New York LLCs vs. Delaware LLCs: Appraisal Rights

January 6, 2022 | By Patrick T. McCloskey

The choice of jurisdiction for the formation of a limited liability company (LLC) often comes down to Delaware or New York. The onerous publication requirement in New York1 is often enough by itself to sway founders towards Delaware, but if the entity will be operating in New York that will usually require the Delaware LLC to obtain a certificate of authority to do business as a foreign LLC in the Empire State, which also requires publication.2

Assuming the publication cost with either a New York or Delaware LLC, the annual cost of a registered office and a registered agent in Delaware becomes a factor.3 However, before being swayed back to New York, founders should consider a significant difference in these LLC statutes on a critical issue: appraisal rights.

Simply put, the members of a New York LLC have statutory appraisal rights in connection with a merger or consolidation,4 while the members of a Delaware LLC do not.5 Although freedom of contract generally reigns supreme in an operating agreement, NYLLCL §1002(e) does not contain the cozy qualifier “unless otherwise provided in the operating agreement.” This means that the operating agreement of a New York LLC cannot remove or have the members waive appraisal rights. As mentioned above, statutory appraisal rights do not exist for the members of a Delaware LLC, but such rights can be provided by contract in the limited liability company agreement or in an agreement and plan of merger.6

One way this issue could surface is in the context of a conversion of an LLC into a corporation or the domestication of a New York LLC into another jurisdiction (such as Delaware). Unlike many other states, New York does not provide for these procedures by statute.7 As a result, the only way to accomplish these transactions is to merge the New York LLC with another entity, which will trigger appraisal rights. This could result in an ugly scenario if one or more founders want to convert or domesticate an LLC for strategic reasons and there is a member who wants to be cashed out.

____

This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).

1See New York Limited Liability Company Law (“NYLLCL”) § 206.

2See NYLLCL § 802(b).

3See Delaware Limited Liability Company Act (“DLLCA”) § 18-104. Since NYLLCL § 609(c), which provides for potential personal liability of the ten largest members of an LLC by percentage ownership for unpaid wages, applies to both domestic and foreign LLCs, this is unlikely to be decisive factor in determining whether to form an LLC in New York or Delaware in this context.

4See NYLLCL §§ 1002(e) & (f).

5See DLLCA § 18-210.

6Id.

7The NYLLCL does, however, provide for the conversion of a partnership or limited partnership into an LLC. See NYLLCL § 1006.