This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Since 2018, Delaware has allowed a limited liability company to do something that still sounds like a magic trick the first time a deal team encounters it: split itself into two or more LLCs, hand each one a curated bundle of assets and liabilities, and never conduct a sale, an assignment, or a wind-up along the way. The mechanism is the statutory division under 6 Del. C. § 18-217, and it has quietly become a standard pre-sale structuring tool: divide the company, sell the clean half, keep the complicated half. Buyers who don’t know how divisions work — and, more to the point, don’t know to ask whether one has ever happened — are diligencing a corporate family tree with a branch sawed off.
One LLC walks in, two walk out, and the liabilities pick a lane
The statute’s architecture is straightforward once you see the vocabulary. A “dividing company” adopts a plan of division and files a certificate of division; out the other side come one or more “resulting companies,” plus, optionally, the original as a “surviving company.” The plan of division allocates everything — assets, rights, obligations, liabilities — among the division companies. Interests in the dividing company can be converted into interests in any of the division companies, or cash, or something else entirely.
Two features make this categorically different from the spinoffs and drop-downs deal lawyers already know. First, no transfer occurs in the classic sense. Assets don’t pass by assignment or bill of sale; they are allocated, and the statute treats the division as something other than a conveyance from one entity to another. That is why divisions became instantly popular for businesses sitting on hard-to-assign contracts and licenses — though whether a particular contract’s anti-assignment clause reaches a division is a drafting question with real teeth, which we’ll come to. Second, the dividing company does not wind up. Section 18-217(d) says the division requires no winding up under § 18-803 and no payment of liabilities and distribution of assets under § 18-804, and the division is not a dissolution. The company simply becomes two companies, mid-stride, without the creditor-protective machinery that a dissolution would trigger.
Crucially, the statute does not let the division erase anything. Pre-division obligations remain valid and enforceable — but they are enforceable against the division company to which the plan allocated them. Your counterparty of ten years may now be a different entity than the one holding the assets you’d want to collect against. That single sentence is the whole reason this post exists.
Approval is easier than you assume, and your contract may not stop it
How hard is it to authorize a division? Often easier than the members realize. Under § 18-217(c), the LLC agreement’s specified division mechanics control if they exist; if the agreement is silent on divisions but has merger-approval mechanics, those apply; and if it’s silent on both — the common case for agreements drafted before 2018 — a division can be adopted by members holding a simple majority of the profits interests. A structure that feels like it should require unanimity can, by default, be authorized by bare majority.
Contract counterparties face a parallel surprise, and here the statute drew a deliberate line at its own birthday. For agreements entered into before August 1, 2018, Delaware treats contractual restrictions on mergers, consolidations, or asset transfers as restricting divisions too — the drafters grandfathered old contracts because nobody prohibits a structure that doesn’t exist yet. For contracts signed after that date, the assumption flips: sophisticated parties are expected to say “division” expressly. A credit agreement, lease, or license drafted in 2022 whose negative covenants meticulously restrict mergers and asset sales but never mention divisions may simply not reach one. Lenders fixed their forms years ago; plenty of commercial contracts never got the memo. If you negotiate definitions in purchase agreements for a living, add “division” to the list of words that must appear in the operative clauses, not just in your head.
The plan of division is the map, and it is not on file
Now the diligence gap. The certificate of division is a public filing with the Delaware Secretary of State — you can find out that a division happened. The plan of division, the document that actually says which entity got which liabilities, is not publicly filed. The statute instead requires a “division contact” — a Delaware resident or entity named in the certificate — to keep a copy of the plan for six years and, on written request of a creditor of the dividing company, to disclose which division company was allocated that creditor’s claim. That is the entire statutory transparency regime: a name-and-address service for people who already know they’re creditors and already know a division occurred.
For a buyer, that thin disclosure valve is not remotely enough. If the target — or any entity in its chain of title — is a division company, the plan of division is a must-have diligence document, requested directly from the seller, because it is the only place the liability allocation lives. The questions to answer from it are concrete. Which liabilities were allocated to the target, including the contingent and unliquidated ones — warranty tails, environmental exposure, litigation that hadn’t been filed yet? Which liabilities went to the sibling company, and could any creditor plausibly argue the allocation didn’t capture its claim? Were any assets the target relies on — IP, permits, key contracts — allocated to a sibling with a license back, creating an ongoing dependency nobody mentioned in the CIM?
Fraudulent transfer is the backstop, not a comfort
The statute’s answer to the obvious abuse case — load the liabilities into a shell, keep the assets, wave goodbye — is fraudulent-transfer law. If the division’s allocation constitutes a fraudulent transfer under applicable law, the protection of the allocation gives way and the division companies bear joint and several responsibility for the offending liabilities. Delaware borrowed the concept deal lawyers already stress-test in distressed acquisitions where clawback risk hangs over the structure: an allocation is only as durable as the solvency analysis behind it.
Notice what that backstop means from each chair. For a seller planning a pre-sale division, the discipline is solvency substance: each division company should emerge adequately capitalized relative to its allocated liabilities, with a contemporaneous record — projections, valuations, ideally a solvency opinion in bigger structures — built the day the plan is adopted, not reconstructed the day a creditor sues. For a buyer of a division company, the backstop cuts both ways. It protects the world from abusive allocations, but it also means your clean target can be dragged back into joint and several exposure for the sibling’s liabilities if the division that created your target is later attacked. Buying CleanCo does not fully insulate you from the sins of the division that made CleanCo clean.
What buyers should ask when a division sits in the chain
The protocol reduces to a short sequence. First, ask the existence question in every Delaware LLC deal: has the target, or any predecessor or affiliate in its chain, ever effected or been formed in a division? Put it in the diligence request list and as a representation — the certificate of division is searchable, but reps smoke out what searches miss. Second, if the answer is yes, obtain the plan of division and the division-date solvency record, and read the allocation like a title examiner: liabilities, assets, and the dependencies between the divided halves. Third, price the fraudulent-transfer tail. If the division was recent, the sibling is thinly capitalized, and creditors are circling, the joint-and-several backstop is a live contingency that belongs in the indemnity architecture — a special indemnity for division-related claims, measured escrow, or both. Fourth, check the target’s own paper: UCC filings and debtor names get messy when entities divide, a cousin of the problem we’ve covered in Florida UCC search mechanics and seriously misleading debtor names.
And the Florida coda: Chapter 605 has no division mechanism. A Florida LLC that wants this tool gets it by converting to Delaware before the sale and dividing there — a two-step that shows up with increasing frequency in lower-middle-market exits where one product line is sellable and another is radioactive. That conversion-plus-division pattern is exactly when a buyer should slow down and run the protocol above, because the structure exists for a reason, and the reason is sitting in the plan of division you haven’t asked for yet.
If you are structuring a pre-sale carve-out, or buying a company with a division somewhere in its history, feel free to reach out to our firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
