Breaking Up Just Got Easier To Do

One of the banes of the existence of closely-held companies is the potential for deadlock in management. If owners cannot agree on the course of operation, what alternatives are available? The California Corporations Code has long provided, in the case of corporations, for the appointment of provisional directors and for a 50% shareholder to elect to wind up and dissolve the corporation. However, 50% owners of limited liability companies (LLCs) have not been so fortunate…until now.

While a corporation may be dissolved at the election of a 50% shareholder or a decree of judicial dissolution, California law has provided that a limited liability company may only be dissolved upon: (1) the happening of an event set forth in its articles of organization or operating agreement; (2) the vote of a majority of the members (or such greater percentage set forth in the articles or operating agreement); (3) the passage of 90 days during which the LLC has no members; or (4) a decree of judicial dissolution. Thus, if there is a 50/50 deadlock in management of an LLC, the LLC may not be able move forward in its operations nor may 50% of its members be able to bring about its dissolution.

To remedy this situation, the Conference of California Bar Associations sponsored AB 1722, which was signed into law by Governor Jerry Brown on July 22, 2016. With the express purpose of avoiding unnecessary and costly litigation to dissolve LLCs with 50/50 standoffs between members and in view of the disparate treatment of similarly deadlocked 50/50 shareholders of a corporation, AB 1722 lowers the required dissolution vote of LLC members to 50% (or such greater percentage as may be set forth in the LLC's articles of organization or operating agreement). Now, if deadlocked LLC members cannot get along, they have an ability to move along.