BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 506|
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CONSENT
Bill No: AB 506
Author: Maienschein (R)
Amended: 7/15/15 in Senate
Vote: 21
SENATE JUDICIARY COMMITTEE: 6-0, 7/7/15
AYES: Jackson, Moorlach, Hertzberg, Leno, Monning, Wieckowski
NO VOTE RECORDED: Anderson
ASSEMBLY FLOOR: 76-0, 5/7/15 - See last page for vote
SUBJECT: Limited liability companies
SOURCE: Partnership and Limited Liability Companies Committee
of the Business Law Section of the California State
Bar
DIGEST: This bill seeks to make various changes to the
California Revised Uniform Limited Liability Company Act.
ANALYSIS:
Existing law:
1) Governs all California limited liability companies (LLCs)
under the California Revised Uniform Limited Liability
Company Act (RULLCA) and defines various terms for purposes
of RULLCA.
2) Prohibits an LLC operating agreement from doing certain
things, including:
Eliminating the duty of loyalty, the duty of care, or
any other fiduciary duty, subject to other specified
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provisions;
Eliminating the contractual obligation of good faith
and fair dealing under specified provisions of
Corporations Code (CORP) Section 17704.09, subject to
other provisions allowing for the operating agreement to
modify the fiduciary duties of a member or manager, as
specified;
Unreasonably restricting the duties and rights stated
under CORP Section 17704.10, which provides for the right
to inspect various LLC documents; the right to a specified
annual report for members in an LLC of more than 35
members, among other things; the right to a copy of the
articles of incorporation or operating agreement, as
specified;
Varying the requirements of CORP Sections 17707.04 to
17707.08, inclusive, relating to the dissolution of an
LLC, except as specified;
Restricting the right to approve a merger, conversion,
or domestication under CORP Section 17710.14 to a member
that will have personal liability with respect to a
surviving, converted, or domesticated organization;
Varying any provision under Article 10, relating to
mergers and conversions;
Varying any provision under Article 12, relating to
class provisions; or
Eliminating the obligation of good faith and fair
dealing under specified provisions of CORP Section
17704.09, but the operating agreement may prescribe the
standards by which the performance of the obligation is to
be measured, if the standards are not manifestly
unreasonable.
1) Provides that, except as provided in the provisions above,
and other specified laws, the provisions of RULLCA may be
varied as among the members or as between the members and the
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LLC by the operating agreement, provided, however, that the
provisions of Sections 17701.13 (relating to the designation
of an agent for service of process and required records that
must be maintained by the LLC), CORP Section 17703.01
(providing that every member is an agent of an LLC unless the
articles of organization state that the LLC is
manager-managed at which point only the manager has agency
power), CORP Section 17704.07 (providing specified rules
governing an LLC depending upon whether the LLC is member- or
manager-managed), and CORP Section 17704.08 (requiring
reimbursement of any payments and indemnification of any
debt, obligation, or other liability incurred by a member or
manager in the course of the member's or manager's activities
on behalf of the LLC, and authorizing the purchase of
insurance for indemnification purposes) can only be varied by
a written operating agreement.
2) Specifies that, notwithstanding prior statements, and in
addition to the matters specified in the provisions above,
the operating agreement must not:
Vary the definitions of RULLCA, as specified, except as
specified therein; or
Vary a member's rights under specified law that
provides that every member is an agent of an LLC unless
the articles of organization state that the LLC is
manager-managed at which point only the manager has agency
power; or other specified law, which provides for the
right to inspect various LLC documents; the right to a
specified annual report for members in an LLC of more than
35 members, among other things; the right to a copy of the
articles of incorporation or operating agreement, as
specified.
1) Governs distributions made by an LLC before its dissolution
and winding up.
2) Provides that an LLC is a member-managed LLC unless the
articles of organization and the operating agreement do
either of the following:
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Expressly provide that the LLC is or will be
"manager-managed" or "managed by managers" or that
management of the LLC is or will be "vested in managers;"
or
Include words of similar import.
1) Specifies that in a member-managed LLC, certain rules apply,
including that a difference arising among members as to a
matter in the ordinary course of the activities of the LLC
shall be decided by a majority of the members of the LLC
which the difference among the members has arisen.
2) Specifies that in a manager-managed LLC, certain rules apply,
including that the consent of all members of the LLC is
required to do any of the following:
Sell, lease, exchange, or otherwise dispose of all, or
substantially all, of the LLC's property, as specified;
Approve a merger or conversion under the RULLCA article
governing mergers and conversions;
Undertake any other act outside of the ordinary course
of the LLC's activities; or
Amend the operating agreement.
1) Specifies that in a manager-managed LLC, a manager may be
chosen at any time by the consent of a majority of the
members and remains a manager until a successor has been
chosen, unless the manager at an earlier time resigns, is
removed, or dies, or, in the case of manager that is not an
individual, terminates. A manager may be removed at any time
by the consent of the majority of the members without notice
or cause.
2) Provides, generally, that members have the right to vote on a
dissolution of the LLC and on a merger of the LLC as provided
under specified law.
3) Requires that an LLC reimburse for any payment made and
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indemnify for any debt, obligation, or other liability
incurred by a member of a member-managed LLC or the manager
of a manager-managed LLC in the course of the member's or
manager's activities on behalf of the LLC, if, in making the
payment or incurring the debt, obligation, or other
liability, the member or manager complied with specified
statutory fiduciary duties, duties of loyalty, and duties of
care.
4) Authorizes an LLC to purchase and maintain insurance on
behalf of a member or manager of the LLC against liability
asserted against or incurred by the member or manager from
that status, even if the operating agreement could not
eliminate or limit the person's liability to the LLC for the
conduct giving rise to the liability, under specified law.
5) Provides various rules for when a person dissociates as a
member of the LLC.
6) Includes various provisions governing suits for judicial
dissolution.
7) Requires that any certificate or statement of conversion be
executed and acknowledged by all members, unless a lesser
number is provided in the articles of organization or
operating agreement and meets specified requirements.
This bill:
1) Replaces references to a "holder of a transferable interest
in the limited liability company" with "transferee," to
reflect the correct terminology in RULLCA. This bill also
corrects references to the term "majority in interest" which
is not defined under RULLCA.
2) Revises and corrects cross-references throughout various
provisions of RULLCA and would otherwise add missing
cross-references to conform potentially conflicting
provisions.
3) Modifies specified references to participation in the
management or conduct of activities of the LLC to clarify
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that "participate" includes the right to vote.
4) Revises the definition of "electronic transmission by the
limited liability company" by removing the requirement that
the electronic transmission by an LLC to an individual member
also satisfy requirements set forth under the federal
Electronic Signatures in Global and National Commerce Act.
5) Expands the definition of "person" to include a trustee of a
trust, including, but not limited to, a trust described under
the Probate Code, as specified.
6) Modifies the provisions limiting what an operating agreement
can do. These modifications include:
Adding or otherwise revising various cross references;
Consolidating potentially duplicative language
prohibiting the elimination of the obligation of good
faith and fair dealing by instead providing that, subject
to specified law, the operating agreement shall not
eliminate the contractual obligation of good faith and
fair dealing under existing law, as specified, but the
operating agreement may prescribe the standards by which
the performance of the obligation is to be measured, if
the standards are not manifestly unreasonable as
determined at the time the standards are prescribed;
Repealing the language prohibiting an operating
agreement from unreasonably restricting the duties and
rights under specified law, which provides for the right
to inspect various LLC documents; the right to a specified
annual report for members in an LLC of more than 35
members, among other things; the right to a copy of the
articles of incorporation or operating agreement, as
specified;
Expanding the general prohibition against varying the
requirements of CORP Sections 17707.04 to 17707.08,
inclusive, relating to the dissolution of an LLC, to apply
more generally to the RULLCA article on dissolution and
winding up, as well as the RULLCA article on formation of
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an LLC; and
Prohibiting the variation of specified provisions
relating the application of RULLCA.
1) Adds a provision to an existing statute on the dissolution
and winding up of an LLC to specify that the profits and
losses of a LLC shall be allocated among the members, and
among classes of members, in the manner provided in the
operating agreement. If the operating agreement does not
otherwise provide, profits and losses must be allocated in
proportion to the value, as stated in the required records,
of the contributions the LLC has received from each member.
2) Modifies existing law, above, to provide, instead, that an
LLC is a member-managed LLC unless the articles of
organization contain a statement to the effect that the LLC
is to be manager-managed, as required under specified law.
3) Modifies an existing rule for member-managed LLCs, above, to
instead provide that a difference arising among members as to
a matter in the ordinary course of the activities of the LLC
shall be decided by a majority of the members.
4) Modifies the existing rule for member approvals required for
certain activities by a manager-managed LLC, above, to remove
the requirement that an LLC obtain all members' consent to
amend the operating agreement and to approve a merger or
conversion under the RULLCA article on mergers and
conversions and would, instead, provide that consent of all
the LLC members is required to do the following:
Sell, lease, exchange, or otherwise dispose of all, or
substantially all, of the LLC's property, as specified; or
Except as otherwise provided in the article on mergers
or conversions, any other act outside of the ordinary
course of the LLC's activities.
1) Modifies the existing rule for the removal of a manager of a
manager-managed LLC, above, to repeal language authorizing
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the LLC to remove a manager at any time, upon consent of a
majority of the members, without notice. This bill provides,
instead, that the manager can be removed at any time by the
consent of a majority of members without cause, subject to
the rights, if any, of the manager under any service contract
with the LLC.
2) Adds that members also have the right to vote on any
conversion of the LLC to another business entity, under
specified law.
3) Adds that, except as provided under specified law (allowing
for an operating agreement to alter or eliminate the
indemnification for a member or manager provided in the
provision above, and to eliminate or limit a member or
manager's liability to the LLC and members for money damages,
except as specified), an LLC may reimburse any payment made
and indemnify any debt, obligation, or other liability
incurred by other persons, including, without limitation, any
officer, employee, or agent of the LLC, in the course of that
person's activities on behalf of the LLC.
4) Expands the existing authorization for an LLC to purchase and
maintain liability insurance for "members" and "managers,"
above, to instead authorize the purchase and maintenance of
insurance for any person.
5) Requires, without limiting the above requirement to reimburse
any payment and indemnify any debt, obligation or other
liability incurred by a member of a member-managed LLC or
manager of a manager-managed LLC, as specified, that an LLC
indemnify an agent of the LLC to the extent that the agent
has been successful on the merits in defense or settlement of
any claim, issue, or matter in any proceeding in which the
agent was or is a party or threatened to be made a party by
reason of his or her status as an agent of the LLC, against
expenses actually and reasonably incurred by the agent, if
the agent acted in good faith and in a manner that the agent
reasonably believed to be in the best interests of the LLC
and its members. This bill also defines the terms "agent,"
"expenses," and "proceeding," for these purposes.
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6) Adds a provision specifying that if a member dies, or a
guardian or conservator of the estate is appointed for the
member, or a member's interest is being administered by an
attorney in fact under a valid power of attorney, the
member's executor, administrator, guardian, conservator, or
other legal representative may exercise all of the member's
rights for the purpose of settling the member's estate or
administering the member's property, including any power the
member had under the articles of organization or an operating
agreement to give a transferee the right to become a member.
7) Specifies that nothing in the existing provisions governing
suits for judicial dissolution shall be construed to limit
the remedies otherwise available to a court of competent
jurisdiction over the dissolution.
8) Modifies existing law above, to instead require that the
certificate or statement of conversion be executed and
acknowledged by all members of a member-managed LLC or all
managers of a manager-managed LLC, unless a lesser number is
provided in the articles of organization or operating
agreement and meets specified requirements.
9) Makes other technical, or clarifying changes.
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
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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 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) was enacted to repeal Beverly-Killea and,
taking into account California's particular LLC protections,
replace it with a modified version of RULLCA.
This bill makes various changes to the RULLCA provisions.
Comments
As stated by the author:
This bill would amend the Revised Uniform Limited Liability
Company Act ("RULLCA") which took effect January 1, 2014. It
will fix certain cross referencing and typographical errors
and inconsistencies in RULLCA that make it difficult to
understand and less attractive to business owners and
investors. It eliminates an inconsistency on what vote is
needed to accomplish a merger or conversion and creates
indemnification rights for agents similar to those afforded
agents of California corporations. It also clarifies RULLCA's
transition rules to avoid potential disputes as to whether
RULLCA or prior law, the Beverly-Killea Limited Liability
Company Act ("Beverly-Killea"), governs the limited liability
company ("LLC").
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified7/15/15)
Partnership and Limited Liability Companies Committee of the
Business Law Section of the California State Bar (source)
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Conference of California Bar Associations
OPPOSITION: (Verified7/15/15)
None received
ASSEMBLY FLOOR: 76-0, 5/7/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, 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, Grove, Hadley, Harper, Holden, Irwin, Jones,
Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low,
Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin,
Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea,
Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood, Atkins
NO VOTE RECORDED: Campos, Gray, Roger Hernández, Steinorth
Prepared by:Ronak Daylami / JUD. / (916) 651-4113
7/15/15 15:44:21
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