SB 323 Senate Bill - Bill Analysis

BILL ANALYSIS �

SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session

SB 323 (Vargas)
As Amended January 4, 2012
Hearing Date: January 10, 2012
Fiscal: Yes
Urgency: No
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SUBJECT

California Revised Uniform Limited Liability Company Act

DESCRIPTION

This bill would repeal the Beverly-Killea Limited Liability
Company (LLC) Act (Beverly-Killea) and enact the California
Revised Uniform Limited Liability Company Act. Among other
things, this bill would:
provide for the creation of a Special Litigation Committee
(SLC) within an LLC for the purpose of investigating
derivative claims made against an LLC; once formed, the SLC
could request that a court stay discovery during litigation,
and once a determination has been rendered by the SLC, a court
would be required, as specified, to enforce the SLC's
determination;
provide for a series of LLC into which the LLC could transfer
LLC assets and liabilities, and the series would be operated
through its own members or managers;
eliminate any requirement that the provisions for amending an
operating agreement, voting rights, meeting requirements,
election or removal of managers, appointment of officers, or
indemnification be specified in either the articles of
organization or a written operating agreement;
authorize the modification of member or manager fiduciary
duties through oral amendments to operating agreements; and
eliminate statutory agency authority of members, and therefore
member liability to third parties, regardless of whether the
LLC is a member-managed or manager-managed LLC.

BACKGROUND

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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)
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.

This bill, sponsored by the Business Law Section Partnerships
and Limited Liability Companies Committee of the State Bar of
California, would repeal Beverly-Killea and, taking into account
California's particular LLC protections, replace it with a
modified version of RULLCA.

CHANGES TO EXISTING LAW

1. Existing law , the Beverly-Killea Limited Liability Company
Act, authorizes the creation of, and governs the activities
of, limited liability companies (LLCs) having one or more
members. (Corp. Code Sec. 17000 et seq.)

This bill would repeal existing law and replace it with the
Revised Uniform Limited Liability Company Act as described in
more detail below.

2. Existing case law recognizes the creation and function of a
special litigation committee (SLC) organized by an LLC for the
purpose of investigating derivative claims against the LLC or
its directors. (Finley v. Superior Court for the County of
Orange (2000) 80 Cal.App. 4th 1152.)

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This bill would authorize an LLC to appoint an internal SLC,
potentially comprised of members who are named defendants, to
investigate derivative claims against the LLC. This bill also
would require a court to stay discovery, unless the plaintiff
could show good cause otherwise, until the SLC completes its
investigation, and would require the court, upon finding that
the committee members were disinterested, independent, and
acting in good faith, to enforce the determination of the SLC.

3. This bill would authorize an LLC to create a series of an LLC
(one or more designated series of assets of the LLC) and
provide organization, governance, and dissolution provisions
for the series separate from the LLC.
4. Existing law provides that if the articles of organization or
operating agreement are silent on member voting requirements,
then the LLC would be subject to specified member voting
requirements. (Corp. Code Sec. 17103.)

Existing law provides that if the articles of organization or
operating agreement are silent on officer appointment
provisions, then the LLC would be subject to specified officer
appointment provisions. (Corp. Code Sec. 17154.)

This bill would not provide default voting restrictions or
officer appointment provisions.

5. Existing law requires an LLC to provide modifications to the
operating agreement, voting rights, meeting requirements, the
election or removal of managers, appointment of officers, and
indemnification in either the articles of incorporation or a
written operating agreement. (Corp. Code Sec. 17005(b).)

This bill would delete this requirement.

6. Existing law provides that a manager's fiduciary duties may
only be modified in a written operating agreement with the
informed consent of the members. (Corp. Code Sec. 17005(d).)

This bill would delete this requirement.

This bill would authorize provisions in an operating agreement
that would identify specific types or categories of activities
or prescribe standards by which the performance of the
obligation of good faith and fair dealing is to be measured,
if the types or categories of activities or standards are not

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manifestly unreasonable.

7. Existing law provides members and other interested parties
with the ability to request LLC information, for purposes
reasonably related to the interest of that person, and inspect
LLC documents, as specified. (Corp. Code Sec. 17106.)

Existing law requires an annual report to be distributed to
all members of an LLC with more than 35 members. (Corp. Code
Sec. 17106(c).)

This bill would delineate specific inspection and copying
provisions for member-managed and manager-managed LLCs.

This bill , with respect to member-managed LLCs, would
authorize a member to inspect and copy, as specified, any
record maintained by the LLC regarding the LLC's activities,
financial condition, and other circumstances to the extent the
information is material to the member's rights and duties
under the operating agreement.

This bill also would require the LLC to furnish to members
information that the LLC knows and that is material to the
proper exercise of the member's rights and duties under the
operating agreement or LLC laws, except to the extent the LLC
can establish that it reasonably believes the member already
knows the information.

This bill also would require the LLC to furnish, if demanded
by a member, any other information, as specified, except to
the extent the LLC determines that the demand for information
is unreasonable or otherwise improper under the circumstances.

This bill , with respect to manager-managed LLCs, would
authorize a member to obtain, inspect, and copy LLC
information, as specified, as is just and reasonable if all of
the following apply:
the member seeks the information for a purpose material
to the member's interest as a member;
the member makes a demand in a record received by the
LLC, describing with reasonable particularity the
information sought, and the purpose for seeking the
information; and
the information sought is directly connected to the
member's purpose.

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This bill would not provide transferees or other interested
parties with rights to LLC information.

This bill would not require an annual report to be distributed
to all members of an LLC with more than 35 members.

This bill would authorize the LLC to place any restriction or
condition on the access and use of LLC information, including
designating information confidential and imposing
nondisclosure and safeguarding obligations on the recipient.

8. Existing law provides that all managers are agents of the LLC,
and, unless a manager has been designated, all members are
agents of the LLC, and managers and members acting on behalf
of the LLC bind the LLC, as specified. (Corp. Code Sec.
17157.)

This bill would delete these provisions.

9. Existing law provides that an LLC has enumerated powers,
subject to any limitations contained in the articles of
organization. (Corp. Code Sec. 17003.)

This bill would provide that LLCs have enumerated powers,
regardless of any limitations on powers contained in the
articles of organization.

10. Existing law provides penalties for the failure of a member
to make contributions to the LLC, and protects the rights of
third-party creditors of LLCs to seek equitable remedies and
maintains their rights under the Uniform Fraudulent Transfer
Act. (Corp. Code Sec. 17201.)

This bill would delete the delineated penalties to a member
who fails to contribute, and would provide that a creditor of
an LLC that extends credit or otherwise acts in reliance on
the member's contribution obligations may enforce the
obligation.

11. Existing law provides that if the members of a foreign
limited liability company residing in California represent 25
percent or more of the voting interests of members of an LLC,
those members are entitled to all information and inspection
rights provided to members of domestic LLCs. (Corp. Code Sec.
17453.)

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This bill would delete this provision.

COMMENT

1. Stated need for the bill

The author writes:

The primary problem with current California law is that it is
not uniform with other states' LLC acts and is not uniform
with RULLCA �the Revised Uniform Limited Liability Company
Act]. SB 323 remedies this problem by adopting the
substantive provisions of RULLCA while leaving certain
provisions unique to California law, such as dissenters
rights, and a prohibition on professional LLCs.

The Business Law Section Partnerships and Limited Liability
Companies Committee of the State Bar of California (PLLC), the
sponsor of this bill, writes:

SB 323 clarifies many issues that existed under Beverly-Killea
and includes a more robust set of default rules on many
topics, which apply if the LLC operating agreement is silent.
SB 323 will bring California LLC law more in line with the LLC
laws of other states, making it easier for multi-state
businesses to operate both in and outside California.

2. January 4, 2012 amendments

According to the author, the January 4, 2012 amendments address
concerns raised by the Secretary of State. Among other things,
these amendments:
maintain existing law prohibiting an individual or entity
rendering professional services from organizing as an LLC;
maintain existing law for the electronic transmission of
communications by an LLC;
delete provisions for low profit limited liability companies,
which are not recognized under existing law;
maintain existing law for documents to be submitted to and
issued by the Secretary of State, as specified;
maintain existing LLC meeting requirements; and
maintain existing remedies for an LLC's failure to comply with
a document inspection request.

These amendments resolve numerous policy concerns, discussed

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further below.

3. Codification of quasi-judicial special litigation committee
(SLC)

This bill would authorize an LLC to appoint an internal SLC to
investigate derivative claims against the LLC, which may be
brought by LLC members on behalf of the LLC to challenge LLC
activities or manager/member decisions. The SLC could be
comprised of members who are named defendants. This bill would
require a court to stay discovery, unless the plaintiff could
show good cause otherwise, until the SLC completes its
investigation. This bill also would require the court, upon
finding that the committee members were disinterested,
independent, and acting in good faith, to enforce the
determination of the SLC. Existing LLC statutes do not provide
for the creation of an SLC that can stay discovery or make
quasi-judicial determinations in judicial proceedings. However,
PLLC asserts that California courts have recognized the SLC in
the corporate, but not LLC, context under Finley v. Superior
Court for the County of Orange (2000) 80 Cal.App. 4th 1152.

In Finley, plaintiff homeowners filed a derivative action on
behalf of their homeowners associations. Plaintiffs challenged
the defendant directors of the homeowners associations for
contributing association money to political causes. Plaintiffs
argued that defendants' defense that the SLC determined that an
action against the directors was not in the best interest of the
associations was invalid. The court held that, while the SLC
defense is valid in California, it should be shown either on
motion or in a full trial. (Finley v. Superior Court for the
County of Orange, supra, 80 Cal.App. 4th at pp. 1161, 1163.)

In its discussion of the validity of the SLC defense, the Finley
court noted that various states required different judicial
review of SLC determinations. The court noted a majority of
states only require the court to determine whether the SLC
determination was disinterested and in good faith, while a
minority approach also requires the trial court to scrutinize
the SLC's decision independently. But the court did not reach
an opinion on the majority or minority approach to judicial
review of an SLC determination because this issue was not
directly before the court. (Finley v. Superior Court for the
County of Orange, supra, 80 Cal.App. 4th at pp. 1158-1160.)
Although California courts recognize the ability of an LLC to
appoint an SLC to investigate director decisions, they have not

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gone so far as to eliminate a plaintiff's ability to be heard at
trial on the merits of the SLC's determination. As currently in
print, this bill would adopt the majority approach, which would
allow for the potential that a court would not be able to review
the merits of the plaintiff's derivative claim and thus
eliminate the ability of the plaintiff to be heard at trial.

Consumer Attorneys of California (CAOC), an opponent of this
bill, argues that this bill "permits the creation of new Special
Litigation Committee that may be comprised of defendant members,
can hold up discovery proceedings, and whose investigation
determination shall be enforced by the court unless the court
finds good reason, as specified. This appears to be an
extremely unusual and objectionable procedure which would give
an internal Special Litigation Committee almost quasi-judicial
powers." PLLC admits that there is no necessity to statutorily
create an SLC. Accordingly, the author has agreed to delete
these provisions. CAOC states that these amendments would
resolve its concerns with the SLC provisions.

Author's amendments:

1. On page 71, delete lines 3 through 40.
2. On page 72, delete lines 1 through 16.

4. Series of an LLC

This bill would authorize an LLC to identify assets and
liabilities of the LLC to be moved into a series of an LLC and
be managed separately from the assigning LLC. Existing
California law does not provide for a series of an LLC.

This provision raises similar concerns expressed by this
committee when it reviewed AB 831 (Leach, Ch. 490, Stats. 1999),
which permitted the creation of an LLC with only one member.
The main issue regarding single-member LLCs was the potential
for the single member to use the LLC status to avoid payment of
legitimate liabilities. (Sen. Com. on Judiciary, Analysis of
Asm. Bill No. 831 (1999-2000 Reg. Sess.) as amended May 18,
1999, at p. 3.) In order to protect third parties transacting
with a single-member LLC, AB 831 provided that the common law
doctrine of alter ego liability applied to the single member.
(Id.) As with a single-member LLC, this bill, by providing for
a series of an LLC into which the LLC could transfer LLC assets
and liabilities, could create an avenue for an LLC to avoid
legitimate responsibilities to third parties and/or members,

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perpetuate a fraud in order to circumvent a statute, or
accomplish some other wrongful act or inequitable purpose.

The author's office reports that the Secretary of State raised
concerns over providing additional veils of secrecy to LLC
assets and liabilities. Accordingly, the Secretary of State
requested that the series provisions be deleted from this bill,
and the author has agreed to remove all series provisions in
this bill.

Author's amendment:

Delete all series of LLC provisions in this bill.
5. No default voting and officer appointment provisions

This bill does not specifically provide for default voting
requirements or the appointment of LLC officers. Existing law,
Corporations Code Sections 17103 and 17154, has contained these
provisions since the enactment of Beverly-Killea in 1994. (SB
469 (Beverly, Ch. 1200, Stats. 1994).) These provisions provide
protections and guidance to LLC members in the event the
operating agreement or articles of organization are silent. For
example, existing law provides that, unless otherwise stated in
the articles of organization or operating agreement, the members
of an LLC shall vote in proportion to their interests in current
profits, as specified. (Corp. Code Sec. 17103(a)(1).)

Other than minor technical and clarifying amendments, these
provisions have changed little since their enactment. Both
sections were amended to correct ambiguities by SB 141 (Beverly,
Ch. 57, Stats. 1996), which also maintained the prohibition of
licensed professional services organizing as LLCs, as the
current version of this bill provides. Corporations Code
Section 17154 was amended by AB 1703 (Leach, Ch. 243, Stats.
1998) to provide for a cross-reference.

As discussed further in Comment 6, the Legislature has deemed
voting and officer appointment provisions to be critical enough
to require that modifications to these provisions be contained
in the articles of organization or a written operating
agreement. (See Corp. Code Sec. 17005(b); SB 469 (Beverly, Ch.
1200, Stats. 1994).) Accordingly, in order to maintain default
member voting rights and provisions for the appointment of LLC
officers, the author has agreed to incorporate existing
Corporations Code Sections 17103 and 17154 into proposed Section
17704.07.

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Author's amendment:

Amend proposed Section 17704.07 to include Corporations Code
Sections 17103 and 17154.

6. No requirement for certain LLC provisions to be in a written
document

This bill would not require any provision for operating,
managing, or dissolving the LLC to be enumerated in a written
document. Under existing law, the LLC's articles of
incorporation or written operating agreement must delineate how
the operating agreement can be amended, member voting rights,
meeting requirements, election or removal of managers,
appointment of officers, and provisions regarding
indemnification to members. (Corp. Code Sec. 17005(b).) This
bill contains none of these requirements, which raises the
concerns described below.

a. Fiduciary duties of LLC managers and members

This bill would authorize the modification of member or
manager fiduciary duties through oral amendments to operating
agreements. Existing law provides that a manager's or
member's fiduciary duties to the LLC and its members can only
be modified in a written operating agreement with the informed
consent of all members. (Corp. Code Sec. 17005(d).)

When SB 469 (Beverly, Ch. 1200, Stats. 1994) was heard in this
committee, concern was raised as to whether the fiduciary
duties of a manager, who is not required to be a member of the
LLC and in most instances today is paid according to the level
of fiduciary duty the manager has to the LLC, should be
"subject to waiver or modification at the whim of the LLC
members." (Sen. Com. on Judiciary, Analysis of Sen. Bill No.
469 (1993-1994 Reg. Sess.) as amended January 3, 1994, at p.
6.) Although SB 469 permitted the modification of the
manager's fiduciary duty, it required that those modifications
must be in a written operating agreement or the articles of
organization.

Similarly, this bill also raises concerns regarding the
ability to modify a manager's or member's fiduciary duties.
First, this bill would authorize the LLC to identify specific
types or categories of activities or prescribe standards by

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which the performance of the obligation of good faith and fair
dealing is to be measured, if the types or categories of
activities or standards are not manifestly unreasonable.
Accordingly, the members and managers, although prohibited
from completely eliminating the duty of loyalty, duty of care,
or any other fiduciary duty, would be able to significantly
reduce these fiduciary duties by listing, potentially in an
oral operating agreement, certain activities that would be
deemed to be in good faith and fair dealing, leaving any other
widely-recognized activity that is not listed subject to be
outside the scope of good faith and fair dealing.

Second, as discussed further below, any modifications to the
fiduciary duties or lists of activities demonstrating good
faith and fair dealing would not have to be disclosed in the
articles of incorporation or a written operating agreement.
Yet incoming members would be deemed to have assented to the
terms of the operating agreement, even though the fiduciary
duties of those members may have been significantly increased
or reduced through an oral operating agreement on which the
incoming member had not voted.

CAOC argues that, under this bill, the fiduciary duties could
become ambiguous, stating that "�t]he combination of a lack of
written operating agreement along with the ability to alter
fiduciary duties seems especially pernicious." In response,
PLLC argues that these provisions are already part of
California law under the Uniform Partnership Act of 1994 (AB
583 (Sher, Ch. 1003, Stats. 1996) and Uniform Limited
Partnership Act of 2006 (AB 339 (Harman, Ch. 495, Stats. 2006)
(see Corp. Code Sec. 15901.10 and 16103). Although these
provisions may be in use for partnerships, as discussed above,
this committee already has expressed concerns of providing an
LLC with the ability to modify its fiduciary duties.

b. Incoming members deemed to have assented to oral
operating agreement

This bill would provide that members would be deemed to have
assented to the terms of the operating agreement, regardless
of whether the operating agreement is oral or written, or
whether an incoming member actually knows the terms of an oral
operating agreement. Further, under this bill, member voting
rights, meeting requirements, election or removal of managers,
appointment of officers, and provisions regarding
indemnification to members are not required to be in any

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written document. Existing law does not statutorily deem an
incoming LLC member to have assented to an oral operating
agreement. Accordingly, a written operating agreement that is
later orally amended could create problems with the parol
evidence rule should litigation arise involving the agreement.

To address these concerns, the author has agreed to incorporate
into proposed Section 17701.10 the written document requirements
in existing law under Corporations Code Section 17005(b) and
(d). As a result, members, including incoming members, will be
better protected by maintaining existing law and requiring that
modifications to member voting rights, meeting requirements,
election or removal of managers, appointment of officers, and
provisions regarding indemnification to members be contained in
a written document. CAOC states that this amendment would
resolve its concerns with these provisions.

Author's amendment:

Amend proposed Section 17701.10 to include the provisions of
Corporations Code Section 17005(b) and (d).

7. Member notice or acknowledgment of facts

This bill would provide that a member does not have any
knowledge, notice or receipt of a notification of a fact
relating to the LLC solely by being a member of the LLC.
Existing law does not contain this restriction.

Existing law provides that an LLC may be organized with only one
member. (Corp. Code Sec. 17050(b).) Yet, under this bill, this
sole member would not be deemed to have any knowledge, notice,
or receipt of notification of a fact relating to the LLC. This
provision could create a stronger corporate veil leaving harmed
third parties contracting with the LLC with a much greater
burden of proving member or manager liability. To resolve this
concern, the author has agreed to remove this provision from the
bill.

Author's amendment:

On page 9, delete lines 4 through 34.

8. Rights to inspect LLC documents

This bill would provide specified inspection and copying

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provisions for member-managed and manager-managed LLCs.
Existing law provides members and other interested parties with
the ability to request certain LLC information, for purposes
reasonably related to the interest of that person, and inspect
LLC documents, as specified. (Corp. Code Sec. 17106.) Existing
law also requires an annual report to be distributed to all
members of an LLC with more than 35 members. (Corp. Code Sec.
17106(c).)

CAOC argues that this bill would alter the rights of LLC members
because, among other things, this bill would change the
requirements for a member requesting information about the LLC
by placing the onus on the member to establish a material
purpose for requesting particular information and that the
information sought is directly connected to the member's
purpose. CAOC states that this provision would create a lack of
transparency.

For member-managed LLCs, this bill would authorize a member to
inspect and copy, as specified, any record maintained by the LLC
regarding the LLC's activities, financial condition, and other
circumstances to the extent the information is material to the
member's rights and duties under the operating agreement. This
bill also would require the LLC to furnish to members
information that the LLC knows and that is material to the
proper exercise of the member's rights and duties under the
operating agreement or LLC laws, except to the extent the LLC
can establish that it reasonably believes the member already
knows the information. This bill also would require the LLC to
furnish any other information demanded by a member, as
specified, except to the extent the demand or information
demanded is unreasonable or otherwise improper under the
circumstances.

For manager-managed LLCs, this bill would authorize a member to
obtain, inspect, and copy LLC information, as specified, as is
just and reasonable if all of the following apply:
the member seeks the information for a purpose material to the
member's interest as a member;
the member makes a demand in a record received by the LLC,
describing with reasonable particularity the information
sought, and the purpose for seeking the information; and
the information sought is directly connected to the member's
purpose.

PLLC argues that these provisions will make it easier for

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members to obtain information than under current law. Under
existing Corporations Code Sections 17106 and 17058, a member is
only entitled to receive a copy of the list of members and
managers showing their addresses, contributions and share of
profits and losses, the articles of organization, operating
agreement and tax returns for the last six years.

However, other provisions regarding access to LLC information
provided in this bill potentially would restrict access to LLC
information. For example, a transferee or interested party
would have no right to obtain LLC information. Further, in a
manager-managed LLC, the LLC can deny a member's request for LLC
information (such as accounting info) if the LLC establishes
that it reasonably believes the member already knows the
information. The member also has to request the information
with reasonable particularity the information sought, the
purpose for seeking the information, and that the information
sought is directly connected to the member's purpose.

This bill also deletes the requirement that an annual report be
sent to members of an LLC with more than 35 members. This bill
also would authorize the LLC to place any restriction or
condition on the access and use of LLC information, including
designating information confidential and imposing nondisclosure
and safeguarding obligations on the recipient. Accordingly,
depending upon the severity of restrictions placed on the access
and use of LLC information, a member, transferee, or beneficiary
of the operating agreement who suspects impropriety by the
managers or members could have a difficult time obtaining LLC
information to investigate or litigate LLC mismanagement.

In order to address these concerns, the author has agreed to
maintain the inspection rights contained in existing law. These
amendments would incorporate into proposed Section 17701.13 the
provisions under existing Corporations Code Section 17058 and
delete the provisions of proposed Section 17704.10 and replace
them with existing Corporations Code Section 17106. As a
result, CAOC states that these amendments would resolve its
concerns with these provisions.

Author's amendments:

1. Amend proposed Section 17701.13 to include the
provisions of Corporations Code Section 17058.
2. Delete and replace the provisions of proposed Section
17704.10 with the provisions of Corporations Code Section

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17106.

9. Agency powers of members

This bill would declare that no member has agency power to act
on behalf of the LLC. Existing law provides that every member
is an agent of an LLC unless the articles of organization state
that the LLC is manager-managed; then only the manager has
agency power. (Corp. Code Sec. 17157.)

CAOC argues that this bill fails to assign default agency powers
to members and there is no reference to manager-managed agency
power liability. Under this bill, no member has agency power,
regardless of whether the LLC is member-managed or
manager-managed. As such, there could be no member liability
for acting as an agent, but the LLC would be liable for member
actions to the detriment of other members. Accordingly,
consumers will have to research agency authority of the LLC in
order to protect themselves when contracting with the LLC
members or managers.

Sponsor PLLC argues that this provision only provides that a
member is not an agent of the LLC solely by reason of being a
member. RULLCA relies on the common law of agency to determine
the apparent authority of a member of a member-managed LLC.
PLLC notes that the bill as introduced would have eliminated
this uncertainty by allowing the LLC to file a Statement of
Authority with the Secretary of State's office designating who
has authority to bind the LLC, but the Secretary of State
requested removal of these provisions on fiscal grounds. Since
PLLC recognized the potential liability loophole but was unable
to adequately address the issue without causing additional
fiscal concerns, PLLC recommends maintaining the existing member
agency powers by removing the provisions of proposed Section
17703.01 and replacing them with the existing member agency
powers provided in Corporations Code Section 17157. The author
has agreed to take this amendment in committee. CAOC states
that this amendment would resolve its concerns with these
provisions.

Author's amendment:

Delete and replace the provisions of proposed Section 17703.01
with the provisions of Corporations Code Section 17157.

10. Definition of "person"

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Existing law provides that "person" means an individual,
partnership, limited partnership, trust, estate, association,
corporation, limited liability company or other entity, whether
domestic or foreign. (Corp. Code Sec. 17001(ae).) This bill
would additionally define "person" to include a business trust,
joint venture, public corporation, government or governmental
subdivision, agency, instrumentality, or any other legal or
commercial entity.

By adding additional corporate bodies to the existing definition
of "person," this bill raises the policy questions of why this
change is necessary and what its substantive impact is on other
provisions of law where the term "person" is used. This bill is
modeled after RULLCA, which contains the same definition of
"person" as this bill. However, it is not clear why the
National Conference of Commissioners on Uniform State Laws, the
purveyors of RULLCA, recommended this definition for "person."
It is also not clear what effects this change to existing law
would have on the LLC statutes. As a result, there is arguably
no compelling justification to modify the existing definition of
"person" in the manner suggested by this bill. Accordingly, the
sponsor has suggested maintaining existing law for the
definition of "person," and the author has agreed to this
amendment.

Additionally, recent public debate has focused on concerns of
individual rights being conferred upon corporations. (See
Editorial Opinion, The New York Times (Sept. 22, 2009)
�as of
Jan. 4, 2012]; Kate Linthicum, Los Angeles Times (Dec. 6, 2011)
�as of Jan. 4, 2012].) Due to these concerns,
this bill should not be construed to reinforce the granting of
constitutional rights of individuals to corporate bodies.
Accordingly, the author has agreed to amend this bill to provide
that the meaning of "person" in this bill would not grant
corporate entities with constitutional rights of individuals.

Author's amendment :

On page 8, delete lines 10-14 and insert "(v) 'Person' means
an individual, partnership, limited partnership, trust,
estate, association, corporation, limited liability company,
or other entity, whether domestic or foreign. Nothing in this

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definition shall be construed to confer rights under the state
or federal Constitution."

11. Limits on LLC powers designated in the articles of
organization

Under this bill, an LLC has the power to sue and be sued,
contract, hold and convey title to assets of the LLC, and grant
lien and security interests in the assets of the LLC, regardless
of any limitations contained in the LLC's articles of
organization. Existing law provides that an LLC has these
powers, subject to the powers delineated in the articles of
organization, which is filed with the Secretary of State.
(Corp. Code Sec. 17003.)

This bill would provide an LLC with powers that may be greater
than the powers listed in the articles of organization, which
may expose the LLC to unintended liability to third parties.
For example, a manager or member could contract for the lien and
security interests in the assets of the LLC, even though the
members specifically agreed that the LLC would not have this
power. This provision potentially would remove member control
over the LLC. To address this concern, the author has agreed to
amend this bill to maintain existing law, which provides that
the LLC's powers are subject to any limitations contained in the
articles of organization.

Author's amendment:

On page 10, at line 27, delete "A" and insert "Subject to any
limitation contained in the articles of organization and
compliance with any other applicable laws, a"

12. Contribution liability to creditors

This bill would only provide that a creditor that extends credit
or acts in reliance on a member's obligation to contribute to
the LLC may enforce the obligation. Under existing law, a
third-party creditor can seek equitable remedies and maintain
rights provided under the Uniform Fraudulent Transfer Act.
(Corp. Code Sec. 17201(d).) In order to maintain existing
third-party creditor rights, the author has agreed to amend this
bill to include these existing law provisions in proposed
Section 17704.03 the language of Corporations Code Section
17201(d). As a result, third-party creditors relying on member
contributions will maintain their rights and remedies under the

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Uniform Fraudulent Transfer Act.

Author's amendment:

Amend proposed Section 17704.03 to include the provisions in
Corporations Code Section 17201(d).

13. Inspection rights of California residents in foreign LLCs

This bill would not provide for inspection rights of California
residents in foreign LLCs. Existing law provides that if
California residents comprise more than 25 percent of ownership
of a foreign LLC, then those members are entitled to all
information and inspection rights of a member in a domestic LLC.
(Corp. Code Sec. 17453.) This bill deletes this provision and
strips California resident members of the ability to monitor the
activities of the foreign LLC. In order to maintain the
inspection protections provided in existing law, the author has
agreed to amend this bill to incorporate the provisions in
Corporations Code Section 17453. As a result, California
residents that comprise more than 25 percent of ownership of a
foreign LLC will be entitled to all information and inspection
rights of a member in a domestic LLC.

Author's amendment:

On page 68, between lines 6 and 7, add "17708.08 If the
members of a foreign limited liability company residing in
this state represent 25 percent or more of the voting
interests of members of that limited liability company, those
members shall be entitled to all information and inspection
rights provided in Section 17704.10.
17708.09"

14. Cross-references to LLC statutes contained in other codes
and statutes

Various California codes contain cross-references to existing
LLC statutes, including the Revenue and Taxation Code, Business
and Professions Code, and the Financial Code. This bill
contains no provisions, and no companion bill exists, correcting
cross-references to the existing LLC statutes that would be
repealed if this bill is enacted.

Repealing existing LLC statutes without correcting
cross-references to the new LLC statutes in this bill

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potentially raises policy concerns. For example, LLCs currently
are subject to particular tax treatment, yet this bill does not
correct cross-references in the Revenue and Taxation Code to
provide for the new LLC sections provided in this bill. The tax
statutes for LLCs also would need to be updated to reference the
new statutes provided in this bill; otherwise, an LLC
potentially has no applicable state tax laws until a companion
bill is enacted. This bill has an enactment date of January 1,
2013, so potentially an LLC could operate for a year before the
cross-references are fixed.
PLLC states that a copy of the cross-reference provisions was
provided to the Secretary of State, which advised PLLC that
there may be additional cross-reference provisions to add. The
author has agreed to amend this bill to provide
cross-referencing provisions in this bill.

Author's amendment:

Include in this bill and amend statutes containing
cross-references to Beverly-Killea to instead reference the
new statutes provided in this bill.

15. Repeal and enactment dates

This bill would be enacted on January 1, 2013, declare
Beverly-Killea inoperative as of that date, and repeal
Beverly-Killea on January 1, 2015. This bill also would provide
that after January 1, 2015, this bill would apply to all LLCs
formed before or after the enactment of this bill. Typically,
when large sections of the Corporations Code is repealed and a
new act is enacted, the Legislature provides at least two years
from the date of the enactment of the bill for the repeal of the
old laws to allow forms to be updated and provide sufficient
notice to the public of the changes in the statutes. (See,
e.g., AB 339 (Harman, Ch. 495, Stats. 2006).) The delay in
repeal of prior statutes and enactment of new statutes also
provides adequate time to identify ambiguous provisions and
provide technical corrections, if necessary, prior to the
changes in law. Accordingly, if this bill moves forward, the
inoperation and repeal dates of Beverly Killea should be
modified, along with the operation date of this bill, and the
author has agreed to take these amendments in committee.

Author's amendments:

1. Amend the provisions that would make Beverly-Killea

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inoperative on January 1, 2013 to instead provide that
Beverly-Killea would be inoperative on January 1, 2014.
2. Amend provisions that would repeal Beverly-Killea on
January 1, 2015 to instead repeal Beverly-Killea on January
1, 2016.
3. Amend all other provisions referencing LLCs filed prior
to January 1, 2013 to instead provide for LLCs filed before
January 1, 2014.
4. Amend provisions that would enact this bill on January
1, 2013 to instead provide that this bill would be enacted
on January 1, 2014.
5. Amend all other provisions referencing LLCs filed after
January 1, 2013 to instead provide for LLCs filed after
January 1, 2014.

16. Various technical and clean-up amendments necessary

The Secretary of State and PLLC have identified multiple
technical and clean-up provisions that should be amended in this
bill. Accordingly, the author has agreed to take these
amendments as author's amendments in committee.

Author's amendment:

Provide various technical corrections and clean-up provisions
in this bill.

17. Opposition concerns

CAOC submitted an opposition letter to the author expressing
concerns over various provisions in the January 4, 2010
amendments. As discussed in detail above, the author has agreed
to take amendments in committee which address all of the
concerns raised by CAOC. Accordingly, CAOC has indicated that
it will remove its opposition once this bill is amended.

Support : Commission on Uniform State Laws

Opposition : Consumer Attorneys of California

HISTORY

Source : Business Law Section Partnerships and Limited Liability
Companies Committee of the State Bar of California

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Related Pending Legislation : None Known

Prior Legislation :

AB 339 (Harman, Ch. 495, Stats. 2006) See Comments 6a and 15.

SB 1022 (Campbell, 2005) would have authorized certain licensed
professions, as specified, to form as LLCs. This bill was held
in the Senate Judiciary Committee.

AB 279 (Calderon, Ch. 16, Stats. 2005), among other things,
authorized an LLC to operate as a health plan, as specified.

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.

SB 1306 (Ackerman, Ch. 254, Stats. 2004), provided for
electronic transmissions of LLC documents, and, among other
things, required an LLC to provide to members copies of
documents in writing, as specified.

AB 2355 (Campbell, Ch. 451, Stats. 2001) allowed a judgment
creditor of the assignee of a member of a limited liability
company to seek a charging order against the member's assignable
interest in the limited liability company in order to satisfy a
judgment.

AB 229 (Baldwin, 1999) would have authorized certain licensed
professionals to organize as LLCs. AB 229 failed passage in the
Assembly Judiciary Committee.