Delaware Business Court Insider | by Tom McParland
A Delaware lawmaker has rekindled a legislative effort to tighten statutes governing the formation and oversight of foreign limited liability companies, a move that has again put him and other reform advocates at odds with attorneys and state officials.
On Jan. 26, state Rep. John A. Kowalko Jr., D-Newark South, filed a bill that would require registered agents, acting on behalf of individuals or entities, to screen the applicants for their compliance with a range of federal laws. Under the legislation, known as HB 57, the agents would be able to block a prospective LLC’s certification, if it is deemed to be a threat to national security.
The two-page bill takes a much more narrow approach to LLC formation than a sweeping measure Kowalko rolled out at the end of the last legislative session.
The previous legislation would have required increased scrutiny of LLCs with a majority of members from nations that are at war with the United States, required the secretary of state to coordinate with investigative agencies and barred hostile governments from forming Delaware LLCs. Introduced just weeks before the General Assembly broke at the end of June, it never came up for a floor vote.
HB 57, on the other hand, focuses almost exclusively on the vetting process for foreign LLCs looking to register here.
Supporters of the bill insist it is a common-sense measure that targets only a sliver of the approximately 835,000 LLCs that the secretary of state’s office said were active in Delaware as of Jan. 29. Of those, only 4,149 entities were foreign-owned, according to the agency’s figures.
“What we’re aiming to deal with here is a very small facet of this entire business in Delaware,” said Christine Whitehead, a member of the watchdog group Delaware Coalition for Open Government who was instrumental in crafting the legislation.
DelCOG members have insisted reforms are needed to repair Delaware’s reputation after the release of the Panama Papers disclosed how the wealthy secretly store assets in offshore shell companies. The ensuing scrutiny of the state’s lenient LLC formation system has demanded urgent action, they said.
Meanwhile, both sides appear to be at loggerheads since talks between LLC reform supporters and representatives of the DSBA broke down last summer. Kowalko said that neither the bar association nor the secretary of state’s office has contacted him to discuss the most recent legislation.
Typically, the DSBA’s corporation law section reviews any proposed changes to Delaware corporate and alternative entities law. Its recommendations are packaged into one long legislative package and introduced to the General Assembly in April.
On Tuesday, Secretary of State Jeffrey W. Bullock stopped short of commenting on the merits of the bill but urged that it be considered as a part of the normal DSBA process.
“HB 57 clearly has good intentions, but it may be a challenge to make it effective. The bill should be submitted to the corporate bar for their review and input, as has been the practice in the past,” Bullock said in a statement.
O’Toole said that his section has not vetted HB 57, and the DSBA has taken no official position on the bill. However, he did say the bar association would formally weigh in, if requested.
“If the General Assembly asks for input, we’ll be prepared to provide it,” he said.
Undeterred, Kowalko sounded a more defiant tone, saying he would not “ask for approval” to pursue the legislation.
“If they have concerns, they can come to me,” he said.
Nor did Kowalko rule out the possibility of eventually pushing some of last year’s more extensive measures, which were jettisoned from the streamlined HB 57.
“Sometimes it has to be a baby step, but I do think we need major overhauls,” he said.
HB 57 has been assigned to the House Economic Development/Banking/Insurance/Commerce Committee, where it awaits a hearing after the General Assembly returns next month from a round of budget talks.