularly in the context of a cross-border conversion, the laws of the other entity that's implicated. But at least for purposes of Delaware law, there's a great deal of certainty about the ability to effect the conversion.

And then the other thing I'll just note is that conversion really involves sort of cross-entity and/or cross-jurisdictional transactions only. You can't convert an existing Delaware LLC to another Delaware LLC. So sorry to interrupt.

Mike: No, that's exactly right, and that's an exclusion to be mindful of as you're making plans and addressing these types of issues.

All right. So the first step of conversion of a Delaware LLC, we're going to talk about authorization. So how is a conversion of a Delaware LLC authorized? Well, if its LLC agreement specifies the manner of authorizing the conversion of a Delaware LLC, then the conversion is authorized in that manner. The LLC agreement I'll note here can also prohibit the company from converting. So you can restrict the ability of a company or an LLC to convert.

Another thing we often see and we'll talk about this and what happens to the interest of the LLC when it converts, but because this can invoke a fundamental change in the form of an entity and have effects on the members of an LLC, it's often something that you'll see in a member approval section. For example, if you have a minority interest in an LLC, this will be the type of thing conversion, merger, division. These are the type of fundamental transactions that will often be subject to approval of either a higher threshold of members or sometimes unanimous consent of the members.

So it's something that first and foremost you need to look in the LLC agreement, understand what the approvals are for the conversion, if there are any. And if you're a drafter of operating agreements, it's worth considering that when you're drafting operating agreements.

Now if the agreement does not specify the manner of authorizing a conversion and it doesn't prohibit such a transaction, then the conversion is authorized in the same manner as is specified in the LLC agreement for authorizing a merger or consolidation that involves the LLC as a constituent entity.

Now if the LLC agreement does not provide for authorization of a merger and specify the manner of authorizing the conversion or merger, and it does not prohibit the conversion, then the conversion is authorized by members who own more than 50% of the then-current percentage or other interests in the profits of the LLC owned by all the members, so typically greater than a 50% of the membership interest or LLC interest. The default requirement regarding approval by the members mirrors the default approval applicable to a merger or consolidation.

Prior to 2015 and another kind of wrinkle here, if your certificate of formation for your LLC was filed prior to July 31st, 2015, then you may be subject to a class or group vote as well. So prior to a 2015 amendment, the default rule for authorizing conversion of an LLC that had one or more class or group of members, the requirement was that you had to receive approval from each class or group of members by members who owned a majority of the then-current percentage or other interest in the profits of the LLC owned by the members in that class or group. And what was difficult about this is a class or group wasn't specified exactly what that meant. And so when you look at an LLC, you could slice and dice the membership or the interests that were held and make arguments for what would be considered a class or a group. And so prior to that 2015 amendment, there was the requirement and as a conservative measure you would get the class or group vote by a majority of the interest.

Now you could otherwise provide. So if you do have a certificate of formation that was filed prior to July 31st, 2015, you do have the option still to otherwise provide in your LLC agreement. So if you've amended your LLC agreement or made changes to it since then, it may be worth considering that default rule and otherwise providing.

Now one other point I'll make here, under the LLC agreement and the LLC Act's default rules, the members or those that have the voting rights for approval of a conversion or a merger could theoretically approve the conversion of an LLC without reference to any specific terms. In practice, however, the authorization of a conversion typically involves approval of a detailed transaction.

So those entitled to a voice in the matter in most cases are asked to consider a particular conversion to a specified form of organization or a jurisdiction, which will exist under the laws of either another form in Delaware or another jurisdiction, governed by documents that are provided for review and approval. For example, if you're converting to a Delaware corporation, typically you'll review the certificate of incorporation and bylaws and approve those. And often these are required. For example, if you're converting to another type of Delaware entity, that is a requirement that you have to approve the certificate of incorporation.

Other terms of the conversion are also going to merit consideration, such as what happens to the interests, what's the ratio of conversion of the interests, and management structure. Are you going to be board-managed or manager- managed? Is there going to be a general partner, a board of directors? Depending on what type of entity and what jurisdiction you're converting to, those are all going to be relevant considerations that should be addressed at some point. And while technically not required for authorization purposes, typically it's, as a practical consideration, worth providing for and also just necessary to do in some cases under other Delaware statutes.

So at this point, I'll turn the time over to Alyssa to talk about the content . . .

Alyssa: Thanks, Mike. Yeah. Okay. So we're going to briefly run through the information that either may or must be contained in the certificate of the conversion of a Delaware LLC. All right. Assuming slide 9 is up, that has a list of requirements of information that may or must be in a certificate of conversion.

So you'll need to include the current name of the Delaware LLC along with the name under which the LLC was originally formed, if that's different than the current name of the LLC. And you'll also need to include the date that the LLC's certificate of formation was filed with the Delaware Secretary of State. And here, we just want to note that sometimes we'll see it's filed certificates of formation that include the date of that the certificate was executed, but you need to make sure that you include the actual date of filing with the Delaware Secretary of State as reflected in the timestamp on the certified certificate of formation, as that may differ from the date on which the certificate was executed.

The certificate of conversion may also include a future effective date or time if desired. It's not necessary to include a future effective date or time, but we note that it may be advisable to include one to ensure simultaneous filing with any other documents that may need to be filed in accordance with the laws of the state under which the converted Delaware LLC will be organized. And we note that this could be relevant in a state where the date on which a certificate of conversion or something similar in connection with a conversion is submitted for filing will not necessarily be the date on which such filing is officially accepted or otherwise recognized by the department of state or secretary of state with which it was filed.

The next requirement is for the certificate to include a statement that the statutory approval requirements have been fulfilled. And then the last two pieces of required information are to address legal proceedings relating to the converting LLC, to the extent that becomes applicable, prior to its conversion.

And as Mike noted earlier, when you're dealing with a conversion out of Delaware, it's 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 in tandem with the Delaware statutory requirements. And someone engaging in a conversion should be familiar with any requirements of the state into which the Delaware LLC will become a converted entity.

As a final point here, you might notice that the text of Section 18-216(e), which we have summarized on the screen, is specific to a scenario where a Delaware LLC is converting to an entity that's formed or organized under the laws of a jurisdiction other than the State of Delaware but is silent as to what must be filed to effect the conversion into the other entity. So in a situation where a Delaware entity is converting into, sorry, a Delaware LLC is converting into another Delaware entity type, you don't need to file anything under Section 18-216(e) of the Delaware LLC Act. So as an example, if a Delaware LLC is converting to a Delaware limited partnership, you would need to look to Section 17-217 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 that statutory section sets forth the information that must be included in the certificate of conversion.

Matt: And Alyssa, I'll just note that's also true for LLC conversions within Delaware to a corporation, to a general partnership under the Delaware Revised Uniform Partnership Act, and also a statutory trust. But as I mentioned earlier, there are situations that might theoretically arise where a Delaware LLC is to convert to an other entity under Delaware law and that other entity is governed by a statute that has no provision for conversion, for example a common-law trust or some of the other types of entities I mentioned earlier. I'll just say I've never encountered a situation like that, so I do think that those circumstances are more academic than practical. But if you ever do get into a situation like that, I think that there are workarounds to provide some certainty on that point. Back to you.

Alyssa: Thank you. Can you switch to the next slide, please?

So we were just discussing Section 18-216(e), which talks about the contents of a certificate of conversion, and one of the requirements in Section 18-216(e) regarding the certificate of conversion of a Delaware LLC to a non-Delaware entity is that it be executed in accordance with Section 18-204 of the Delaware LLC Act. So this section states that each certificate required to be filed with the Delaware Secretary of State under the Delaware LLC Act must be executed by an authorized person. Authorized person is not a defined term under the Delaware LLC Act, but it really just means what it says. It is a person who is authorized by the LLC. So in this context, it is advisable that any resolutions that are approving or authorizing the conversion, that were adopted by whoever is managing the converting Delaware LLC, include specific authorization for a person or entity to execute the certificate of conversion as an authorized person of the converting LLC.

So now we're going to move on to discuss more mechanics of the filing of a certificate of conversion to a non-Delaware entity. Under section 18-216(e) of the Delaware LLC Act, this requires the certificate to be filed with the Delaware Secretary of State in accordance with Section 18-206. There are a number of technical provisions in Section 18-206 relating to the Delaware Secretary of State's backend processes for handling the filing of certificates. But for our purposes, we are just going to note that the certificate of conversion must be signed, and there are a few options for doing so. So a certificate can be signed using a facsimile signature, which is a reproduction of a manual signature, and you can also use a conformed signature or an electronically submitted signature.

Matt: So Alyssa, can I just jump in there? A practical question that we're asked from time to time is whether signatures on a filing like that can be DocuSigned. What's the answer to that?

Alyssa: Yeah. So the answer is yes, you can use DocuSign. And in fact, Section 18-113 of the Delaware LLC Act, which deals with electronic signatures, was I think added or amended just a couple of years ago, effective last August, and it does allow for different methods of electronic signature, including DocuSign.

And then just the last couple of things to note here are that there needs to be authorization to file the certificate of conversion with the Delaware Secretary of State, and that's something that Mike touched on just a few moments ago. And also something to note, that the default under the Delaware LLC Act is that a certificate is effective at the time of its filing with the Delaware Secretary of State, but a certificate of conversion may include a future effective date or time. And one thing to know on that point is that there are limits on future effectiveness, so the filing must become effective on or by the 180th day after the date the certificate is filed. And whether the certificate is effective at the time of filing or whether it provides for future effectiveness, once a certificate becomes 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 of certificate of formation.

And one final point here is that the filing of a certificate with the Delaware Secretary of State will require payment of associated filing fees and some additional fees that you may be charged if you obtain a certified copy of the certificate of conversion.

Matt: There is no free lunch.

Alyssa: Absolutely not, not in Delaware at least.

Mike: All right. So I'm going to talk a little bit about the effect of filing and the effects of conversion when talking about a conversion of a Delaware LLC to another entity. So as Alyssa alluded to, upon a certificate of conversion to a non-Delaware entity becoming effective under the LLC Act, the converting company ceases to exist as a Delaware LLC. Interestingly, the LLC Act does not contain a statement to this effect with respect to a Delaware LLC's conversion to a different type of Delaware entity or business form, but the same outcome results upon any conversion of an LLC under 18-216, whether out of or within the State of Delaware. And that is that the same entity continues to exist but in a different form.

Each other Delaware statute governing the conversion of an LLC to a different type of Delaware entity implies that the LLC company or that LLC ceases to exist upon this conversion. But the very nature of conversion, as we've been discussing, is not in the termination of the converting entity but in its transformation and that it continues to exist, whether in a different business form or in a similar form in another jurisdiction.

One other note on the slide here that I'll just highlight is it says a copy of the certificate conversion is prima facie evidence of the conversion by the LLC out of the State of Delaware. And I think part of the reason for that is because if you're going out in the state of Delaware, you're not necessarily going to . . . you'll have to look to another jurisdiction or another place to find evidence of the continuation or that the conversion was effected appropriately under that jurisdiction. But a copy of the certificate conversion to another non-Delaware entity pulled from the Delaware Secretary of State is going to be prima facie evidence that the conversion did occur correctly, at least on the Delaware side.

Next slide. Okay. So moving on and talking more about the effects of the conversion, a certificate of conversion to a non-Delaware entity, filed under the Delaware LLC Act, in effect serves as a certificate of cancellation, as Alyssa noted. It cancels the certificate of formation. The certificate of conversion . . . Therefore it's not necessary to file a certificate of cancellation in connection with an LLC's conversion out of Delaware. In connection with the conversion of an LLC to another Delaware entity or business form, the LLC Act neither provides for the automatic cancellation of the certificate of formation nor requires the filing of a certificate of cancellation.

In the absence of these provisions, it is consistent with the default rule that the conversion of an LLC does not constitute a dissolution of the LLC, nor does it require its dissolution or winding up. So no need to go through the winding-up process unless you otherwise agree. This is because upon the conversion of the LLC to another business form, to another jurisdiction, or to another form in Delaware, the LLC continues to exist, but the entity that was the LLC, I should say, continues to exist as a continuation of the entity in a different form or jurisdiction.

I think we can move to the next slide. So the conversion of the LLC to a non-Delaware entity or a business form pursuant to 18-216 and the resulting cessation of its existence as a Delaware LLC do not affect any obligations or liabilities of the entity incurred prior to the conversion. It also does not alter the choice of law applicable to the company with respect to matters arising prior to the conversion. So what does that mean?

It means issues pertaining to the internal affairs of the LLC prior to the conversion continue to be governed by Delaware law, notwithstanding conversion to a form of organization existing under the laws of a different jurisdiction. Similarly, although the LLC Act does not state explicitly in the case of a Delaware LLC that is converted to another Delaware entity or business form, Delaware's law governing LLCs continues to apply to pre-conversion matters even though the company has converted to a different form that's governed post-conversion by other Delaware laws. Therefore, for example, absent any creditors' agreements to contrary, under the LLC Act, the conversion of an LLC would not necessarily release a pre-conversion guarantor of the company's debt from liability and such guarantee.

All right. So moving on, what else happens when there's a conversion? Any conversion pursuant to 18-216 upon becoming effective, whether to a Delaware or a non-Delaware entity or business form, for all purposes of the laws of the State of Delaware, all the rights, privileges, and powers of the LLC that has converted and all of its property (real, personal, or mix), including debts due to it, and all other things and causes of action belonging to it remain vested in the other entity or business form to which the company is converted and are the property of such other entity or business form.

Further, for the purposes of Delaware law, title to any real property vested by deed or otherwise in the converting company does not revert and is not impaired by the reason of the LLC conversion.

As a matter of Delaware law, moreover, rights of creditors and all liens on property of the LLC that has converted are preserved unimpaired, and all the company's debts, liabilities, and duties remain attached to the other entity or business form to which the company is converted and may be enforced against it to the same extent as if those debts, liabilities, and duties originally had been incurred or contracted by it in its capacity as such other entity or business form.

So it really is a continuation. And what's interesting here is when you look at the merger statutes, you talk about not being impaired, but what's different in the conversion statute, in dealing with 18-216, the property of the converting company remains vested in the new entity or business form, and the obligations of the company remain attached to that [inaudible 00:32:09] organization. And that really these formulations vary from the language governing a merger in particular to reflect this idea that it is the same entity, it's a continuation of the same entity in a new form essentially.

Finally, one other point I'll make here on this slide is there's no transfer of property. So consistent with the concept that the conversion of an LLC constitutes a continuation of a single entity in a new form, the LLC Act provides that, for Delaware law purposes, the rights, privileges, powers, and interests in property, debts, liabilities, and duties of the company are not deemed as a consequence of its conversion under 18-216 to have been transferred to the other entity or business form to which it has converted. This may be particularly relevant with respect to contract terms, such as those conditioning or prohibiting assignment of a contract to which the converting LLC is a party.

Alyssa: Yes, and interestingly, Mike, there is somewhat recent case law on this point coming out of a New York court. In 2021, there is a case called Turnwood Associates vs. Sutton Hay Day, Inc. And basically, it was a situation where the New York Court was applying Delaware law to find that a conversion . . . I don't recall now if it was of other entities to Delaware or Delaware LLCs out of Delaware. But basically, they were tenants under a commercial lease, and the New York court held that the conversion did not constitute or result in an assignment of the lease in violation of the lease because under Delaware law the converted entity was the same entity as the prior to conversion entity.

Mike: Right. No. Thanks, Alyssa. That's a perfect example of what we're talking about here. So this non-transfer language and you'll see this sprinkled throughout the LLC Act, but also the other conversion statutes, in Delaware at least, where it talks about it's not considered a transfer for purposes of Delaware law. And I think this is a perfect example of how that comes into play.

So I think we'll turn the time over to Matt.

Matt: Yep. So in connection with a Delaware LLC's conversion pursuant to Section 18-216, rights or securities of or interests in the converting LLC can be exchanged for or converted into cash, property, or rights or securities of or interests in the continuing converted entity. Or those interests in the LLC can be exchanged for or converted into rights or securities of or interests in another entity or business form. They can remain outstanding. Or they can be canceled. So flexibility is a hallmark generally of the LLC Act, and these provisions are a good example of that flexibility and also illustrate the point that Mike made earlier, which is that a conversion is a fundamental transaction and can have really significant effects on the constituents of the entity.

So pre-existing participants in a Delaware LLC, whether it's the members of the company or non-member equity owners, may continue as participants in the new post-conversion entity, or they can in effect be squeezed out in a conversion. If LLC interests are exchanged for or converted into equity interests in the new other entity or remain outstanding, as the statute says, and I'll just interject here that remain outstanding concept is one that might raise an eyebrow in light of the change that a conversion effects on the entity, but putting that aside, if that's the case, then those pre-existing participants continue as constituents of the post-conversion entity.

On the other hand, if interests in the converting Delaware LLC are exchanged for cash or some sort of an in-kind distribution, like an interest in real property or a debt instrument, or even canceled without the payment of any consideration, then those participants don't continue with the entity post-conversion. And this highlights what Mike talked about earlier, that detailed terms are associated with conversion transactions, and Mike talked earlier about how those detailed terms might be documented, including in a plan of conversion.

So with that, I will turn it over to Mike to talk about the flipside of what we've been talking about — conversion to a Delaware LLC.

Mike: Great. Thanks, Matt. So as Matt mentioned, we're talking now about conversions of an other entity to a Delaware LLC, and this is covered under the LLC Act in Section 18-214, which permits the conversion of an other entity to a Delaware LLC.

So what does an other entity mean in this context? Well, it means a corporation, a statutory trust, a business trust, association, real estate investment trust, common-law trust, general partnership including a limited liability partnership, limited partnership including a limited liability partnership, or any other incorporated or unincorporated business or entity, whether organized under the laws of Delaware or another jurisdiction or form LLC. So what that means in short is there's a lot of flexibility in what types of other entities can convert to a Delaware LLC.

So the LLC Act enables conversion broadly, both conversions within Delaware, so, i.e., a conversion of a different type of Delaware organization to a Delaware LLC, for example a corporation to a Delaware LLC, or conversions into Delaware, for example an LLC formed under another state's law to a Delaware LLC.

Now, as Matt mentioned earlier, a Delaware LLC, however, may not convert directly to another Delaware LLC. So aside from that one exception, however, there's a lot of flexibility in how and to what extent other entities can convert to a Delaware LLC. Now, again, 18-214 does not require the laws under which the converting other entity is governed must permit or not prohibit a conversion to a Delaware LLC. But it's a practical issue, again, that's worth considering. Various Delaware statutes, besides the LLC Act, obviously are going to specifically enable and govern the conversion of a Delaware entity, for example a Delaware corporation or partnership to an LLC, statutory trust to an LLC, as Matt mentioned. However, there are entities, like a common-law trust, that doesn't have any statutory basis for that.

But applicable non-Delaware law should also be consulted with respect to a conversion of a non-Delaware entity to a Delaware LLC. And in particular, we've seen in our practice, in the last however many years, times when another state's law doesn't permit a conversion, for example, the one example I give is a Montana LLC is not permitted to convert to a Delaware LLC. A Montana corporation can convert to a Delaware LLC, but a Montana LLC cannot.

And so then it puts into question, well what do you have if you've done this without consulting the other state's laws? What do you have when you file that those documents here in Delaware? Is it actually a continuation? So there's a lot of . . . So while not a requirement necessarily, other than certain requirements which we'll talk about here in a second for authorization of a conversion, there's really not a lot of parameters or guidelines on that, but it's worth keeping in the back of your mind that you should always consult the other jurisdictions.

Matt: Yeah, and just the larger point is while there may be certainty on those particular issues, like the continuation concept under Delaware law . . .

Mike: Right.

Matt: . . . because Delaware isn't the only law that's implicated, there's some measure of certainty out there, so . . .

Mike: Yeah, exactly. So moving on to authorization questions. So the LLC Act requires the conversion of an other entity to a Delaware LLC must be approved prior to the filing of a certificate of conversion of the LLC in a manner provided for by the writing governing the other entity's internal affairs and the conduct of its business or by applicable law as appropriate. So really you're looking to the other jurisdiction or the other entity's, the converting entity's governing documents and governing law. And also the statute requires that an LLC agreement must be approved by the same authorization required to approve the conversion.

So as I mentioned, Delaware statutes other than the LLC Act address the manner in which conversion, for example, of a Delaware corporation or partnership or a limited partnership, the statutory trust must be approved. And again, the documents governing the internal affairs of these entities may bear on the manner of authorizing in such a conversion.

All right. In the case of a different type of Delaware organization, and this goes back to that common-law trust idea, it may be that the only guidance you're going to receive on authorization of a conversion of a common-law trust, for example, may be under the common-law trust documents.

So parties involved in the conversion of an other entity to a Delaware LLC, again, wish to consider the advisability of specifically approving the details of the transaction in addition to taking the required step of adopting the LLC agreement. So just this goes back to the point that Matt was raising and that we've raised a few times is typically it's not just the approval of the conversion itself and the LLC agreement as required by the statute, but you also want to consider the other fundamentals terms, so to speak, of the transaction and probably want to set those forth either in a plan of conversion or a set of resolutions that explicitly document these things.

Moving to slide 21, so procedures for a conversion, I'll just quickly touch on these. Converting an entity to a Delaware LLC requires compliance with filing two certificates with the Delaware Secretary of State, a certificate of conversion to the LLC and a certificate of formation for the LLC. Each certificate, as noted on the slide, must be executed in compliance with 18-204 and 18-201 with respect to the certificate of formation.

Now what's important I think to note here on this slide is really that the certificates must be filed simultaneously with the Delaware Secretary of State. And if they're not to become effective upon filing, they must provide for the same effective date or time. And this really avoids any issues or ambiguities about what you have if you, for example, filed one without the other. If you file the certificate of formation, then arguably you have an LLC that exists in this form. And as we've noted a few times now, you can't convert an LLC directly to another LLC. So then you're stuck with an LLC that's been formed but not necessarily the continuation of the same that the prior entity.

Matt: And that foot-fault is one we've seen in practice maybe more than others. And the principle, as Mike said, is that you can't convert to a pre-existing LLC. So if you filed a certificate of formation first, or it has a prior future effective date, you've got an issue.

Mike: Right. All right. With that, I'll turn the time over to Alyssa.

Alyssa: Thank you, Mike. So as Mike just noted, when you're converting to a Delaware LLC, then you need to file both a certificate of conversion to a Delaware LLC and the filing of a certificate of formation of such Delaware LLC.

And just I'm going to briefly go through some of these requirements of what needs to be in the certificate of conversion to a Delaware LLC. One of the things to note is that the certificate of conversion must list both the current jurisdiction under which the LLC exists as well as the jurisdiction under which it was organized. So if that's the same thing, then I think we've seen some sort certificates that just include it twice. But really you just want to make sure that you're going through these requirements line by line to make sure that you're including every piece of information that is asked for so that you can be in compliance with the statute.

And just as an example of what this might look like, if you have an entity that was originally formed as a Pennsylvania LLC and then it converts to a Wyoming corporation and then it wants to convert to a Delaware LLC, the certificate of conversion should 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. So that's just an example.

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. And then, the next required piece of information is supposed to be from historical information to forward-looking and requires you to put the name of the Delaware LLC to which this entity is converting. And here, you want to be careful to make sure that the name listed here matches exactly the name of the Delaware LLC that will be listed in the certificate of formation that needs to be filed simultaneously with the certificate of conversion.

And finally, you may want the certificate of conversion to include a future effective date or time for the conversion to be effective. And if none, the certificate will be effective when filed.

Now we're going to move on to the contents of the certificate of formation that needs to be simultaneously filed. And the requirements here are really just the same as if you were preparing a certificate of formation of a Delaware LLC, whether or not a conversion is involved. So as with any Delaware LLC, the converted company is required by Section 18-104 of the Delaware LLC Act to have and maintain a registered office and a registered agent in the state of Delaware. And the certificate of formation must include the name and address of its registered agent. If desired and as we've described a few times, the certificate of formation may also include a future effective date or time.

Now we're going to touch on execution of the certificates of conversion and formation. Section 18-214(b) requires each certificate to be executed in accordance with Section 18-204 of the Delaware LLC Act. 18-204 requires that a certificate of conversion to a Delaware LLC to be executed by one or more authorized persons authorized to execute the certificate on behalf of the other entity that is converting to a Delaware LLC. The certificate of formation, on the other hand, must be signed by a person authorized to do so on behalf of what will be the converted Delaware LLC. And typically, the way that we handle that is that we will include authorization and ratification of the execution of the certificate of formation by the authorized person in a limited liability company agreement that is adopted and effective as of the effectiveness of the filing of the certificate of formation.

So now we're going to briefly touch on filing. So I've been discussing the context of filing a certificate of conversion of a Delaware LLC. We now are going to talk about the filing of a certificate of conversion to a Delaware LLC and the certificate of formation of the Delaware LLC.

So both of these certificates need to be filed in accordance with Section 18-206 of the Delaware LLC Act. Once again, each certificate may be signed by a facsimile signature, a conformed signature, or an electronically submitted signature, which will kind of include using DocuSign if desired, and has the authorization to file each certificate and that the filing of each certificate will be accompanied by associated fees as well as obtaining a certified copy of each certificate.

As we've previously touched on, the certificates should be filed simultaneously so that they become effective simultaneously. And again, future effectiveness cannot be made later than 180 days after the certificate is filed.

Generally speaking, obtaining the desired result of simultaneous filing and effectiveness, which is required under the statute, can be accomplished relatively easily. You can simultaneously file certificates that are effective at filing, or you can include an identical future effective date or time in each of the certificate of conversion and the certificate of formation.

Matt: But when you don't have the future effective date or time stated, you need to make sure that the filing times are in sync, and that's something that the Secretary of State's office can accommodate.

Alyssa: Yeah, I agree. So 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 Mike is now going to talk about the effects of conversion.

Mike: Right, and I'll keep this pretty high level. A lot of the effects are going to be similar to converting, I don't know to another form of entity, but conversion to a Delaware LLC, some of the key points here, that we'll just touch on, is for purposes of Delaware law, a conversion in accordance with 18-214 constitutes a continuation of the existence of the converting other entity in the form of a Delaware LLC. So when an other entity is so converted, for all purposes of the laws of the State of Delaware, that LLC is deemed to be the same entity as the converting organization, transformed obviously into a Delaware LLC, but a continuation of that existing entity.

And I think what's critical is once it's become effective, the LLC is subject to all the provisions of the LLC Act, with one exception, that the existence of the company, the other entity or the LLC is deemed to have begun on the date that the other entity commences its existence in the jurisdiction in which it was first created, formed, incorporated, or otherwise came into being. So this relation back of the LLC's deemed formation date is consistent with the concept again that we've been discussing throughout is that the conversion represents a transformation of the entity. So the conversion constitutes an entity's continuation in a new form rather than the end of one entity and the beginning of another.

With respect to the conversion, more effects of the conversion, moving on to slide 28, under the LLC Act, the conversion is not deemed to affect any obligation or liabilities the converting entity incurs prior to that transaction. So very similar to the effects stated in 18-216 with respect to conversion of a Delaware entity to another entity.

The rights, privileges, powers, property, all those things remain vested in the LLC to which the other entity is converted. Title to real property, rights of creditors are preserved unimpaired. Debts and liabilities and duties of the converted entity remain attached. And the rights, privileges, powers, and interest in property, debt, liabilities, and duties of the other entity are not, as a consequence of the conversion, deemed to have been transferred to the LLC, but rather they continue to remain in the LLC.

Matt: And just, Mike, to talk about one point. One of the provisions is that the conversion doesn't affect the personal liability of any person that's incurred prior to the conversion. So what that means in this context would be if you have a limited partnership converting to an LLC, that doesn't take a general partner who has general liability under the partnership law off the hook for pre-conversion liabilities. Similarly, the conversion is not a get out of jail free card for a guarantor. And to the extent that there's potential liability under a veil piercing theory for the pre-conversion other entity, that's still a viable theory for those pre-conversion liabilities.

Mike: Exactly. All right. And just one other point here on this last slide, unless otherwise agreed, the converting other entity is not required to wind up its affairs similar to the other conversion statutes. Don't have to dissolve, wind up, cancel. Now this again can be varied if desired or if required by another jurisdiction's laws. For example, we've seen where other jurisdictions may require winding up in an accounting and usually on a foreign jurisdiction, cross-border type transaction. And so prior to the conversion becoming effective or as a result of the conversion becoming effective, there may be requirements in those in those states or other jurisdictions.

So with that, I will turn it back over to Matt.

Matt: This slide just talks about what can happen to the interests in the converting other entity, and again it just emphasizes the point that a conversion can have existential consequences not only for the entity itself but radical effects on the constituents. The principles here are pretty much the same as what we've discussed earlier.

So with that, we turn to the non-exclusivity of the conversion provisions. And what this means in effect is that you can still engage in a merger that results in the entity merging into a Delaware LLC or do a domestication. If you're coming into Delaware from abroad, the availability of a conversion transaction does not preclude a non-U.S. entity from instead domesticating into Delaware as an LLC. Interestingly, there is no counterpart in 18-216 to this provision in regard to conversion of a Delaware LLC, but it's not intended to provide otherwise.

We'll talk very briefly about other entities and series conversions. And here we've got listed the different statutes that govern, for example, conversions relating to Delaware limited partnerships, Delaware corporations, and also series. And series could be a subject for an entirely different CLE. We'll just note that a series conversion is possible in quite limited circumstances. And I apologize for giving that short shift, but we are quickly running up on our time limit here.

The provisions in these different statutes are really aligned with what we've talked about under the LLC Act. The provisions for conversion under the LP Act, for example, are largely consistent with those in the LLC Act. Key differences derive from some of the differences between the entity types, and that means that the approvals, for example, in a partnership has to be coming from partners rather than members. You file a certificate of limited partnership along with the certificate of conversion when you're converting to a Delaware limited partnership, things of that nature. And we talk a little bit about the conversion to a LLLP. That's just a specialized type of a limited partnership. So I'll ask Mike to talk at this point very briefly on series conversions.

Mike: Right. And I'll sum this up pretty quickly. Conversions are possible for series, but a series of the same LLC. So you can convert from a protected series to a registered series. Registered series are a series that had a certificate of registered series filed with respect to this. So it's a little more formal than a protected series. So you can convert from a protected series to a registered series of the same LLC or from a registered series to a protected series of the same LLC. And there are similar requirements in the statute and similar treatment in a lot of ways as converting of an LLC. And as Matt mentioned, that's a topic that you can cover a whole nother several hours in a CLE for not just conversions of the series, but also series themselves and how those function within LLCs and limited partnerships.

Matt: So I'll just note on that point, Mike, as you just said, you can't have a cross-entity . . .

Mike: Exactly.

Matt: . . . series conversion. And similarly, you cannot have a conversion of a series into its own separate entity.

Mike: Right.

Matt: And likewise, you can't have an entity, a standalone entity convert to a series. That said, there are workarounds and structuring options to accomplish effectively the same result.

Mike: Exactly. All right. And then I guess I'm going to touch briefly on conversion to a Delaware corporation. So similarly to what we've discussed in the LLC context and the LP context, Section 265 of the DGCL permits other Delaware entities and non-Delaware entities to convert to a Delaware corporation. I think that's what we're talking about. Yeah.

So with that, there's a couple requirements, certificates that are required. The certificate of conversion and the certificate of incorporation have to be filed simultaneously, very similar to the requirements under the LLC Act, except there's obviously going to be some statutory differences that we would refer you to Section 265 to deal with those specifically.

So on the effects of conversion, very similar treatment for a Delaware LLC. The rights, actions, and obligations remain vested. It's very similar in the transfer aspect as well, where the converting other entity is not required to wind up its affairs and its liabilities, and it's not treated as a transfer as a consequence of the conversion. Debt, liabilities, and duties of the other entity are not deemed as a consequence to have been transferred to the domestic corporation.

So with that, we'll go to slide 39 I think.

Matt: Yeah. And here, again the provisions in the corporation law dealing with conversion to a Delaware corporation and what happens to the interests in the converting entity, they're similar to the provisions we've already discussed with respect to LLC conversions. The same flexibility exists here. The same potential range of transactional outcomes are available in this context.

Mike: Right.

Matt: We're and it looks like I'm . . .there we go. We now turn to conversion of a Delaware corporation. I think in light of the time constraints that we're facing, we'll skip ahead a couple of slides because conversion of a Delaware corporation we're really covering the same types of things as we've covered with regard to the other types of conversions, the flexibility in terms of accomplishing a conversion, the different types of conversions, availability, specific authorization requirements, and those are certainly worth observing, and some of the particulars about when conversion requirements have to be satisfied.

There's the CLE code you saw earlier.

We talk briefly here on this slide, you can review it separately, about the contents for a certificate of conversion and what happens when an entity is converting within Delaware. Very similar types of provisions that apply in this context as in other types of conversions. There are, again, here the same things we've been talking about, about treatment of entities.

These are a few particular provisions of the General Corporation Law that are unique to conversions of Delaware corporations. The first paragraph deals with Section 266(j), as in Juliet. I'm going to use the NATO alphabet, as Annie did. And then the second paragraph deals with 266(k), kilo.

And so then we get into some of the practical considerations, and I think we'll really have to wrap up with this. The first thing you want to think about is the substance of applicable non-Delaware law. Mike talked about that a little bit. Do you want to elaborate on that at all, Mike?

Mike: No. Just be aware of it. I think that's really if you're converting especially from another jurisdiction, it's good to be aware of whether that state or other jurisdiction permits conversions into those types of entities or from those types of entities in it. So it really counterbalances, from a Delaware purpose or Delaware law purpose, there's a lot of certainty, but there may be some uncertainty with respect to the other jurisdiction.

Matt: Yeah. Where it gets interesting is let's say you're trying to convert, as Mike said earlier, a Montana LLC to a Delaware LLC, and a Montana LLC, by Montana law, is not permitted to convert to a Delaware LLC. That doesn't mean you can't effect the transaction as a conversion under Delaware law. You can, but you're going to have to structure it on the other side in a suitable manner that complies with Montana law. So remember because you've got the two applicable bodies of law, whereas you might be able to say this transaction was effectuated as a statutory conversion under Delaware law, you might be in a position where you say but it was a dissolution and sale of assets on the Montana side. So it can get kind of interesting there.

Coordination across borders, anybody want to comment on that?

Mike: Yeah. The only thing I'll say on that is that goes back to being aware of maybe the winding up and dissolution requirements. For example, there could be a jurisdiction that requires, whether it's a transfer or a domestication or a conversion out of that jurisdiction, they may require some kind of winding up and accounting, removal off of a company registry, or something like that. And so even though the conversion to Delaware is effective at a certain time, you may want to coordinate and make sure that . . . and this is maybe where a future effective time for a conversion comes into play is you give enough time for the conversion to become effective after or as the process of wind-up and dissolution in the other jurisdiction takes place.

Matt: Right. Alyssa, do you want to talk about the next to last bullet there, about use of forms for filings?

Alyssa: Sure. So this is just something that we thought was worth mentioning. You can get various forms for conversions from the Delaware Secretary of State, that they have prepared.

Matt: Or other sources.

Alyssa: Or from other sources, that's right. And we would just caution that rather than simply relying on those forms, that you still look at the statutory requirements to make sure that every required piece of information is being addressed because we have found that sometimes forms just will not include all relevant information or space for all relevant and required information. So typically, when we're preparing forms, we will be looking directly at the statute and just going line by line to make sure that we're addressing each requirement.

Matt: Yeah. And that can be a real problem in terms of, for example, legal opinions. We're asked to give opinions on statutory conversions from time to time. And if there's a filing that's made that omits a statutorily required statement, we can't give an opinion on the effectiveness of the conversion. So that that can be a real problem, and it's an easily avoided foot-fault.

Would you like to talk briefly, Alyssa, about that last point too, availability of name?

Alyssa: Sure. Just as a possible consideration, before you go down the road of preparing certificates and getting ready to file them, we would just advise that you check to make sure that the name that you want to use for the converted entity is available in the state into which the entity is converting.