If you form entities frequently, you may have noticed the State of Delaware has increased their scrutiny of entity names. Names which seem innocent initially may be stopped because of alternative, or unintended meanings: if your entity has “CBD”, “Illegal”, or “Gun” in the name will mostly likely get suspended at the state. Think “The Straight Dope, LLC” is a good name for your new blogging LLC? Think again! A new regulation published by the State in October offers a clearer explanation of is and is not allowed.
The issue began in April, 2019, when Illegal Pete’s, a Colorado food chain serving Mexican food, filed to relocate in Delaware. Delaware Secretary of State suspended the filing based on the “negative connotation” of using the “Illegal” name “that might cause harm to the interests of the public or the state”, though there is wide precedent for using “Illegal” in other entities in Delaware. This denial set off a lawsuit with Illegal Pete’s arguing an infringement on their First Amendment rights, while Delaware arguing they have a right to promote and protect the integrity of the industry.
In response to the lawsuit, and to make their position more defensible in the future, Delaware created a regulation which offers guidelines over what is not permitted in entity naming. The regulations are designed to give the Division of Corporations broad power in suspending filings for further review. Naming cannot contain words that:
- “discriminate against…any of the protected classes”
- “facilitate, incite or foster any criminal act or offense as prohibited under Delaware law” and further clarifies those acts which are more closely monitored
- “cause public deception or confusion or difficulty in administration”
- “likely to mislead the public about the business purpose of the business entity”
- “likely to lead to a pattern and practice of abuse that would cause harm to the interests of the public or Delaware”
While the regulation may be well intentioned, it’s existence has done little to settle the confusion for the filing industry.
- Inconsistency in suspensions: We have found that names might be acceptable for some State filing agents, but others will suspend or outright reject a name.
- Unpredictable results: Preclearing a filing does not ensure it won’t be suspended for naming. This can be especially troublesome if a document is precleared for a merger that must take place on a certain date, then the filing is suspended when the document is pushed through.
- Avoidance of Delaware: Delaware is known to be a fast in filing documents and business friendly. This regulation raises doubts about the speed of filings, and may be a signal of the direction the state is heading.
So, what happened to Illegal Pete’s?
Illegal Pete’s eventually won their case and were permitted to file in Delaware. However, after winning the case, the owner, Pete Turner, decided he would stay in Colorado after all. “This was a reminder that Illegal Pete’s always has been and always will be a Colorado company,” Turner said in the release. In the end, Delaware got what it wanted — Illegal Pete’s didn’t domesticate in Delaware — but did Delaware really win?
Joshua Twilley, President