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CALIFORNIA CORPORATE & SECURITIES LAW

CARULLCA Amendment Purporting To Eliminate Surprise May Do The Opposite

Readers will know that I’m no fan of California’s Revised Uniform Limited Liability Company Act (aka CARULLCA).  As originally enacted, the law was rife with technical errors.  As the legislature continues to tinker with the CARULLCA, it creates even more problems for existing California LLCs.  The legislature’s recent enactment of AB 1722 (Wagner) is yet another dispiriting legislative “fix” that is likely to increase, rather than diminish, the problems of this deeply flawed law.

AB 1722 amends Corporations Code Section 17707.01(b) to allow 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).  Previously, a vote to dissolve required the vote of a majority of the members.  Thus, the bill makes two changes.  First, it reverses the status quo by providing that a tie goes to the members seeking dissolution rather than those seeking to avoid dissolution.  Second, it changes the required vote from a vote of the members to a vote of the voting interests.  Because the CARULLCA doesn’t define “voting interests”, it is unclear what the legislature intended by this change.  Section 17704.07(r) provides that voting by members may be on a per capita, number, financial interest, class group or any other basis and then specifies certain default rules if no voting provision is contained in the articles of organization or written operating agreement.

Some may view these changes to be inconsequential.  After all, they are generally consistent with Corporations Code Section 1900(a) which allows for voluntary dissolution upon the vote of 50% or more of a corporation’s voting power.  However, the General Corporation Law defines “voting power” (Section 194.5) whereas the CARULLCA does not define “voting interests”.  Moreover, the changes are inconsistent with California’s predecessor LLC Act, the Beverly-Killea Act.  Under former Section 17350(b) dissolution required the vote of “a majority in interest of the members”, a term defined in former Section 17001(v).  Given that the large number of existing LLCs formed under either the Beverly-Killea Act or the CARULLCA, many LLC owners will be surprised by these changes.  They may also find that their operating agreements are inconsistent with the law as amended.

The many thousands of LLCs formed under the Beverly-Killea Act will also need to face the question of whether the Constitution even permits the application of the CARULLCA.  See Legislature Shuts The Barn Door After The Horse Has Bolted And Then Burns Down The Barn.

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