BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                       AB 506


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          ASSEMBLY THIRD READING


          AB  
          506 (Maienschein)


          As Amended  April 23, 2015


          Majority vote


           -------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                   |Noes                |
          |----------------+------+-----------------------+--------------------|
          |Banking         |12-0  |Dababneh, Travis       |                    |
          |                |      |Allen, Achadjian,      |                    |
          |                |      |Brown, Chau, Gatto,    |                    |
          |                |      |Hadley, Kim, Low,      |                    |
          |                |      |Perea, Ridley-Thomas,  |                    |
          |                |      |Mark Stone             |                    |
           -------------------------------------------------------------------- 


          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  
            Probate Code Division 9. 








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          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 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.  









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          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  
            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 to 17713.13).


          2)Establishes the RULPA, modeled after the national Uniform  
            Limited Partnership Act which governs California business  
            partnerships. (Corporations Code Sections 15900 to 15912.07)


          FISCAL EFFECT:  None.


          COMMENTS: 


          An LLC is a hybrid between a corporation and a partnership.  An  








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          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  
          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.  


          This bill amends the California RULLCA and the California RULPA.   
          RULLCA was enacted in in 2012 through SB 323 (Vargas), Chapter  








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          419, Statutes of 2012.  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 to 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., 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 this bill is addressing.  


          Specifically, this bill 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, this bill would resolve an ambiguity in RULPA that  








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          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.   
          This bill would clarify that an agreement is paramount to forming  
          a partnership and a critical part of the formation process.


          Previous Legislation:


          SB 323 enacted the RULLC which recasts and reorganizes the  
          existing BKLLCA. 




          Analysis Prepared by:                                               
                          Kathleen O'Malley / B. & F. / (916) 319-3081  FN:  
          0000272