BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 1722 (Wagner)
Version: February 29, 2016
Hearing Date: June 14, 2016
Fiscal: Yes
Urgency: No
RD
SUBJECT
Limited liability companies: dissolution: cancellation of
articles of organization
DESCRIPTION
This bill would insert a "50 percent or more" standard in place
of current law requirements that a "majority" of an LLC's voting
power, as specified, vote to dissolve or to cancel its articles
of organization.
BACKGROUND
A California limited liability company (LLC) is a hybrid between
a corporation and a partnership. An LLC generally has the
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.
California first recognized LLCs in 1994 with the enactment of
the Beverly-Killea Limited Liability Company Act
(Beverly-Killea), which provided comprehensive provisions for
the organization, management, and dissolution of LLCs. (SB 469
(Beverly, Ch. 1200, Stats. 1994).) That same year, the National
Conference of Commissioners on Uniform State Laws (NCCUSL)
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approved the use of a Uniform Limited Liability Company Act. In
2006, after reviewing the development of LLC laws in the United
States, NCCUSL adopted the Revised Uniform Limited Liability
Company Act (RULLCA), which has been enacted in five states
(Idaho, Iowa, Nebraska, Utah, and Wyoming) and the District of
Colombia.
In 2012, SB 323 (Vargas, Ch. 419, Stats. 2012), sponsored by the
Partnerships and Limited Liability Companies Committee of the
Business Law Section of the State Bar of California, was enacted
to repeal Beverly-Killea and, taking into account California's
particular LLC protections, replace it with a modified version
of RULLCA. Currently, under RULLCA, an LLC may file a short
form certificate of cancellation with the Secretary of State's
office within 12 months of the filing of the articles of
organization, as specified, and would make the cancellation of
the LLC effective upon filing of that form. To do so, however, a
majority of the members (or, if there are no members, the
majority of the managers, if any, or if no members or managers,
the person or a majority of the persons signing the articles of
organization) are needed to execute the certificate of
cancellation of articles of organization. Otherwise, California
law generally requires a majority of members of an LLC to vote
to dissolve or cancel the articles of organization. (Corp. Code
Secs. 17707.01(a), 17707.02.)
This bill would, instead, only require 50 percent or more of the
voting interests of the LLC members, or 50 percent of the
members, managers, or persons signing the articles of
organization, as applicable, to effectuate the above provisions
authorizing the dissolution or cancellation of an LLC.
CHANGES TO EXISTING LAW
Existing law provides that any corporation may elect voluntarily
to wind up and dissolve by the vote of shareholders holding
shares representing 50 percent or more of the voting power.
(Corp. Code Sec. 1900(a).)
Existing law provides that a limited liability company (LLC) is
dissolved, and its activities shall be wound up, upon the
happening of the first to occur of the following:
on the happening of an event set forth in a written operating
agreement or the articles of organization;
by the vote of a majority of the members of the LLC or a
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greater percentage of the voting interests of members as may
be specified in the articles of organization, or a written
operating agreement;
the passage of 90 consecutive days during which the LLC has no
members, except that, on the death of a natural person who is
the sole member of an LLC, the status of the member, including
a membership interest, may pass to one or more heirs,
successors, and assigns of the member by will or applicable
law, as specified; or
entry of a decree of judicial dissolution pursuant to
specified law. (Corp. Code Sec. 17707.01.)
Existing law provides that notwithstanding any other provision
of RULLCA, if a domestic LLC has not conducted any business,
only a majority of the members, or, if there are no members, the
majority of the managers, if any, or if no members or managers,
the person or a majority of the persons signing the articles of
organization, may execute and acknowledge a certificate of
cancellation of articles of organization, on a form prescribed
by the Secretary of State, stating specified information,
including:
that the certificate of cancellation is being filed within 12
months from the date the articles of organization was filed;
that the LLC does not have any debts or other liabilities,
except as provided, below;
that a final franchise tax return or a final annual tax
return, as specified, has been or will be filed with the
Franchise Tax Board;
that the known assets of the limited liability company
remaining after payment of, or adequately providing for, known
debts and liabilities have been distributed to the persons
entitled thereto or that the limited liability company
acquired no known assets, as the case may be;
that the limited liability company has not conducted any
business from the time of the filing of the articles of
organization;
that a majority of the managers or members voted, or, if no
managers or members, the person or a majority of the persons
signing the articles of organization, voted to dissolve the
limited liability company. (Corp. Code Sec. 17707.02(a).)
Existing law provides for various provisions governing suits for
judicial dissolution. (Corp. Code Sec. 17707.03.)
This bill would instead allow an LLC to dissolve by a vote of 50
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percent or more of the voting interests of the members (unless a
greater percentage of the voting interests of members is
specified in the articles of organization, or a written
operating agreement).
This bill would, instead, allow a domestic LLC to cancel its
articles of organization with 50 percent or more of the voting
interests of the members; or, if there are no members, 50
percent or more of the managers, if any; or, if there are no
members or managers, 50 percent or more of the persons signing
the articles of incorporation.
COMMENT
1. Stated need for the bill
According to the author:
Where a corporation may voluntarily elect to dissolve and
wind-up business by vote of shareholders holding 50 [percent]
or more of the voting power (See Corp. Code, [Sec.] 1900(a)),
it takes an absolute majority vote of the membership of an LLC
to achieve the same end (Corporations Code [Sec.]
17707.01(b).) - even though the LLC may consist of no more
than two people with equal ownership. In the case of a 50-50
standoff, the only way to seek dissolution would be by the
member(s) bringing a costly and time-consuming action in court
for a judicial dissolution.
AB 1722 is needed to avoid unnecessary and costly litigation
currently required to effect dissolution of two-member and
other small LLCs where acrimony between members stands in the
way. It also will eliminate the prospect of unpleasant
surprise to those seeking dissolution of a small LLC to
realize that, unlike other business organizations, dissolving
the LLC will require an absolute majority vote, even if the
LLC consists of only two members. Many small businesses are
organizing without the aid of legal counsel (e.g., using the
online self-help websites) and do not realize the ramification
of forming an LLC with equal ownership. This will change the
default rule to 50 [percent] or more and avoid the costly
litigation that these small companies often cannot afford.
2. The proposed 50 percent or more standard is consistent with
existing law for corporations
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This bill would change the current standard for the percentage
of LLC members needed to effectuate the dissolution of the LLC
or to cancel the articles of organization. Under existing law,
absent language specifying otherwise in the articles of
organization or written operating agreement, a majority (over 50
percent) of an LLC's members (or, in some occasions, its
managers, or, if no members or managers, the persons filing the
articles of organization) must vote to dissolve and wind-up the
corporation, or to execute the certificate of cancellation of
the articles of organization if no business has been done by the
LLC within 12 months since the articles were filed. This bill
would change that standard to one of 50 percent or more.
Currently, by requiring a majority of LLC members, if the
members are in a 50-50 split on whether to dissolve, they would
need to seek a judicial dissolution in order to dissolve and
wind-up the LLC. (See Corp. Code Sec. 17707.03.) Under those
provisions generally governing judicial dissolutions, California
law allows any manager or any member or members of an LLC to
file an action in a court of competent jurisdiction to decree
the dissolution of an LLC whenever any of the following events
occur:
it is not reasonably practicable to carry on the business in
conformity with the articles of organization or operating
agreement;
dissolution is reasonably necessary for the protection of the
rights or interests of the complaining members;
the business of the LLC has been abandoned;
the management of the LLC is deadlocked or subject to internal
dissension; or
those in control of the LLC have been guilty of, or have
knowingly countenanced, persistent and pervasive fraud,
mismanagement, or abuse of authority.
In any suit for judicial dissolution, the other members may
avoid the dissolution of the LLC by purchasing for cash the
membership interests owned by the members so initiating the
proceeding, the "moving parties," at their fair market value, as
specified. (Id.)
Notably, however, under existing law for corporations, a
majority is not needed for dissolution of the corporation-only
50 percent is needed. Thus, this bill would appear consistent
with the percentage of shareholders that would be needed to
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dissolve a corporate structure. As noted in the Background, an
LLC is a hybrid between a corporation and a partnership. The
sponsor of this bill writes:
Under existing law, absent a contrary provision in the
articles of organization or written operating agreement, it
takes a majority vote of the members of an LLC to dissolve the
entity and wind up its activities. This can create major
problems with small LLCs having an equal number of ownership
interests - particularly two-member LLCs that are often 50-50
owners, where the requirement requires the decision to
dissolve, in effect, be unanimous. If a majority vote cannot
be achieved, the only way to seek dissolution is by the
member(s) bringing a costly and time-consuming action in court
for a judicial dissolution. In contrast, it takes only 50
[percent] of the voting power of corporate shareholders to
[a]ffect a dissolution under that business model (see
Corporation Code [Sec.] 1900(a)).
AB 1722 would harmonize the LLC dissolution statute with the
corporate voluntary dissolution statute to require only 50
[percent] of the voting power of the LLC's member to initiate
voluntary dissolution under default circumstances. If the
members wish to require a higher voting percentage to [a]ffect
dissolution, they may still do so through the LLC's articles
of organization or operating agreement.
This change in the law will maintain flexibility for LLCs to
shape their articles and operating agreements in the manner
that works best for them, while eliminating the unpleasant
"surprise" existing law may hold for two-member and other
small LLCs who are unaware that their dissolution can be far
more complex than if they had formed as another type of
business entity.
Support : None Known
Opposition : None Known
HISTORY
Source : Conference of California Bar Associations
Related Pending Legislation : None Known
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Prior Legislation :
AB 506 (Maienschein, Ch. 775, Stats. 2015) made various updates
and changes to the California Revised Uniform Limited Liability
Company Act (RULLCA).
SB 323 (Vargas, Ch. 419, Stats. 2012) See Background.
AB 1859 (Nakano, Ch. 416, Stats. 2004) streamlined procedures
for LLC dissolution, as specified, and the certificate of
cancellation filed with the Secretary of State, based on the
short form cancellations created by AB 1875, below, for
corporations.
AB 1875 (Nakano, Ch. 390, Stats. 2002) allowed corporations that
never issued shares to file short form cancellations.
Prior Vote :
Assembly Floor (Ayes 76, Noes 0)
Assembly Appropriations Committee (Ayes 18, Noes 0)
Assembly Banking and Finance Committee (Ayes 12, Noes 0)
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