BILL ANALYSIS Ó
AB 506
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Date of Hearing: May 4, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 506
(Maienschein) - As Amended April 23, 2015
SUBJECT: Limited liability companies
SUMMARY: Makes changes to the California Revised Uniform Limited
Liability Company Act (RULLCA) and the California Revised Uniform
Limited Partnership Act of 2008 (RULPA). Specifically, this
bill:
1)Specifies that a limited partnership is formed when the
partners enter into a partnership agreement before or after the
filing of a certificate of a limited partnership.
2)Expands the definition of "person" to include a trustee of a
trust including, but not limited to, a trust described under
Division 9 of the Probate Code.
3)Amends the definition of "electronic transmission by the
limited liability company."
4)Requires a limited liability company (LLC) to indemnify the
agent of a LLC to the extent that the agent has been successful
on the merits in defense or settlement of any claim, issue, or
matter if the agent acted in good faith and in a manner that
the agent reasonably believed to be in the best interests of
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the LLC and its members.
5)Limits the RULLCA to acts or transactions existing on or after
January 1, 2014, or by members or managers of the LLCs existing
on or before that date.
6)Eliminates the requirement requiring the consent of all members
of the LLC to approve a merger or conversion, as well as, to
amend the operating agreement.
7)Requires profits and losses of a LLC be allocated among the
members, and among classes of members, in the manner provided
in the operating agreement and would require that profits and
losses be allocated in the proportion to the value of the
contributions from each member if the operating agreement does
not otherwise provide.
8)Modifies what an operating agreement may provide.
9)Specifies that upon dissociation, a person's right to vote as a
member in the management and conduct of the LLCs activities
terminates.
10)Authorizes, if a member dies or a guardian or general
conservator is appointed for the member, the member's executor,
administrator, guardian, conservator, or other legal
representative to exercise all of the member's rights for the
purpose of settling the member's estate or administering the
member's property, including any power the member had under the
articles of organization or an operating agreement to give a
transferee the right to become a member.
11)Provides that specified provisions of the Labor Code, relating
to consideration for employment and employment contracts, shall
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not apply to membership interests issued by any LLC or foreign
LLC.
12)Makes other technical and clarifying changes.
EXISTING LAW:
1)Establishes the California RULLCA which governs all California
LLCs. (Corporations Code, Sections 17701.01-17713.13).
2)Establishes the RULPA, modeled after the national Uniform
Limited Partnership Act which governs California business
partnerships. (Corporations Code, Sections 15900-15912.07)
FISCAL EFFECT: None.
COMMENTS:
An LLC is a hybrid between a corporation and a partnership. An
LLC generally has the beneficial characteristics of a partnership
for operational and taxation purposes, but its members enjoy the
immunity provided by a corporation to its shareholders for
contract debts or tort liability. The interest of a member in an
LLC is an economic interest, in the same manner that a
partnership interest or a corporate share is an economic
interest, that may be transferred under terms and conditions
provided by the LLC agreement, the partnership agreement, or the
corporate structure.
Background:
On January 1, 2014, the Beverly-Killea Limited Liability Company
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Act (BKLLCA) (the law in California governing LLCs prior to
January 1, 2014) was repealed and replaced by the RULLCA.
Existing LLCs and those formed after January 1, 2014 are subject
to the RULLCA. The RULLCA imposes significant changes in the way
California LLCs are to be governed and inserts default provisions
in LLC operating agreements if certain matters are not
specifically addressed. The RULLCA applies to all LLCs, foreign
and based in California that register with the Secretary of State
(SOS). The RULLCA is based on the RULLCA adopted by the National
Conference of Commissioners on Uniform State Laws (NCCUSL), with
modifications to include certain aspects of existing California
law.
The purpose of the RULLCA is to clarify the issues that existed
under the BKLLCA. The RULLCA provides a wider breadth of default
rules that applies to all LLCs in situations where an operating
agreement is silent as to a particular issue. The intended
benefit of enacting the RULLCA was to coordinate California's LLC
laws with the LLC laws of other states, thereby making it easier
for businesses to operate across state lines.
AB 506 amends the California RULLCA and the California RULPA.
RULLCA was enacted in in 2012 through SB 323 (Chapter 419). SB
323 did not replicate word-for-word the RULLCA as promulgated by
the NCCUSL. RULLCA as enacted in California incorporates
numerous provisions from the BKLLCA (Corporations Code, Sections
17000-17656) which were carried over to RULLCA for the purpose of
improving the NCCUSL version. The carried-over provisions
include: important topics (e.g., meetings, officers, voting
rights, and mergers and conversions) that were not covered in the
NCCUSL version; particular requirements of the Business Programs
Division of the SOS (e.g., the requirement for filing biennial
statements of information); certain investor protections (e.g.,
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member information rights and certain restrictions on operating
agreement amendments); and other provisions (e.g., for limited
liability company (LLC) dissolutions)
Since the enactment of SB 323, a number of inconsistencies and
conflicts have been found through the Corporations Code. SB 323
faced challenges in carrying over provisions from BKLLCA because
the statutory numbering convention was different, the
organizational structure was different, and various defined terms
in BKLLCA differed from the corresponding terms in the NCCUSL
version of RULLCA which AB 506 is addressing.
Specifically, AB 506 amends the RULLCA transition rule in
Corporations Code, section 17713.04 to clarify that the term
"contracts" includes LLC operating agreements. Thus, the
operating agreements of LLCs existing prior to January 1, 2014
are governed by BKLLCA and should not necessarily need to be
amended after that date. RULLCA applies to all LLCs and
operating agreements entered into on or after January 1, 2014.
Whether the operating agreement of an existing LLC should be
amended after January 1, 2014, e.g., to take advantage of RULLCA
provisions is an issue for practitioners to decide in
consultation with their clients on a case-by-case basis.
In addition, AB 506 would resolve an ambiguity in RULPA that
provides that a limited partnership is formed when a Certificate
of Limited Partnership is filed and the parties have entered into
a partnership agreement. Existing law provides that a
partnership is formed when the SOS files the Certificate of
Limited Partnership, but makes no mention of a partnership
agreement. The bill would clarify that an agreement is paramount
to forming a partnership and a critical part of the formation
process.
Need for the bill:
According to the sponsor, The Partnership and Limited Liability
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Companies Committee of the Business Law Section of the State Bar
of California,
"Since SB 323's enactment, the Committee has engaged in robust
discussions with, and has received comments from, many
experienced LLC law practitioners in California. As a result of
those discussions, the Committee collected some further
suggestions for clarification and improvement of RULLCA. This
bill would correct the ambiguities and inconsistencies, and make
some further improvements for the benefit of California attorneys
and judges who must work with and interpret RULLCA in the future,
as well as for the benefit of all California business enterprises
that wish to conduct their business in the LLC form."
Previous Legislation:
SB 323 (Vargas, Statutes of 2012, Chapter 419) enacted the RULLC
which recasts and reorganizes the existing BKLLCA.
REGISTERED SUPPORT / OPPOSITION:
Support
State Bar of California (Sponsor)
Conference of California Bar Association (CCBA)
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Opposition
None on file.
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916) 319-3081