BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                       AB 1722|
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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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