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Thomas D. Kearns
tkearns@olshanlaw.com

@TDKearns
212.451.2273

Update on Using Delaware LLC's vs. NY LLC's

Below is the latest update of my original Client Alert comparing the Delaware and New York laws governing LLCs. This update discusses the far superior service by the Delaware Secretary of State’s office with respect to corporate filings.

The choice between Delaware and New York as the jurisdiction of organization for a new limited liability company which will do business in New York needs to be reviewed in every circumstance.  The following is a list of the pros and cons of using Delaware when representing the controlling member:

Cons

  1. Filing Fees.  Assuming the business will operate in NY, the Company will need to file in both Delaware (organization) and NY (qualification to do business).  This adds approximately $450 to the cost of the organization.
  2. Statutory Representation.  The Company needs a statutory agent in Delaware.  This adds approximately $115 per annum.
  3. Accounting Fees/Tax Filings.  The Company must file tax returns in both Delaware and NY.  Estimated additional costs of $300 per annum for the Delaware fees.

Pros

  1. Superior Statute.  Delaware has a superior statute which is regularly updated to resolve any inconsistencies.
  2. Superior Service for Filings. Delaware’s Secretary of State offers far superior service to corporate filers in a hurry. In a recent multi-million dollar merger involving entities in both states, Delaware offered 60 minute service for a $1,000 extra fee (two hours is $500) and made its deadline. New York’s Department of State only offered a two hour service (for which you had to submit by noon) and, what’s worse, failed to meet its deadline, causing enumerable headaches with respect to wire deadlines on loan payoffs.  If you have a multi-party merger transaction involving a New York LLC, consider a migratory merge to Delaware well in advance of the closing – it may save many thousands in per diem payoff costs, not to mention the cost of a dozen or more lawyers staring at their screens for multiple hours waiting for effectiveness.  (Another example: Delaware’s filing cut off is 7 PM, New York’s is 4 PM.)
  3. Fiduciary Duty.  Delaware expressly permits the restriction or elimination of fiduciary duty.  See §18-1101.  NY does not.
  4. Case Law.  As the case law has developed, Delaware courts are turning out to be more sophisticated than NY courts at interpreting their respective statutes.
  5. Need for Operating Agreement.  NY requires a written operating agreement within 90 days.  See §417.  The impact of failing to do so has been the subject of litigation.  Delaware does not require a written agreement.
  6. Management by Managers.  NY §401(a) appears to require that if management is changed from members to managers, an amendment to the charter is required.
  7. Classes of Members.  NY §418(a) could be interpreted to require that the articles must describe different classes or groups of members.
  8. Removal of Managers.  Unless otherwise expressly provided in the operating agreement, NY §414 permits removal of the manager without cause by a vote of members holding a majority in interest.
  9. Merger.  DE §18-209(b) permits a merger of the LLC without a vote of members if expressly provided in the LLC Agreement.  NY §1001(c) requires a vote by no less than a majority in interest of the members in all cases.
  10. Indemnification.  Delaware law regarding indemnification of members is closer to the typical business person’s understanding particularly with respect to reimbursement of enforcement costs.  Compare similar statutory language in DE §108 to NY §420 and 546-552 West 146th Street v. Arfa, 603041-06 (1st Dept. Aug. 10, 2012) to DeLucca v. KKAT Mgmt, LLC, 2006 WL 4762856 (Del. Ch. 2006).
  11. Waiver of Judicial Dissolution.  Delaware permits the express waiver of the statute pertaining to judicial dissolution for impracticality of carrying on the business of the company.  Although there is no recent case law, it is not likely that New York will respect a waiver of that kind.  See Huatuco v. Satellite Healthcare, 12/9/13, DE CV Actions 8465-VCG.
  12. Availability of Opinions.  For larger transactions, lenders often ask for lender friendly provisions in LLC agreements including the appointment of independent managers with authority to veto bankruptcy filings.  Established Delaware law firms such as Richards, Layton & Finger, PA, are proficient in issuing opinions on these and other matters which lenders require.  See Joshua Stein's excellent article in the March 4, 2014 issue of the Commercial Observer.
  13. Publication.  Filing in Delaware does not help avoid New York’s expensive publication requirement if the business to be operated is located in New York since publication is required for qualification to do business in New York.  However, if the business is located outside of New York, it makes no sense to incur that cost.  Delaware has no publication requirement. 

In general, if the additional costs are not meaningful to the client, we should recommend that Delaware be used in most circumstances.

Author
Thomas Kearns

Tom represents owners, operators and developers in the acquisition, development, ground leasing and financing of office, residential and retail properties. He has extensive experience with joint venture, LLC, tenant-in-common and other agreements between co-venturers including programmatic ventures across multiple assets, and has negotiated and drafted sophisticated commercial condominium documents including condominiums to permit not-for-profit entities to take advantage of real estate tax exemptions

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