BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1722| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 AB 1722 Page 2 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; AB 1722 Page 3 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 AB 1722 Page 4 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 AB 1722 Page 5 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 AB 1722 Page 6 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 AB 1722 Page 7 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 AB 1722 Page 8 6/29/16 15:50:38 **** END ****