On April 7, 2021, significant amendments were approved concerning several key Delaware business acts, including the Delaware Uniform Limited Partnership Act (DRULPA). These changes, approved by the Corporation Law Section of the Delaware State Bar Association, are poised to update and refine the legal framework for limited partnerships in Delaware, a popular jurisdiction for business formation. These amendments to the DRULPA, along with changes to the Delaware Revised Uniform Partnership Act (DRUPA) and the Delaware Limited Liability Company Act (DLLCA), are currently awaiting consideration by the Delaware legislature and, if enacted, will become effective August 1, 2021. This update delves into the crucial amendments to the Delaware Uniform Limited Partnership Act, explaining their implications for businesses operating as or considering forming Delaware limited partnerships.
Ratification of Void or Voidable Acts Under DRULPA
A significant amendment introduces a new section, § 17-106(e), to the Delaware Revised Uniform Limited Partnership Act addressing the ratification of acts or transactions that might be considered void or voidable. This provision allows for the ratification of actions taken by or concerning a Delaware limited partnership, its agreement, or its operations. Specifically, if an act or transaction is deemed void or voidable, it can be officially ratified by the individuals whose approval would have been initially required to authorize the action or to amend the partnership agreement to permit the action in the first place.
This amendment also extends to the waiver of non-compliance with partnership agreement requirements. If a limited partnership fails to adhere to specific stipulations within its partnership agreement, this failure can also be waived by the same approval authority. Importantly, any act or transaction that undergoes ratification, or any non-compliance that is waived under this new section, is legally considered to have been effective from the original date of the act or transaction.
This legislative update directly responds to Delaware Court of Chancery precedents, notably Composecure, L.L.C. v. Cardux, LLC and Absalom Absalom Trust v. Saint Gervais LLC. These cases had established that actions deemed void were generally not ratifiable. The new DRULPA amendment effectively overturns this precedent, providing a clearer pathway for businesses to rectify procedural or transactional errors, enhancing legal certainty for Delaware limited partnerships.
Clarifying the Right to Information for Delaware Limited Partners
Amendments to § 17-305(f) of the Delaware Uniform Limited Partnership Act refine the rights of limited partners to access information. The updated section specifies that when a partner is entitled to information for a stated purpose, their right is limited to obtaining information that is “necessary and essential” to fulfill that purpose. This principle applies unless the partnership agreement explicitly broadens or restricts this right.
This amendment is intended to clarify and, in some respects, narrow the scope of information access rights, responding to the Delaware Supreme Court’s decision in Murfey v. WHC Ventures, LLC. While Murfey held that the “necessary and essential” test didn’t apply to proper purpose requirements in partnership agreements, these amendments reaffirm the application of this test to the fundamental proper purpose requirement under § 17-305(a) of the DRULPA. This change seeks to balance the informational needs of limited partners with the operational practicalities and confidentiality concerns of the limited partnership itself, ensuring that information requests are appropriately tailored to their stated purpose.
Delegation of Duties by General Partners with Conflicts of Interest
Section 17-403(c) of the DRULPA is amended to address the delegation of rights, powers, or duties by a general partner who may have a conflict of interest. The updated provision explicitly states that a general partner can delegate any of their rights, powers, or duties, regardless of whether they have a conflict of interest concerning the matter being delegated. Furthermore, the individual or entity to whom these rights or duties are delegated is not automatically deemed conflicted simply because the delegating general partner has a conflict.
This amendment directly counters the interpretation of prior law as seen in the case of Wenske v. Bluebell Creameries, Inc., which suggested that a conflicted principal was legally unable to delegate authority on matters where they were conflicted, even to an independent delegate. The DRULPA amendment aims to provide greater flexibility and practicality in the governance of limited partnerships, particularly in complex situations where conflicts might arise. It allows for delegation to ensure efficient management and decision-making, even when a general partner faces a conflict, as long as the delegation itself is appropriate and in the best interests of the limited partnership.
Becoming a Statutory Public Benefit Limited Partnership under DRULPA
The amendments also bring changes to Subchapter XII of the DRULPA, concerning Statutory Public Benefit Limited Partnerships. These revisions clarify the process for a limited partnership that was not initially formed as a public benefit entity to convert to one. A standard limited partnership can become a Statutory Public Benefit Limited Partnership by following the procedure outlined in its partnership agreement or by amending the agreement and its certificate of limited partnership to meet the requirements of Subchapter XII of the DRULPA.
Furthermore, the amendments stipulate mandatory content for the partnership agreement of a Statutory Public Benefit Limited Partnership. The agreement must explicitly state that the entity is a Statutory Public Benefit Limited Partnership and clearly define the specific public benefit or benefits it is committed to promoting. In case of any discrepancies between the stated public benefit in the partnership agreement and the certificate of limited partnership, the partnership agreement will take precedence among partners, members, managers, and other parties bound by the agreement. The certificate must then be amended to rectify any inaccuracies, ensuring alignment between internal governance documents and public filings.
Continued Application of DRUPA to Partnerships Opting Out of Entity Status
Finally, amendments to Section 15-103 of the Delaware Revised Uniform Partnership Act (DRUPA) clarify the application of DRUPA provisions to partnerships that have chosen to opt-out of entity status. The amendment confirms that even if a partnership has opted out of entity status or has partners with interests in specific partnership property, as permitted under Sections 15-201(a), 15-203, and 15-501 of the DRUPA, all other provisions of the DRUPA remain applicable. The only exception is if the partnership agreement explicitly states that certain provisions do not apply.
For instance, the dissolution rules outlined in Section 15-801 of the DRUPA will continue to govern partnerships that have opted out of entity status unless their partnership agreement specifically provides otherwise. This amendment ensures consistency and clarity in the legal framework, preventing unintended consequences from opting out of entity status and maintaining the overall regulatory structure of partnership law in Delaware.
These amendments to the Delaware Uniform Limited Partnership Act represent important updates for businesses operating under this structure. Understanding these changes is crucial for ensuring compliance and leveraging the intended benefits of these legislative refinements. For specific questions regarding these amendments and their impact, reaching out to legal counsel specializing in Delaware alternative entities is advisable.
