BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1722|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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CONSENT
Bill No: AB 1722
Author: Wagner (R)
Amended: 2/29/16 in Assembly
Vote: 21
SENATE JUDICIARY COMMITTEE: 7-0, 6/14/16
AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,
Wieckowski
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
ASSEMBLY FLOOR: 76-0, 4/14/16 (Consent) - See last page for
vote
SUBJECT: Limited liability companies: dissolution:
cancellation of articles of organization
SOURCE: Conference of California Bar Associations
DIGEST: This bill inserts a "50 percent or more" standard in
place of current law requirements that a "majority" of an
limited liability company's voting power, as specified, vote to
dissolve or to cancel its articles of organization.
ANALYSIS:
Existing law:
1)Provides that any corporation may elect voluntarily to wind up
and dissolve by the vote of shareholders holding shares
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representing 50 percent or more of the voting power.
2)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
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.
1)Provides that, notwithstanding any other provision of the
Revised Uniform Limited Liability Company Act (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;
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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 LLC remaining after payment
of, or adequately providing for, known debts and
liabilities have been distributed to the persons entitled
thereto or that the LLC acquired no known assets, as the
case may be;
that the LLC 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 LLC.
1)Provides for various provisions governing suits for judicial
dissolution.
This bill:
1)Allows, instead, for an LLC to dissolve by a vote of 50
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).
2)Allows, instead, for a domestic LLC to cancel its articles of
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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.
Background
A California 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, Chapter 1200, Statutes of 1994). That same year, the
National Conference of Commissioners on Uniform State Laws
(NCCUSL) 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 RULLCA, which has been
enacted in five states (Idaho, Iowa, Nebraska, Utah, and
Wyoming) and the District of Colombia.
In 2012, SB 323 (Vargas, Chapter 419, Statutes of 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
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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, instead, only requires 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.
Comments
As stated by 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
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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.
The Conference of California Bar Associations, 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
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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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
SUPPORT: (Verified6/27/16)
Conference of California Bar Associations (source)
OPPOSITION: (Verified6/27/16)
None received
ASSEMBLY FLOOR: 76-0, 4/14/16
AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,
Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,
Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,
Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth
Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,
Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper,
Roger Hernández, Holden, Jones, Jones-Sawyer, Kim, Lackey,
Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty,
Medina, Mullin, Obernolte, O'Donnell, Olsen, Patterson, Quirk,
Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood, Rendon
NO VOTE RECORDED: Irwin, Levine, Melendez, Nazarian
Prepared by:Ronak Daylami / JUD. / (916) 651-4113
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6/29/16 15:50:38
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