Mergers Involving Delaware LLCs Don’t Trigger Appraisal Rights – Except When They Do
When parties consider an M&A transaction involving a merger, a factor that is top of mind for counsel is complying with the statutory appraisal procedures afforded to holders of equity in the merging entity who do not consent to the transaction – particularly where it is expected that a portion of the shareholder base will not approve of the transaction. Section 262 of the Delaware General Corporation Law protects shareholders of Delaware corporations who do not consent to a merger by providing for statutory appraisal rights, unless the shareholders have otherwise waived or “opted out” of these protections. Statutory appraisal rights entitle dissenting shareholders who comply with the statutory requirements to file a petition in the Delaware Court of Chancery demanding a determination of the fair value of their stock. Many other states, including California, New York, and Minnesota, have adopted statutes providing for similar appraisal rights for dissenting corporate shareholders.
Parties conducting a merger of a Delaware LLC, however, operate under a different set of default rules. Section 18-210 of the Delaware Limited Liability Company Act states that there are no statutory appraisal rights afforded to dissenting members in a merger of a Delaware LLC. Instead, the Delaware Limited Liability Company Act provides that dissenting members only have appraisal rights if those rights are specifically created by contract, most commonly in the limited liability company agreement or an agreement of merger.
Though a merger of a Delaware LLC does not involve mandatory, statutory appraisal rights, it is important for counsel to review the limited liability company agreement and any other agreements among members of the LLC to account for appraisal rights that may have been adopted by contract. The default appraisal rights rules for mergers of LLCs vary by state. For example, Florida, California, and New York do provide statutory appraisal rights for dissenting members in an LLC merger. Counsel should check the statutes of each state under which a constituent entity to the merger was formed.
If a Delaware LLC has significant operations in another state, it would also be prudent to confirm that the statutes of the applicable state do not apply to the LLC involved in the merger. For example, the California Corporations Code extends statutory appraisal rights to apply to foreign LLCs formed on or after January 1, 2014 or qualified to do business in California on or after January 1, 2014, if members holding more than 50% of the voting power of the LLC reside in California. In short, when planning for a merger involving an LLC, the best practice is to check all organizational documents, member agreements, and the statutes under which each constituent entity is organized and conducts significant operations before concluding there are no appraisal rights for dissenting members of an LLC.