Structuring Divisive Mergers Under the Delaware and Texas Statutes

Recording of a 90-minute premium CLE webinar with Q&A


Conducted on Tuesday, April 23, 2019

Recorded event now available

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Program Materials

This CLE webinar will examine the divisive merger statutes of Delaware, which was enacted in 2018 and applies only to LLCs, and Texas, which was adopted in 1989 and applies to all Texas entities. The panel will guide M&A counsel on how to structure a divisive merger and will also discuss the implications of Divisive Mergers for existing and future credit agreements and other contracts to which a Delaware and Texas entities may be parties.

Description

A divisive merger under Texas law is a merger that enables an existing entity to divide its assets and liabilities into one or more entities pursuant to a plan of merger or division (Plan). Delaware law also enables an existing limited liability company (LLC) to similarly divide its assets and liabilities into one or more entities pursuant to a Plan but simply refers to this type of transaction as a “division,” which is not accomplished by a merger. For ease of reference, division under both Texas and Delaware law is referred to herein as a "Divisive Merger".

In 2018, Delaware Limited Liability Company Act (DLLCA) Section 18-217 was amended to authorize a Divisive Merger in which an existing Delaware LLC can adopt a Plan with the requisite member or manager approval. Pursuant to the Plan and upon the filing of a certificate of division with the Delaware Secretary of State, and a certificate of formation for any new entities resulting from the Divisive Merger, the LLC could divide its assets and liabilities among itself and one or more new Delaware LLCs. Divisive Mergers are accomplished by merger in Texas and are currently imbedded in Texas Business Organizations Code (TBOC) Sections 1.002(15) and 10.008. Divisive Mergers in Delaware are only presently authorized for LLCs, whereas in Texas a corporation, partnership or LLC may effect a Divisive Merger.

The Divisive Merger gives M&A lawyers a strategic alternative to traditional spinoffs or asset sales, but also presents new concerns for creditors and counterparties. Divisive Mergers have implications for corporate and finance practice nationwide.

Under the Delaware and Texas statutes, an entity may create a Plan which is adopted in the same manner as a plan of merger unless otherwise provided in the operating agreement of the LLC. Once adopted and a certificate of division or merger is filed with the applicable Secretary of State, the assets and liabilities of the initial entity will be divided as provided in the Plan, and each new entity generally has only the assets and liabilities of the initial entity allocated to it in the Plan. There can be unintended consequences if the Plan does not sufficiently and clearly make the allocations of the entities’ assets and liabilities.

Further, applicable fraudulent transfer statutes and regulatory requirements may impact a Divisive Merger. The Divisive Merger statutes generally cannot be used to circumvent contractual obligations under agreements with third parties existing before the effective date of the Divisive Merger. Lenders and counterparties may consider amending existing agreements to address Divisive Mergers.

Listen as our authoritative panel discusses the process as well as the consequences of adopting a Plan of Divisive Merger under the Delaware and Texas statutes. The panel will also discuss tax consequences of Divisive Mergers and best practices for lenders and other counterparties in transactions with Delaware and Texas entities going forward.

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Outline

  1. Delaware and Texas Divisive Merger statutes: Structuring alternative to M&A spinoffs and carve-outs
  2. Mechanics of a divisive merger
    1. Plan of a Divisive Merger: Key terms
    2. Approval of Divisive Merger
    3. Certificate of division or merger
  3. Effect of the Divisive Merger: Allocation of assets, properties, licenses, debts, liabilities and duties of the dividing entity among multiple survivors
  4. Federal income tax treatment of Divisive Mergers
  5. Concerns for lenders and other counterparties and best practices going forward

Benefits

The panel will review these and other important issues:

  • How is a Divisive Merger accomplished under Delaware and Texas statutes?
  • What are some implications of Divisive Mergers on future structuring of M&A transactions?
  • What is the effect of a Divisive Merger?
  • What steps should lenders and other counter-partners take in existing and future credit and other agreements to address the possibility of a future Divisive Merger?

Faculty

Egan, Byron
Byron F. Egan

Partner
Jackson Walker

Mr. Egan is engaged in a corporate, partnership, securities, mergers and acquisitions (M&A), and financing...  |  Read More

Hornberger, William
William H. Hornberger

Partner
Jackson Walker

Mr. Hornberger he has practiced in the areas of tax, transactional, international and corporate law. His tax practice...  |  Read More

Russell, R. Jason
R. Jason Russell

Partner
Morris Nichols Arsht & Tunnell

Mr. Russell's practice focuses on limited liability company, partnership (including master limited partnerships...  |  Read More

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