BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                        AB 506|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
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                                   THIRD READING 


          Bill No:  AB 506
          Author:   Maienschein (R)
          Amended:  8/17/15 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 throughout the  
          California Revised Uniform Limited Liability Company Act.  

          Senate Floor Amendments on 8/17/15 add double-jointing language  
          to avoid chaptering out issues in the event that both this bill  
          and AB 1471 (Perea), also amending Section 17710.06 of the  
          Corporations Code, are enacted.  The amendments also add  
          double-jointing language to avoid chaptering out issues in the  
          event that both this bill and AB 1517 (Committee on Banking and  
          Finance), also amending 17713.12 of the Corporations Code are  
          enacted.

          ANALYSIS:  
          
          Existing law:

           1) Governs all California limited liability companies (LLCs)  








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             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  
                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, and, 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 Article 10 provision, relating to mergers  
                and conversions, or any Article 12 provision, 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  








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                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 RULLCA provisions may be varied  
             as among the members or as between the members and the LLC by  
             the operating agreement, provided, however, that certain  
             provisions can only be varied by a written operating  
             agreement, including CORP Sections 17701.13 (relating to the  
             designation of an agent for service of process and required  
             records that an LLC must maintain), 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), 17704.07 (providing  
             specified rules governing an LLC depending on whether it is  
             member- or manager-managed), and 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 his or her activities on behalf of  
             the LLC, and authorizing the purchase of insurance for  
             indemnification purposes).  

           2) Specifies that, notwithstanding prior statements, and in  
             addition to the matters specified in the provisions above,  
             the operating agreement must not: 

                   Vary the RULLCA definitions, 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  








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             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:

                   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: 

                   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 corresponding  
                RULLCA article;

                   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.  








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           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 an LLC to reimburse for any payment made and  
             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 his or her  
             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, except as  
             specified.

          This bill:

           1) Replaces references to a "holder of a transferable interest  
             in the limited liability company" with "transferee," to  
             reflect correct RULLCA terminology, and also corrects  
             references to "majority in interest," which is not defined by  
             RULLCA.

           2) Revises and corrects cross-references throughout various  
             RULLCA provisions and adds missing cross-references to  
             conform potentially conflicting sections. 








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           3) Modifies specified references to participation in the  
             management or conduct of activities of the LLC to clarify  
             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 also satisfy requirements set  
             forth under specified federal law. 

           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 by:  

                   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,  








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                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 LLC  
                formation; and

                   Prohibiting the varying of specified provisions  
                relating to 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 an 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 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: 

                   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.








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           1) Modifies the existing rule for the removal of a manager of a  
             manager-managed LLC, above, to repeal language authorizing  
             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, 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 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,"  








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             "expenses," and "proceeding," for these purposes.  

           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 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 partnership and  
          corporation in that it 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, which 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  








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          (Beverly-Killea), which provided comprehensive provisions for  
          the organization, management, and dissolution of LLCs.  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.  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 those 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:   (Verified8/17/15)




           Partnership and Limited Liability Companies Committee of the  
            Business Law Section of the California State Bar (source)
          Conference of California Bar Associations 








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          OPPOSITION:   (Verified8/17/15)


          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
          8/18/15 17:18:11


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