CONTRIBUTOR FEATURE | GORDON, FOURNARIS & MAMMARELLA THE SERIES LLC AND CAPTIVES – A BRIEF HISTORY Jeff rey Simpson and Andrew Rennick of Gordon, Fournaris & Mammarella provide a unique look at Series LLC and captives he use of Series Limited Liability provide for the creation of series statutory Companies (Series LLC) is one of trusts. Six years later, the Delaware Lim- the most signifi cant innovations ited Liability Company Act (DLLCA) was Jeeff rrey Simmppson Tin captive insurance over the past amended to permit the creation of Series ten years. Similar to a protected LLCs. cell company (PCC), a Series LLC permits the segregation of assets and liabilities into Jeffrey Simmpsonn is a director at the Wilmington Delaware creates the Series LLC various series, each of which can be oper- law fi rm of Gordon, Fournaris & Mammarella. Jeff ’s The 1996 revisions to the DLLCA provided ated as a separate captive insurance com- practice focuses on the formation, regulation and a much more detailed description of the governance of captive insurance companies. He pany. This permits sponsors and users of is a founder and director of the Delaware Captive series than the original statutory trust act, Series LLC structures to achieve fl exibility, Insurance Association. He chaired and continues particularly as it pertains to how to safe- cost savings and administrative effi ciency. to serve on the committee that drafted Delaware’s guard the separateness of each series for Given that Series LLCs have only been updated captive insurance statute in 2005. the purpose of limiting liability of a series’ used in captive programmes since 2010, obligation to that series’ assets. Under the one could be forgiven for thinking that the DLLCA, a Series LLC’s operating agreement Series LLC structure is much newer than could permit the LLC to designate series the PCC, the fi rst of which was authorised of owners, managers, or assets and liabili- in Guernsey in 1997. In fact, Series LLCs Anndreww Reennniick ties, which are segregated from each other pre-date PCCs, and their roots stretch back and from the LLC generally (often called into the early twentieth century. Series the “Core”). As with the series investment LLCs have developed from a mechanism to Andrew Reennickk is an associate at the Wilming- trusts, this segregation would provide cost facilitate the segregation of mutual funds ton law fi rm of Gordon, Fournaris & Mammarella, savings and administrative effi ciencies by in Delaware to a popular risk management P.A. Andrew’s practice focuses on the formation, avoiding multiple fi lings with the Secretary tool in a half-dozen captive domiciles. In regulation, and governance of captive insurance of State and the Securities and Exchange companies. In addition, Andrew has extensive this article, we review the history of the Commission. Over the next 15 years, states experience in the areas of general corporate law Series LLC and trace its evolution into the and business counseling in connection with issues such as Illinois, Nevada, Tennessee and powerful tool in the captive insurance involving entity formation and governance. Montana would follow Delaware’s lead, market that it is today. amending their respective LLC Acts to expressly authorise the formation of series Series Investment Trusts efi ciaries. By the middle of the century, the LLCs and provide liability protections for The story of the Series LLC begins in the use of series investment trusts was preva- each individual series. world of investment trusts, which have lent enough that the Investment Company been used since the early twentieth cen- Act of 1940 contains language recognising Comparison with Protected Cell Companies tury to provide savings and effi ciencies the use of series. For most of the twentieth The year after Delaware adopted Series for mutual fund families. Using series in century, the trusts used in series structures LLC legislation, Guernsey passed the Pro- investment trusts allowed the segregation were common law trusts; however, the tected Cell Companies Ordinance 1997, of various investment portfolios. This in surging popularity of series investment authorising the creation of PCCs. A PCC turn permitted income from particular trusts in the 1980s prompted Delaware functions similarly to a Series LLC, in that investments to be allocated to specifi c ben- to amend its statutory trust law in 1990 to the assets and liabilities of each cell are 38 March 2017 captivereview.com GORDON, FOURNARIS & MAMMARELLA | CONTRIBUTOR FEATURE segregated from each other cell and from the Core. As with the Series LLC, this seg- regation enables each cell to operate as if it were separate from the Core and the other cells while still being administered and regulated in conjunction with the Core. A significant difference between the series of a Series LLC and the cells of a PCC is that while a series has the statutory authority to contract in its own name, a cell generally does not. Where a cell cannot contract in its own name, the Core generally contracts for and on behalf of the cell. Some practition- was licensed in Delaware in 2010. Since ULC’s drafting committee has released ers believe that having the Core contract then, dozens of Series LLC structures, with multiple drafts of such an amendment, for and on behalf of the cell unnecessarily hundreds of individual series, have been most recently in July 2016. exposes the Core. It can also preclude con- formed in Delaware. Recognising the pop- In our view, the work of the ULC and the tracts between and among cells because the ularity of series, in 2015 Delaware updated increased interest in Series LLCs from var- Core cannot contract with itself. its captive insurance statute to formalise ious states could have a salutary effect on As a corollary to the inability to con- the licensing, taxation, reporting and gov- the development of the Series LLC struc- tract separately, a cell generally cannot ernance of what it now calls a “series cap- ture. As it currently stands, there is great sue or be sued in its own name. This issue tive insurance company”. variation in the substance of Series LLC was addressed in the 2015 case of Pac statutes. For example, not every jurisdic- Re 5-AT v. AmTrust North America, Inc. tion has followed Delaware’s approach CV-14-131-BLG-CSO, 2015 WL 2383406, “The story of the Series in expressly providing that a series can (D. Mont. May 13, 2015). For a time, the contract in its own name or sue and be ability of a Delaware series to pursue lit- LLC begins in the world sued in its own name. In light of the Pac igation on its own behalf had also been Re decision, we believe that clear statu- in question. In 2007, a federal court in of investment trusts, tory language is essential to guarantee Maine held in GxG Management LLC which have been used that the courts will respect not only the v. Young Brothers that a series holding segregation of series assets and liabilities, title to a boat was not independently since the early twentieth but also the separate ‘personhood’ of the capable of pursuing its own legal claims. series. In addition, while the ability to In response to that decision, later that century to provide form a series without a state filing is an year Delaware amended the DLLCA to attractive feature for many programmes, expressly provide that a series could sue savings and efficiencies the downside is that other than in Illinois, and be sued in its own name. it is not possible to obtain a Certificate for mutual fund families” of Good Standing from the Secretary of Captive insurance and the Delaware State, certifying as to the due formation Series LLC and authorisation to conduct business in When Delaware undertook a revision of Further developments the state. Whether through the work of the its captive insurance statute in 2005, the Other captive insurance domiciles have ULC or through individual state initiatives, drafters sought maximum flexibility in the taken note of the success of the Delaware a statutory mechanism for obtaining a Cer- type of entity structure that could be used. Series LLC and have either permitted Series tificate of Good Standing would be of great The 2005 revisions to the Delaware cap- LLCs to be licensed as special purpose cap- assistance in enabling series to open bank tive statute permitted the use of statutory tives (Montana) or utilise their protected and investment accounts. trusts and LLCs for captives. In addition, cell provisions to create a hybrid “Series Over the past twenty-plus years, the the 2005 revisions created a licensing cat- Protected Cell” structure (Tennessee). Series LLC has evolved greatly from its orig- egory called the special purpose captive, Under the Tennessee model, the Series inal use in the mutual fund marketplace. granting the Insurance Commissioner the LLC is formed under authority granted by By enabling series to function as separate flexibility to license programmes that did the Tennessee Limited Liability Company business enterprises, and by permitting not fit squarely into an existing category. Act and licensed as a PCC under the cap- their use in special purpose programmes, With the Series LLC structure already tive statute. Each series is therefore a ‘cell’ Delaware’s innovative approach to Series established as a viable entity form, the for regulatory purposes. Meanwhile, the LLCs has brought risk management oppor- pieces were in place to establish captive use of the Series LLC is attracting national tunities to a variety of domiciles and to insurance programmes using Series LLCs. attention, as the Uniform Law Commission hundreds, if not thousands of captive own- Therefore, while Delaware also permitted (ULC) has formed a committee to study ers.