Legislative History for Connecticut Act

PA 16-97 HB5259 Senate 3081-3082, (3094-3096) 5 Judiciary 989-991, 1012-1020, 34 1046-1048, 1095-1113 House Transcripts have not been received. They are available 39 on CGA website, but are not the Official copy. Contact House Clerk for assistance (860) 240-0400

Transcripts from the Joint Standing Committee Public Hearing(s) and/or Senate and House of Representatives Proceedings

Connecticut State Library Compiled 2017 S - 699

CONNECTICUT GENERAL ASSEMBLY SENATE

PROCEEDINGS 2016

VOL. 59 PART 9 2751 – 3097

003081 /je 331 SENATE May 4, 2016

0 Thank you, Madam President. Will the Clerk now please call Calendar Page 27, Calendar 568, House Bill 5259.

THE CHAIR:

Mr. Clerk.

THE CLERK:

On page 27, Calendar 568, Substitute for House Bill Number 5259, AN ACT CONCERNING ADOPTION OF THE CONNECTICUT UNIFORM LIMITED LIABILITY COMPANY ACT.

THE CHAIR:

Senator Coleman.

SENATOR COLEMAN (2ND) : 0 Thank you very much, Madam President. I move acceptance of the Joint Committee's favorable report and passage of the bill in concurrence with the House.

THE CHAIR:

The motion is on acceptance and passage in concurrence. Will you remark, sir?

SENATOR COLEMAN (2ND) :

Madam President, this is a bill which makes some changes to the laws governing limited liability companies. Its rules generally apply when an LLC operating agreement does not cover a particular matter except for certain items that the bill does not allow in an agreement or that an agreement () 003082 /je 332 SENATE May 4, 2016

0 cannot change. I urge support and passage of the bill. Thank you, Madam President.

THE CHAIR:

Will you remark? Senator Kissel.

SENATOR KISSEL (7TH) :

Thank you very much, Madam President. This bill is supported by the Connecticut Bar Association and is a good bill and ought to pass. Thank you.

THE CHAIR:

Thank you. Will you remark further? Will you remark further? If not, Senator Coleman, would you like to put it on Consent Calendar, please.

0 SENATOR COLEMAN (2ND) :

May I move this item to Consent.

THE CHAIR:

Absolutely, seeing no objection. Senator Duff.

SENATOR DUFF (25TH) :

Thank you, Madam President. Will the Clerk now call Calendar page 24, Calendar 545, House Bill 5425.

THE CHAIR:

Mr. Clerk.

THE CLERK: 0 003094 /je 344 SENATE May 4, 2016 0 THE CHAIR:

All right. Mr. Clerk, will call the Consent Calendar. The machines will be open.

UNKNOWN SPEAKER:

(Inaudible comment.)

THE CHAIR:

Okay. Just get going. It's getting there. It's getting there. You've got to call for a vote. Okay. She's pulling it up, she's pulling it up.

SENATOR DUFF (25TH) :

Madam President, if the Clerk can just read the bill numbers and not the titles, that would be great.

THE CHAIR:

That's right. Okay.

THE CLERK: (t\S£35b)(He5"Jq) . . . (»£5433) Ot55Jqt) House B1ll 5470, House B1ll [1naudible], 5423, [inaudible], 5593, 5360, 5311, 5359, 5366, 5317, (ltf?$(,01) (iJJ3.~DSI) 5329, [inaudible], 5438, 5637, 5520, 5553, 5510, (lt£>.5k>.3~J C%5556) s42o, ss4o, 5484, s3o6, s289, s639, s147, 5411, (~f?5J<'ol) CH-6$"£9b) 5055, [inaudible] , 5479, 5138, 5189. {)tB 6J5q) (\tB5444) ; THE CHAIR:

Okay.

(Applause. ) 0 003095 /je 345 SENATE May 4, 2016

0 The machine is open.

SENATOR DUFF (25TH) :

Madam President, I need to add one more. Calendar 513, page 19, Calendar 513, House bill 5553.

THE CHAIR:

It's already on Consent, sir. May I open the machines to vote.

SENATOR DUFF (25TH) :

Madam President.

THE CHAIR: 0 Yes? SENATOR DUFF (25TH) :

I need to, does the Clerk have agendas 6 and 7?

THE CHAIR:

Yes, sir.

THE CLERK:

The Clerk has Senate Agenda 6 and 7. They have been printed and on Senators' desks and dated Wednesday, May 4, 2016.

SENATOR DUFF (25TH) :

Madam President, I move that all items on Senate Agendas 6 and 7, dated Wednesday, May 4, 2016, be 0 003096 /je 346 SENATE May 4, 2016

0 acted upon as indicated and the Agenda be incorporated by reference in the Senate Journal and transcript and placed immediately on the Calendar.

THE CHAIR:

So ordered, sir.

THE CLERK:

Immediate roll call has been ordered in the Senate. Immediate roll call is ordered in the Senate.

THE CHAIR:

Come on, come on, come on. Crisco, Crisco, Crisco. Where•s Crisco? Where is Crisco? Come on Joe.

All members have voted? All members have voted? 0 The machine will be closed. The Consent Calendar passed.

THE CLERK:

Consent Calendar Number 3 [inaudible] .

(Applause. )

THE CHAIR:

I almost [inaudible] holding the clock back. Don't worry about it [inaudible] it. Senator Duff.

SENATOR DUFF (25TH) :

Madam President, I move that we adjourn Sine Die.

THE CHAIR: 0 JOINT STANDING COMMITTEE HEARINGS

JUDICIARY PART 3 902 – 1382

2016

> ,, 000989 2 February 29, 2016 je/mc JUDICIAL COMMITTEE 10:30 A.M.

the Judiciary Committee to order. We have an agenda of about ten bills today, and we'll get right to it. First person to testify this morning will be Barry Hawkins. Good morning, Mr. Hawkins.

BARRY HAWKINS: Good morning. I'm testifying today on behalf of House Bill 5259, the Connecticut Uniform Liability Company Act. Testifying on behalf of the Uniform Law Commission, which is an agency nationally, of which I am a member of the Connecticut Commission appointed the Governor, serving at the pleasure of the Governor along with seven other Connecticut commissioner. All the members of the uniform law commission are lawyers. They spend their time as volunteers drafting legislation where uniformity among the states is considered to be important. They report back to their various states. They are all creatures of a state appointment and help to promote and ask their legislatures to enact bills which are basically uniform. Bill 5259 is the first attempt to have Connecticut adopt the uniform limited liability act to replace and substitute for a limited liability act, which we•ve had on our books since 1990. It has not really been substantially overhauled in the 26 years since enactment. Uniform law commission considers this act to be one in particular, which would promote national approaches to limited liability acts because they have become such an important substitute for small corporations in the formation of bus entities. In particular, limited liability companies are often done by people without sophisticated advice. They are taken by forms from the internet. They are taken by forms that they purchase from the drug store. Many small unsophisticated business needs are met by creating limited liability companies without substantial or sophisticated advice. The limited liability company . I I 000990 3 February 29, 2016 je/mc JUDICIAL COMMITTEE 10:30 A.M.

act is to provide the default provisions by which companies can look to the statutes to govern internal matters of governments, what they can do, what they should be doing, and how they do it without having to go through the sophisticated advice that they might get if they were creating an entity where if there was a great deal of money involved or many participants in the organization. The limited liability act from the perspective of the uniform law commission is one which we ask for Connecticut to join the other 18 states, which have enacted it, and to create a truly national act. I will leave the details of explaining the differences between the uniform act and the Connecticut Now version since 1990, our homegrown version, which has served many things well, has done many things well, why do we need and how does it change that law that will be developed by testimony from members of the Connecticut Bar Association, business law section who are practitioners in this field as I am not. Thank you very much for allowing me to testify.

REP. TONG (147TH): Thank you, Mr. Hawkins. Questions? Representative Stafstrom.

REP. STAFSTROM (129TH): Thank you, Mr. Chair, and thank you, Mr. Hawkins, for being here. Just real quick, I notice the enactment date of the statute is I think 2018, is there a reason, do you know if there's a reason for that?

BARRY HAWKINS: Yes. I'll let the CVA witnesses testify in particular about that, but in general on more complicated and far-ranging types of legislation from the Uniform Law Commission, we propose that they have a deferred or delayed active date so that the Secretary of State's office can take appropriate steps to modify its rules, 000991 4 February 29, 2016 je/mc JUDICIAL COMMITTEE 10:30 A.M.

procedures, and forms so that educational programs can take place so that practitioners are aware of the changes in the act, that the Bar Association would have an opportunity to put on seminars and educate both the users of the statute and the lawyers who advise many of the users as to the changes in the law so that by the time it gets to being used everybody's fully familiar with it and on the same page.

REP. STAFSTROM (129TH): Similar to what we did with the power of attorney act last year.

BARRY HAWKINS: Pardon?

REP. STAFSTROM (129TH): Similar to what we did with the power of attorney act last year.

BARRY HAWKINS: Yes. Similar to what we've done on the power of attorney. Again, because it, it's not a single easy fix, it's something that people need to anticipate and plan for and not be surprised when the rules change.

REP. STAFSTROM (129TH): Thanks again for being here and for your advocacy on this.

REP. TONG (147TH): Further questions? Thank you.

BARRY HAWKINS: Thank you very much.

REP. TONG (147TH): Al Garafolo. Good morning sir.

AL GARAFOLO: Good morning, Senator Coleman, Representative Tong, distinguished members of the Judiciary Committee, thank you for the opportunity for appearing today. This is on behalf of Senate bill 248, an act concerning revisions to statutes 001012 25 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

the damages that the decedent incurred, which include a number of different elements in terms of, you know, potential life earnings, I would think pain and suffering while he or she was alive.

LINK WOODARD: Enjoyment of life.

REP. SMITH (108TH): Enjoyment of life. Right. So for the young person who had a projected income of X number of dollars based on what he or she may have been earning, those are the types of damages that we look for a wrongful death claim whereas the loss of consortium is strictly the relationship, am I correct on my analysis?

LINK WOODARD: Yes. It would strictly be limited to the loss that the minor child suffers as a result of the loss of a parent due to that, that loss.

REP. SMITH (108TH): All right. Thank you. Thank you, Mr. Chairman.

REP. TONG (147TH): Thank you. Further questions? Thank you.

LINK WOODARD: Thank you very muCh.

REP. TONG (l47TH): Marcel Bernier. Is it Bernier or Bernier.

MARCEL BERNIER: Bernier.

REP. TONG (147TH): Bernier. Good morning.

MARCEL BERNIER: Good morning Chairman Coleman, Chairman Tong, members of the committee. Thank you for the opportunity to testify today. I have been practicing law and business law in Connecticut for 001013 26 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

over 30 years. I'm a partner in the Hartford office of Murtha Cullina where I'm also the chair of the corporate law group. I'm here as a member of the business law section of the Connecticut Bar Association and also a co-chair of the LLC committee, which has been working on the Connecticut Uniform LLC act for over three years.

I think the essence of the problem is that our Connecticut LLC act has not been is largely unchanged since it was enacted in 1993, and the state of the law has developed quite a bit since then. There are a couple of problems that follow from that. I think there are business lawyers who are representing newly formed Connecticut businesses and forming those LLC's in Delaware instead of forming them in Connecticut because of that lack of clarity in the law and when parties do end up in disputes and litigation, I think they spend more time and money on that litigation than they otherwise would with a clearer LLC act. So, our proposed solution would be that we would request that the committee would support the passage of House bill 5259. It is important to note that there are actually seven times as many LLC's being formed as corporations being formed now, so LLC's really have become the entity of choice, and having a good statute is particularly important to small businesses because with small businesses they may not choose to have a written operating agreement, and if they make that choice, it's the LLC act that essentially provides the default rules. If there's a lack of clarity in those default rules, at least I think both unnecessary litigation and then inconsistent litigation decisions because the judges don't have clear guidance. 001014 27 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

So some of the advantages to having a uniform act, the Uniform Law Commission has spent years working on the act that this is modeled after. The Uniform Law Commission has detailed commentary on the medium of certain sections. It can be referred to by attorneys, and also there are currently 16 states that have some version of the uniform act and two additional states, Pennsylvania and South Carolina, are considering it, so if there isn't a judicial decision on point in Connecticut, by having a uniform act, we pick up the advantage of being able to cite to other jurisdictions such as New Jersey that do have the uniform act. I'd be pleased to answer any questions.

REP. TONG (147TH): Thank you. As you know, Connecticut's commission on, Connecticut's leadership in corporation and business law just issued a report to this committee. One of the recommendations in that report is that Connecticut showed leadership in the development of its limited liability company act in that perhaps we'd be a preferred destination not only for the formation of LLC's but for the adjudication of disputes related to LLC's, and I've been mulling that over, and I'm wondering does adopting a uniform act accomplish that goal. Does that make us a leader if we join other states in adopting uniform provisions, or can we distinguish ourselves by making our LLC act bigger, faster, stronger than others.

MARCEL BERNIER: It's a good question. I guess my answer would be yes. I think it would support the goal of encouraging formation here. You know, what we tried to do as a community was have a uniform act that followed the uniform act and then when it was better for Connecticut, we would keep existent 001015 28 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

Connecticut law, which we've done. So I guess my answer would be yes.

REP. TONG (147TH): But is there more work where we could go further? I know Mr. Sklarz is up next, so I wonder if we could go further and enhance the LLC act in this state to act as a differentiator, a pro­ business differentiator in this state so that for example I'm looking over at Representative Porter, and she has a Yale professor for example in her district in New Haven, and they are deciding as they look to spin out a new company, and do they want to form that under Connecticut law or under Delaware law, and what can we do to enhance our LLC act to convince them that they want to do that here in Connecticut.

MARCEL BERNIER: Well, I think this act would do that, but I would offer this, my honest belief is that the bigger distinguishing factor is that the Delaware court system has a chancery court that spends a tremendous amount of time dealing with very large business disputes, and I think when my clients are considering Delaware, part of it may be the statute, but I think a lot of it is the resolution of disputes by those courts. We as a smaller, well maybe not smaller than Delaware, but I don't know that we have the volume of disputes here. I don't know that we have the judiciary set up to focus on those business law disputes.

REP. TONG (147TH): You just walked into my trap.

MARCEL BERNIER: Okay.

REP. TONG (147TH): So, what if we did have a judiciary or a system that was equipped to handle, or was focused on handling disputes related to the 001016 29 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M. mid liability companies and the spectral issues that they give rise to. You know, LLC's are different, right, obviously in many ways to corporations. They have membership interests, not necessarily stockholder interests, right? They're governed by operating agreements. There's different tax treatment for LLCs. They are pass-through entities. So, there are a variety of other issues related to LLCs that are different from corporations, and what if Connecticut had a special set of judges, special masters, a docket that over time developed a reputation as being expert in adjudicating LLC disputes.

MARCEL BERNIER: I think that would be a really important step towards the goal of having people choose to form in Connecticut. I think that would be very important.

REP. TONG (147TH): Thank you. Further questions? Thanks so much. Mark Sklarz.

MARK SKLARZ: Good morning Senator Coleman, Representative Tong, honorable members of the Judiciary Committee, thank you for the opportunity to appear here today. My name is Mark Sklarz. I've been a private practitioner in Connecticut since 1970. I'm currently of counsel in the New Haven office of Day Pittney, LLP. The focus of my practice is on business and corporate law, and I'm appearing here today as chair of the business law section of the Connecticut Bar Association as well as a member of the drafting community of the section's uniform limited liability company act. The business section includes over 600 Connecticut lawyers who are interested and involved in business and corporate law issues. The business law section strongly supports unanimously the enactment of House 001017 30 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

bill 5259, an act concerning the Connecticut Limited Liability Company Act or ULLCA as I may have referred to it this morning. Frankly, we regard this as a landmark act in the modernizing of limited liability company law and to keep Connecticut at the forefront of the cutting edge of the limited liability company laws as well as continuing to be business friendly.

Just to review and Representative Tong elaborated a bit a minute ago about limited liability companies. LLC's, as we refer to them, are basically hybrids between a corporation affording the limited liability of a corporation and a partnership enabling pass-through tax structure without the eligibility limitations of a sub-S corporation. In addition, a limited liability company offers a right of contractual relationship between the parties to define their relationships between or among them as well as relations with other members. So the importance as has been described earlier is that there is a contractual relationship in the LLC law becomes more of a gap filler or a default when there is no operating agreement or there is an uncertain written operating agreement. I'm going to vary a little bit from my testimony and try and address in my mind a couple of the questions that Representative Tong just asked because I also was a member of that commission, and the commission did recommend the adoption of the or the enactment of the uniform limited liability company act because we do feel that is important. As I said to continue us in Connecticut as a business-friendly state and at the ultimate top level of the law. Also, it's consistent with our business law section objective to enact pertinent uniform acts so that we have the precedent and consistency of the uniform acts, and we develop law that's consistent with national law. 001018 31 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

Last comment, enactment though requires that Connecticut law that has been favorable be retained, and for that reason I think what we have with ULLCA, with the Uniform Limited Liability Company Act, is really the best of both worlds. We have preserved the favorable components of the Connecticut LLC law, but we have integrated it with those acts and those provisions of the [inaudible] Uniform Law Commissioner's Act, it gives us a top-flight act. I would be glad to answer any questions.

REP. TONG (147TH): Thank you. I guess I would ask the same question that I asked Mr. Bernier. It may give us a top-flight act. Does it give us a true differentiated act, a game changer for us as a state. As you know, we've talked at length about how to get more corporations and LLC's organized under the state laws of Connecticut. I think that Delaware gets $500 million a year to its state budget from franchise fees alone every year. So I want to understand what can we do to pump up the LLC act in order to attract people and ensure that they do want to organize under Connecticut law.

MARK SKLARZ: I think, Representative Tong, that this is a start. Enactment of this act will upgrade substantially our act and with the Connecticut favorable [inaudible] will give us a top-flight act that does distinguish in a way from other jurisdictions while at the same time allowing us to have the benefit and the expertise of the Uniform Law Commissioners and the consistency of precedent. We will continue to explore it because we always would like to upgrade the act, but I think this is a very positive, very important and affirmative beginning, and we continued to work from there as you and the commission, you know, so wisely have 001019 32 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

encouraged us to adopt changes that will enable us to encourage business that otherwise would not be in Connecticut.

REP. TONG (147TH): Thank you. Further questions? Representative Smith.

REP. SMITH (108TH): Thank you for your testimony. In response to Representative Tong's question, you said it's a start. Give me some other avenues we can take to improve the business climate here in Connecticut because, as you know, and I think everybody in this room knows, you know, we have struggled and continue to struggle, so it's a start, but else can we do?

MARK SKLARZ: Well, I think the court analogous to the chancery court is something we discussed at length in the commission. Another aspect that we talked about, this kind of gets beyond, is to develop a business law center that may particularly focus upon LLC act, whether it be at the University of Connecticut School of Law or in conjunction with other law schools throughout the state, because I think that Connecticut has the intellectual power and the knowledge to become a real leader of business law throughout the country, and if we can cultivate those resources so that people will look at Connecticut, like today we would at the chancery court in Delaware as being an expert or being the top precedent in terms of business law. I think we can fashion that in some ways in Connecticut by becoming a learning center, an education force, and a resource of knowledge for business law and particularly for limited liability companies because we have, we're such a cradle of intellectual ability and entrepreneurship and innovation, and I think we 001020 33 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M. have the ability to do that. It just will take time and focus and some resources.

REP. SMITH (108TH): I appreciate that response and for you coming up here this morning and testifying. One comment you made was that there is a difference in Connecticut in the sense that people go to Delaware because many LLCs do not have an operating agreement, and that can cause some issues when certain things are being litigated. I didn't really, maybe I missed some of your testimony, I don't really follow that. What is, why is that a factor, and how would this act affect that?

MARK SKLARZ: I think that was Mr. Bernier's testimony, but the point is that there has not been sufficient case law that's been developed in Connecticut in default situations so that where there are disputes, business people, those who create LLCs may feel that they'd like a more certainty of precedent within the law. Delaware has a, and again it's the chancery court, but Delaware has such a wealth of and such a broad section of law that I think business people are satisfied that if there is a dispute and it's not covered in an operating agreement, that they will have a certainty of what the result will be. ULLCA, the Uniform Act, helps us in that regard because we're able to rely basically on case law and precedent throughout the country, not just looking to Connecticut as a resource.

REP. SMITH (108TH): Thank you again. Thank you, Mr. Chairman.

REP. TONG (147TH): Thank you. Further questions? Thank you. 001046 59 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

by this family to try the case after they had already a jury in fact. I don't want to get into how that all came about, but I do a lot of defense work. I can tell you that as a defense attorney, very rarely do we have claims for loss of consortium that are given a lot of value in terms of settlement. Even in this particular case. There was no offer because no one thought much even for the loss of the spousal consortium. So this idea that if you recognize this it's going to.lead to these huge verdicts, I've been practicing for 25 years, and I think this is the only case where I've seen even a significant verdict for the spouse.

Now in terms of the children, again, right now, the way that this decision sits, it says that we can only get antemortem loss of consortium for the child. So that means the three days that his father lived. That makes no sense. What we're going to have at trial is some jury trying to figure out, well wait a minute, if he had a nervous breakdown, is that because of the three days, or, and if so then it's compensable. If it's not, it's really because of the death. Well the wrongful death statute doesn't allow that, so we can't give him any damages. It's a mess, and it should be fixed.

SENATOR COLEMAN (2ND) : Are there questions for attorney Mills? Thank you very much.

JOHN MILLS: Thank you for your time. I appreciate it.

SENATOR COLEMAN (2ND): David Levine.

DAVID LEVINE: Senator Coleman, Representative Tong, \lli 5d.S9 and honorable members of the Joint Judiciary , Committee. Thank you for the opportunity to appear 001047 60 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M.

before you. My name is David Levine. I have practiced business law in Connecticut since 1986, and I am a shareholder at Cohen and Wolf, PC, in Bridgeport. I co-chaired the CVA committee that drafted House bill 5259, and I testified today in favor of that bill. Now, two other members of my committee testified ably earlier about the advantages of the bill, but Representative Tong asked a question whether it was sufficient to be drafting a bill that would be uniformly applied along with 18 other states and give us more guidance and predictability, or should Connecticut's LLC act be even bigger, better, and stronger. I applaud the spirit behind that. I heard my colleague, Mark Sklarz, say that this bill is a start, and I just want to expand upon that a little bit. Right now in Connecticut, as you know, we are playing defense with regard to retaining business. We are defending our own goal as businesses ought to do business elsewhere. As an example. I live in Fairfield. I live exactly one mile down the road from GE's corporate headquarters. Nobody needs to hear again about the problems that we're having in Connecticut retaining businesses in Connecticut. We are playing defense, so much so that even before when Representative Tong asked about the Yale-based startup, he said, well would she be inclined to start a business in Delaware or Connecticut, and how could we get her to stay in Connecticut. Understand what that means. You have people living and working in Connecticut, starting businesses in Connecticut, that are electing by their own volition to pay Delaware in corporation fees, pay a registered agent in Delaware, and even if that's redundant, in their determination, the current Connecticut statute is so broken that this needs to happen, that they actually need to think about incorporating elsewhere. So, that's Connecticut -- Connecticut-based businesses 001048 61 February 29, 2016 je/mc JUDICIARY COMMITTEE 10:30 A.M. headquartered here, speaking that way, we have to this about startup businesses going forward and how they may be thinking. That's how broken our act is.

This bill 5259 goes very far to fix Connecticut's LLC law. Representative Tong asked about business courts and whether we should append some language about business courts to this act. We are all for the establishment of business courts, but before we establish business courts, our statute, our substantive law, has to be improved. We have to have a better statute for those business courts to apply. This is a better stat. Our LLC law was drafted and became the law in 1993, and yet we still pause and consider incorporating in other states.

Case law in Connecticut has been slow to keep up with the pace of LLC formations and the disputes that arise within them, and Connecticut judges had a problem interpreting Connecticut law because of the dearth of case law. Under this uniform act, a common body of case law has and will continue to coalesce around this uniform act. In my written testimony, I have highlighted a number of notable provisions, but I won't take any more of your committee's time to cover them now, but I will entertain any questions you may ask.

SENATOR COLEMAN (2ND) : Do any members have questions for attorney Levine? If not, we appreciate your testimony.

DAVID LEVINE: Thank you.

SENATOR COLEMAN (2ND): Next is Michael Harris.

MICHAEL HARRIS: Thank you, honorable Chairs and members of the judiciary committee. My name is : I 001095

DENISE W. MERRILL SECRETARY OF THE STATE CONNHCTICUT

In Support of Raised HB 5259 11 AAC the Adoption of the Connecticut Uniform Limited Liability Company Act ("CULLCA )

Thank you for the opportunity to submit testimony about HB 5259: AAC the Adoption of the Connecticut Uniform limited Liability Company Act, or "CULLCA." My office was given the opportunity to have input into its development and I offer testimony in support of the legislation.

It is important to remember that modifying business entitles in statue also requires adjustments in our online systems and CONCORD, our business database. We estimate that implementation of this legislation will cost roughly $60,000 to adjust those systems.

The present CT LLC Act was enacted in 1993 and has remained in largely unchanged form since then, Meanwhile the law surrounding LLC's and the rights and obligations of LLC members has advanced to a great degree, rendering our law somewhat antiquated. The proposed act was adapted to suit Connecticut's needs from the 2013 Revised Uniform LLC Act that was drafted by the Uniform Law Commissioners.

The most important aspects of the new law are that it adds provisions that clarify the rights and obligations ofthe members and managers of LLC's while adopting a more user friendly format and language that is accessible to entrepreneurs.

And, like the present LLC Act, the new Act will operate as a set of default t rules for LLC's that form without the aid of counsel and without a written Operating Agreement. At the same time, adoption of this Uniform Act will enable our courts to benefit from the experience of courts In other uniform jurisdictions.

I offer the assistance of my agency In answering any questions you may have. Thank you.

State Capitol, 210 Capitol Avenue, Hartford, Cl' 06106 • Tel. (860) 509-GZOO • Fax (860) 509-GZ09 001096

Yf(J- & . Lf_ P. B Iff . ~I \J 30 Bank Street New Britain, CT 06051 T. (860) 223-4400 ~cticut F. (860) 223-4488 www.ctbar.org Bar Association ®

Testimony of Marcel J. Bernier Business Law Section Co-Chair of the LLC Committee Connecticut Bar Association

In SUPPORT of House Bill No. 5259 "An Act Concerning the Adoption of the Connecticut Uniform Limited Liability Company Act"

Judiciary Committee February 29, 2016

Senator Coleman, Representative Tong and members of the· Judiciary Committee, Thank you for the opportunity to appear before the Judiciary Committee today.

My name is Marcel Bernier. I have been practicing law in Connecticut since 1982. I am a partner in the Hartford office of Murtha Cullina LLP. The focus of my practice is on corporate and limitecl liability company law. I am a Co-Chair of the CBA Business Law Section LLCs Committee (the "LLC Committee''). I am testifying on behalf of the Business Law Section of the Connepticut Bar Association to support Bill 5259.

The current Connecticut LLC Act (the "Current Act") is largely unchanged since 1993.

Seven times as many LLCs are being formed in Connecticut as corporations.

The goals of the CBA Business Law Section Executive Committee are for the new Connecticut LLC Act (the "New Act") to be: (i) patterned after the Revised Uniform LLC Act approved by the Uniform L.aw Commission (the "ULC") in 2013 (the "Uniform Act"); (ii) Connecticutized by continuing existing Connecticut laws when Connecticut laws are better for Connecticut than the provision:> of the Uniform Act; and (iii) business friendly.

The New Act is more comprehensive, well written and modem than our Current Act. The New Act will be more business friendly, result in greater predictability for LLCs and will result in more LLCs being fonned in Connecticut than would occur under the Current Act. The New Act will be beneficial for small LLCs which do not have a written operating agreement because the New Act provides a clearer set of default rules which will apply when the LLC does not have a written operating agreement.

The ULC comments to the Uniform Act and the decisions of other states interpreting the Uniform Act can be used to interpret the provisions of the Uniform Act and can be cited as authority regarding the meaning of the provisions of the New Act which are the same as-or similar to the-Uniform Act~ -- -

Sixteen states (Alabama, California, Florida, Hawaii, Idaho, Illinois, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Utah, Vermont, Washington .and Wyoming) have enacted a version of the Unifonn LLC Act and the Uniform LLC Act is currently pending enactment in Pennsylvania and South Carolina. Connecticut would be the lOth state to enact the most recent version of the Uniform Act. 001097

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 ~cticut F. (860) 223-4488 www.ctbar.org Bar Association ®

The ULC has reviewed and commented on the New Act and discussed the New Act with the CBA LLC Committee. The ULC has determined that the New Act is substantially similar to the Uniform Act and therefore may be called a Uniform Act.

The LLC Committee consists of the 12 business law attorneys listed below who have averaged practicing law for over 25 years: Marcel Bernier, Murtha Cullina, Hartford; Seth Klaskin, office of the Secretary of the State, Hartford; Joseph Selinger, Tobin, Carberry, O'Malley, Riley & Selinger, New London; Mark Sklarz, Day Pitney, New Haven;· David Levine, Cohen & Wolf, Bridgeport; Sam Braunstein, Braunstein & Todisco, Fairfield; Elizabeth Seeley, Seelay & Berglass, Southport; Matthew Gaul, Carmody Torrance Sandak & · Hennessey, New Haven; Rob Perelli-Minetti, Singer, Anner, & Perelli-Minetti, Greenwich; Paul Edelberg, Fox Rothschild, Stamford; Hillel Goldman, Mix & Goldman, Danbury; and Edward Spinella, Reid and Riege, Hartford. The LLC Committee has spent over 3 years and 2,000 attorney hours working on the New Act, including 40 conference calls lasting 90 minutes each.

The LLC Committee unanimously believes the New Act is better than the Current Act.

The CBA Business Law Section has unanimously approved the New Act.

The CBA Litigation Section has unanimously approved the New Act.

The CBA Legislative Program Review Committee has unanimously approved the New Act.

The CBA Board of Governors has unanimously approved the New Act.

The Secretary of the State's Office participated in drafting and supports the NewAct.

The draft of the Report of the Commission on Connecticut's Leadership in Corporation and Business Law Established under Public Act 14-189 recommends, "Updating and revising the Connecticut limited liability company statutes patterned after the Revised Uniform Limited Liability Company Act". The New Act is patterned after the Revised Uniform Limited Liability Company Act.

The CBIA supports the New Act.

Improvements in the New Act Article 1

defines distribution, disinterested individual, disinterested member, majority m interest of the members, material inter.est and material relationship. ·---·----··------~· ------~ ~~ The New Act may be varied by an operating agreement, except for the fourteen (14) items listed in Section S(c). ·

S(d) states that if it is not manifestly unreasonable, the operating agreement may alter or eliminate a,spects of the duty of loyalty and may alter the duty of care. It also states that a court determines as a matter of law what is manifestly unreasonable. ~ I 001098

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 6::ecticut F. (860) 223-4488 www.ctbar.org. Bar Association ®

Article 2

The certificate of organization no longer needs to state a purpose or if it is member managed or manager managed because this is in the operating agreement.

25(b) states that the certificate of organization must state the name and address of a member or a manager and an email address of the LLC.

Article.3

31 allows a certificate of organization to state a delayed effective date of no more than ninety days after filing.

37(a) states that a "member is not an agent of an LLC solely by reason of being a member".

37(a) is an improvement over 34-130 which states that each member is an agent of the LLC unless the member has no such authority and the other party knows it.

38(b) states that failure to observe formalities is not a ground for imposing liability on a member or a manager of the LLC.

Article 4

43(a) prohibits distributions to the members when an LLC is not able to pay debts as they become due or the LLC's assets are less than the LLC's liabilities.

The definition of distribution in 2(8) excludes "amounts constituting reasonable compensation".

45(a) states that an LLC is member-managed unless the operating agreement states the LLC is manager managed.

45(b)(3) states that a 2/3 in interest vote is required for an act outside ordinary course of business or to approve a Connecticut Entity Transactions Act transaction.

45(b)(4) states that the approval of all of the members is required to amend the operating agreement.

46(b) states that an LLC may indemnify a member, manager or officer of an LLC.

--46(c)-states-that-an-J:J::;e-shalhndemni:fy-a-member;mana:ger·orofficerwho-is-wholly-succ-e-ssfut-itnh-e __ _ defense of any proceeding.

4 7 is a clearer statement of fiduciary duties than 34-141.

4 7(b) states that the duty of loyalty includes the duty to:

(i) account to the LLC for any property, profit or benefit derived by the member in the conduct of the activities of the LLC; 001099

> 30 Bank Street ' New Britain, CT 06051 T. (860) 223-4400 6::ecticut F. (860) 223-4488 www.ctbar.org Bar Association ®

(ii) refrain from dealing with the LLC on behalf of someone with an interest adverse to the LLC; and (iii) refrain from competing with the LLC in the conduct of the activities of the LLC before dissolution of the LLC.

47(c) states that a member shall discharge the duties of such member:

(i) in good faith; (ii) with the care of an ordinarily prudent person; and (iii) in a manner the member reasonably believes to be in the best interests of LLC.

4 7( c) is the same as the standards for the director of a corporation under 33-756.

47(d) states that a member shall discharge their duties consistently with the implied contract covenant of good faith and fair dealing.

47(f) states that a majority in interest of the disinterested members can authorize or ratify, after full disclosure of the material facts, any act or transaction that would otherwise breach duty ofloyalty.

48 contains a more detailed statement of rights of a member to information about the LLC and how to obtain the information than 34-144.

Article 5

51 is a clearer regarding charging orders than 34-17 L

\ 51 (c) states that a member may extinguish the charging order by satisfying the judgment and filing a \copy of the satisfaction with the court. I I 1 51 (d) states that the LLC or one or more members whose interests are not subject to the charging order 1 ean pay the judgment creditor in full and succeed to the rights of the judgment creditor, including the charging. lorder. I

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1 51 (e) states that the charging· order is the exclusive remedy for satisfying the judgment from the judgment debtor's LLC interest.

Article 6

54(5) permits a member to be expelled by judicial order if the person:

(i) has engaged or is engaging in wrongful conduct that has or will adversely and materially affect the LLC; (ii) has committed or is committing willfully or persistently a material breach of the operating agreement or a fiduciary duty; or (iii) has engaged or is engaging in conduct which makes it not reasonably practical to carry on the business of the LLC. 001100

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 ~cticut F. (860) 223-4488 www.ctbar.org ar Association ®

Article 7

56(a)(4) permits judicial dissolution ifthe conduct ofthe activities ofthe LLC is unlawful or it is not reasonably practicable to carry on the activities of the LLC.

56(a)(5) permits judicial dissolution if the managers or members in control of the company act in a manner that is illegal or fraudulent or act in a manner that is oppressive and is or will be directly harmful to the member who applies for the dissolution

56(b) permits the court to order a remedy other than dissolution in a proceeding under Section 56(a)(5)

61 permits a dissolved LLC to apply to a court for a determination ofthe amount and form of security to provide ·for the payment of claims that are contingent or unknown. Within ten days after filing the application the LLC must give notice of the proceeding to each known claimant holding a contingent claim. If the LLC provides the amount and form of security ordered by the court, the LLC can distribute other assets to its members and the creditors cannot enforce their claims against such members.

Article 8

64 states that a member may commence a direct action against a manager, a member or an LLC for an injury that is not solely the result of an injury suffered or threatened to be suffered by the LLC.

65 states that a member may bring a derivative action to enforce a right of the LLC after making demand on the managers, the members or the LLC that they bring the action and they do not do so within 90 days or if such a demand would be futile.

68 permits an LLC in a derivative proceeding to appoint a special litigation committee composed of or more disinterested individuals to investigate the claim.

69(b) permits the court to order:

(i) the LLC to pay the plaintiffs expenses ifthe court finds the proceeding has resulted in a substantial benefit to the LLC; (ii) the plaintiff to pay any defendant's expenses if the court finds the proceeding was commenced or maintained without reasonable cause or for an improper purpose; or (iii) a party to pay an opposing party's expenses with respect to. a motion filed for an improper purpose such as to delay or harass.

69(b) is the same as 33-726 for corporations.

Article 11

102(d) states that the New Act shall not be construed to impair the obligations of any action :commenced before July I, 2017, any contract existing on July 1, 2017 or any right accrued before July 1, :2017. I I I' 001101

~, :- 30 Bank Street New Britain, CT 06051 T. (860) 223-4400 'cticut F. (860) 223-4488 www.ctbar.org Bar Association ®

Testimony of William J. O'Sullivan, Esq. Vice-Chair, Litigation Section Connecticut Bar Association

In SUPPORT of HB 5259 "An Act Concerning the Adoption of the Connecticut Uniform Limited Liability Company Act"

Judiciary Committee February 29, 2016

My name is William J. O'Sullivan. I have been an attorney in private practice since 1990, and am a shareholder in the Wethersfield law firm O'Sullivan McCormack Jensen & Bliss PC.

I am vice-chair of the Litigation Section of the Connecticut Bar Association, which has formally voted to endorse House Bill No. 5259 ("New Act"). I submit this testimony to supplement that of Attorney Marcel Bernier on behalf oftl'ie CBA's Business Law Section, which also supports the New Act.

My practice is devoted primarily to business litigation. Most of my cases involve limited liability companies, and as such I frequently litigate issues that arise under Connecticut's current Limited Liability Companies Act ("Current Act"). The Current Act was adopted in 1993, when the LLC business form was a relatively new concept, and leaves many gaps that I believe the New Act capably addresses. Following are some of those issues that are frequently encountered by business litigators.

I. Dissociation. The Current Act does not specifically provide that a member may be deemed to dissociate from the LLC based on bad behavior. The New Act creates, at section 602, a mechanism by which the LLC or a member can seek a judicial order expelling a member based on, inter alia, "wrongful conduct that has affected adversely and materially, or will affect adversely and materially, the company's activities and affairs." This clarification is very helpful.

2. Fiduciary duty. The Current Act requires LLC members to perform their duties "in good faith" but does not expressly state that they owe a fiduciary duty to the company. Connecticut's courts are split on this. The New Act specifically provides, at section 409, that members owe a "fiduciary duty of loyalty" to the company.

3. Grounds for dissolution. The Current Act identifies only one ground for judicial dissolution of an LLC, at C.G.S. § 34-207: "it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement." This provides very little guidance in many member-dispute cases, including those alleging illegality and/or oppression. The New Act, at section 70l(a)(5), specifically allows members to apply for dissolution based on illegality or oppression. ! I 001102

\' 30 Bank Street New Britain, CT 06051 T. (860) 223-4400 ~cticut F. (860) 223-4488 www.ctbar.org Bar Association ®

4. Buyout in lieu of dissolution. Connecticut's stock corporation act provides, at section 33-900, that in a shareholder action for judicial dissolution, the corporation (or other shareholders) can avoid dissolution by invoking a right to buy out the petitioning shareholder. But the Current Act contain no such provision for LLCs. The New Act provides, at section 701(b), that in an action to dissolve an LLC based on illegality, fraud, or oppression, "the court may order a remedy other than dissolution." While this is less detailed than the buyout provision in the corporate statutes, it also gives the court a great deal of latitude to fashion an equitable remedy.

5. Derivative actions. The Current Act does not provide for members to pursue derivative actions on behalf of the LLC. Our judges have had to borrow from the corporate statutes. The New Act specifically provides for derivative actions, in sections 802 and 803, and clarifies who is a proper plaintiff.

6. Special litigation committees. Our corporate statutes provide, at C.G.S. § 33-724, a mechanism to quash meritless derivative actions through the appointment of a special litigation committee to investigate the claims and, when appropriate, recommend dismissal, which is binding on the courts (if the investigation is performed properly). Since the Current Act doesn't address derivative actions at all, obviously it contains no such provision. The New Act does, at section 805.

7. Charging orders. The Current Act allows a judgment creditor of an LLC member to obtain a charging order directed to all "distributions" (a term that is not defined under the Current Act) that the LLC makes to the member. The meaning is clear when the LLC is a passive investment, but significant (and unresolved) issues arise when the member pursues his or her livelihood through an LLC: namely, is all of the income that the member obtains from daily labor subject to execution by a creditor? Wage income under the corporate form receives significant protection from execution, and it does not make sense for people who work under the LLC form to have all of their earning exposed to execution. The New Act implicitly addresses this, at section 102(8), in its definition of"Distribution" which excludes "amounts constituting reasonable compensation for present or past service ... "

Also, the Current Act's section on charging orders, C.G.S. § 34-171 is bare bones in the extreme, providing no guidance on mechanics; the New Act, at section 503, provides a great deal of detail and is a vast improvement.

. In sum, on behalf of the CBA's Litigation Section, I believe the proposed New Act will be a great help to business litigators, clients and the judiciary, reducing many areas of uncertainty under existing law. I urge the committee to support House Bill No. 5259. 001103

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 6::ecticut F. (860) 223-4488 www.ctbar.org Bar Association ®

Monte E. Frank, president-elect CT Bar Association

IN SUPPORT OF

HB5259, AAC Adoption of the Connecticut Uniform Limited Liability Company Act

Judiciary Committee February 29,2016

My name is Monte Frank. I am a principal in the law firm of Cohen & Wolf, P.C. in Bridgeport and Danbury. I am also the president-elect of the Connecticut Bar Association, and chair of its Legislative Policy and Review Committee.

I would like to express my strong support for HB5259, AAC Adoption of the Connecticut Uniform Limited Liability Company Act. The CBA's Business Law Section worked extremely hard on this legislation, including a subcommittee consisting of more than a dozen ofthe best business lawyers in Connecticut. They devoted more than two and a half years to it. It represents a high priority for the Section.

Connecticut has not made any significant changes to our LLC Act adopted in 1994. Meanwhile, fifteen states have adopted the Uniform Limited Liability Company Act ("ULLC"), and another three are contemplating adopting it this year. The ULLC has been approved by the American Bar Association. Members of the Business Law Section will provide you with expertise on the details and nuances of the Act.

While our Business Law Section is bringing this proposal to the General Assembly, our Litigation Section, of which I am a member, and our Commercial Law Section are also in support ofHB5259. Significantly, the Business Law Section has also obtained the support of the Secretary of the State and the CBIA.

As a leader of the Connecticut Bar Association, I am very interested in working with our sections and committees to support their efforts to make Connecticut more business friendly. This Act will send a strong message to our business community and to others that may want to consider doing business here that Connecticut is working to promote a pro-business climate. In the year ahead as I assume the role of president ofthe CBA, I intend to work with our sections and committees to bring other pro­ business legislation to you. This Act is an excellent place to start. I I 001104

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Testimony of Mark G. Sklarz Chair, Business Law Section Connecticut Bar Association

In SUPPORT of H.B. 5259, "An Act Concerning Adoption of The Connecticut Uniform Limited Liability Company Act"

Judiciary Committee February 29,2016

Senator Coleman, Representative Tong and all Honorable Members of the Joint Judiciary Committee: Thank you for the opportunity to appear before the Judiciary Committee today.

My name is Mark G. Sklarz. I have been a private practitioner in Connecticut since 1970 and am "of counsel" in the New Haven office of the law firm of Day Pitney LLP. The focus of my practice is on business and corporate law and I am testifying today as the Chair of the Business Law Section of the Connecticut Bar Association as well as a member of the Section's Uniform Limited Liability Company Drafting Committee chaired so ably by Marcel Bernier of Murtha Cullina and. David Levine of Cohen & Wolf. The Business Law Section includes over 600 Connecticut attorneys who are interested and involved in business and corporate law issues.

The Business Law Section strongly supports House Bill 5259, An Act Concerning Adoption of The Connecticut Uniform Limited Liability Company Act or "ULLCA" (the "Bill") which· evolves from and is patterned after the Revised Uniform Limited Liability Company Act approved by the UniformLaw Commissioners of the American Bar Association (the "ULC Act") based upon years of study and analysis to modernize and address the most salient items regarding the business organization which over the last twenty five years has become the dominant entity used by small businesses.

Limited Liability Companies ("LLCs") were introduced in Connecticut with the enactment of the "Connecticut Limited Liability Company Act" in 1993 as a new entity to conduct business. In essence, a limited liability company is a hybrid between a corporation, affording limited liability to its owners (referred to as members), and a partnership, allowing a "pass-through" tax structure and avoiding double taxation without the eligibility limitations of an "S" corporation. Further, an LLC allows members substantial flexibility through contract (known as 1ll1 operating agreement) between or among its members without governance and statutory formalities imposed upon a corporation. As a result, the statutory provisions governing LLCs are basically "default" rules, applicable to situations not addressed in an operating agreement. The combination oflimited liability, favorable tax I I' 001105

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30 Bank Street New Britain, CT 06051 T. (860) 223-4400 F. (860) 223-4488

www.ctbar.org ®

--- --~------attributes, contractual flexibility and somewhat lower organizational costs has resulted in LLCs becoming the predominant business entity since its introduction into the law, particularly among small businesses;

The nationwide proliferation of LLCs as the primary entity to conduct business over the last two decades has created a body oflaw and experience which necessitates an update of the current Connecticut LLC act. Enactment ofULLCA by the General Assembly will achieve this objective and moreover support an important goal of the Business Law Section to adopt appropriate uniform acts which are intended both to create a business friendly .environment and to provide common precedent and predictability through such uniform acts. This has been the case for example with the Connecticut Business Corporation Act and the Connecticut Uniform Limited Partnership Act and we consider ULLCA to be another in the important laws of such statutory codes. The Committee may recall most recently in this trend the enactment of the Connecticut Entity Transactions Act in 2011.

On behalf of the Business Law Section, we :wish to thank the Committee for raising this critical Bill to reinforce and elevate Connecticut's position as a business friendly state and national leader of developing limited liability company law. I would also like to express gratitude for the enormous assistance of the ABA Uniform Law Commissioners and in particular Connecticut ULC Commissioner Attorney Barry Hawkins of Shipman & Goodwin in guiding our drafting Committee through many of the intricacies and policy aspects of the ULC Act. Finally, I would be remiss to fail to recognize publicly the extraordinary stewardship of our drafting committee co-chairs Marcel Bernier and David Levine and the enormous dedication of our committee members who met on a monthly and often semi-monthly basis over the past three and one-half years and spent countless hours scrutinizing and debating virtually every word and clause of this Bill to craft a law to provide Connecticut businesses, their customers and advisors with a high quality operating code.

An important component of enactment of a Uniform Law is to benefit from the expertise of the Uniform Law Commissioners and obtain the predictability of precedent that flows from the act while preserving the law that has been developed and worked well in Connecticut (the so-called "Connecticutizing" of the act). This was a particularly important process with ULLCA which as · expressed above is in general what is referred to as a "default" act, i.e. the parties to a limited liability company operating agreement may in most cases by contract between or among them develop their own rules to govern their relationships but if items are not specifically addressed in the agreement, ULLCA will govern. It therefore became essential for the drafting committee to evaluate the probable expectations of the parties in such default situations based on current Connecticut law and include them in ULLCA. This was particularly pertinent in addressing Article 4 ofULLCA (sections 39 through 48 inclusive ofHB 5259), and I would like to highlight a few of those provisions with the Committee this morning as follows (references are to the sections o~ HB 5259): · I I 001106

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 . ~cticut F. (860) 223-4488 www.ctbar.org Bar Association ®

------· -----'------~~------

• Section 39(c) ofULLCA changes current Cmmecticut law and follows the ULC Act to provide that after formation of a limited liability company, members may be admitted to the limited liability company only with the affirmative vote or consent of ALL members rather than with the affim1ative vote or consent of a majority in interest of its members. Our committee and the Business Law Section agreed this would be consistent with the law of · other jurisdictions, including Delaware, and protect the right of all members of an LLC to choose their member wlless the LLC operating agreement specifically provides otherwise.

• Section 42(a) ofULLCA revises the ULC Act to prbvide that interim distributions (i.e. distributions prior to dissolution of the limited liability company) are to be distributed in proportion to unreturned contributions rather than on a~ capita (equal) basis.

• Section 45 (b )(2) of ULLCA revises the ULC Act to provide that in a member-managed limited liability company, matters in the ordinary course shall be decided by a majority in interest of the members rather than a majority of the members.

• Section 45(b )(3) of ULLCA revises the ULC Act to provide that in a member-managed limited liability company, certain specified actions outside the ordinary course of business require an affi1mative vote or consent of only two-thirds (2/3) in interest of the members rather than all of the members; provided however, Section 45(b)(4) retains the language of the ULC Act requiring an affinnative vote or consent of ALL members to amend an LLC operating agreement. While a change from current Connecticut law, this is the standard throughout the cow1try, including Delaware, and our committee felt it was appropriate to protect all members of an LLC who had entered into an agreement by requiring w1animity to alter such agreement unless the agreement specifically states to the contrary.

• Section 45(c)(3) ofULLCA similarly revises the ULC Act to provide that in a manager­ managed limited liability company, certain specified actions outside of the ordinary course of business require an affirmative vote or consent of only two-thirds (2/3) in interest of the members rathe1: than all of the members \vith the qualification in Section45(c)(4) that amendment of the LLC operating agreement requires an affinnative vote or consent of ALL of the members unless the LLC operating agreement provides otherwise.

• Section 46 ofULLCA revises the ULC Act to provide in general that the reimbursement, advance of expenses and indemnification provisions relating to limited liability companies follow the substantive provisions of the Connecticut Business Corporation Act (CGS sections 33-770 through 33-779). The Committee felt that hannony between the CBCA and ULLCA for similar matters presents a more consistent and coherent business law structure. 001107

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 'cticut F. (860) 223-4488 www.ctbar.org Bar Association ®

• Sections 47(c)(l) and 47(i)(l) ofULLCA rev1se the ULC Act to provide that the standard for discharge of the duties of a member of a member-managed limited liability company and a manager of a manager-managed limited liability company will continue to be governed by the standard cwTently set forth in section 34-141 of the current Cmmecticut Limited Liability act and the standard proscribed in section 33-756 governing directors of a corporation, creating a somewhat higher standard than that required by the ULC Act. Our committee believed that such a standard was appropriate for managing members and managers and again felt the harmony and consistency of the CBCA and ULLCA standards provided a coherent business law structme.

• Section 47(f) ofULLCA revises the ULC Act to provide that certain actions which would othernrise violate the duty of loyalty may be authorized or ratified after full disclosure of all material facts by a majority in interest of disinterested members rather than all of the members.

Since the Uniform Law Commissioners have detennined that none of the above proposed revisions of the ULC Act affects ULLCA from being substantially similar to the ULC Act, the Business Section believes ULLCA achieves the "best of both worlds" for the state of Connecticut, i.e. recognition of uniform law status and preservation of current Connecticut law favor;:tble to and consistent with the conduct and expectations ofLLC members in "default" situations.

'I I I

II

I r3600594.1

I I i ! I' 001108

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 'cticut F. (860) 223-4488 BarAssociation ®

Testimony of David M. Levine Business Law Section Co-Chair of the LLC Committee Connecticut Bar Association

In SUPPORT of H.B. 5259, "An Act Concerning Adoption of The Connecticut Uniform Limited Liability Company Act"

Judiciary Committee February 29, 2016

Senator Coleman, Representative Tong and Honorable Members of the Joint Judiciary Committee: Thank you for the opportunity to appear before the Judiciary Committee today.

My name is David M. Levine. I have been a lawyer in private practice in Connecticut since 1986. I am a shareholder in the Bridgeport office of the law firm of Cohen and Wolf, P.C.

I co-chaired, along with my colleague Marcel Bernier, the Limited Liability Company Act Drafting Subcommittee ofthe Business Law Section of the Connecticut Bar Association.

For 30 years my practice has been concentrated on closely held businesses. I regularly form LLCs and corporations of many shapes and sizes. I most frequently incorporate my clients' LLCs and corporations in Connecticut, but when the business arrangement among the LLC members is complex and not straightforward, for the past many years I have had to pause and consider forming my client's entity in Delaware. This is because, historically, Delaware law has provided lawyers and their clients with greater guidance and predictability. The courts there have adjudicated a wide variety of business disputes, interpreting business entity statutes that have kept up with the times.

The current Connecticut Limited Liability Company Act has not kept up with the times. It became the law in Connecticut in 1993 -almost 23 years ago. At that time, it was an alternative to partnerships, whose partners faced personal liability for company debts, and corporations whose shareholders were saddled either with double taxation or, in the case of s-corporations, restrictions on who the owners could be. In 1993 an LLC was a new entity type that was largely untested. Fast forward 23 years and the overwhelming majority of new business entities formed in Connecticut are limited liability companies. 001109

30 Bank Street New Britain, CT 06051 T. (860) 223-4400 'cticut F. (860) 223-4488 www.ctbar.org Bar Association ®

Unfortunately, case law in Connecticut has been slow to keep up with the pace ofLLC formations and the disputes that arise within them. Connecticut judges have struggled to interpret and decide cases on a consistent basis. The growing number of states adopting the Uniform Limited Liability Company Act stands in stark contrast to the antiquated Connecticut LLC Act, which has exacerbated the problem. Connecticut judges are interpreting the current act in many instances with little precedent from which to draw. When a client becomes embroiled in a dispute with fellow LLC members, litigators are often forced to explain to the client that the dispute in question may be a case of"first impression" to the court. Those of you lawyers on this panel know that many, many research memos begin with the sentence "[T]here is no Connecticut case on point."

The bill before you, House Bill 5259, will go far to eradicate the dearth of case law with which we business lawyers contend. It is patterned largely after the Uniform Limited Liability Company Act, originally drafted by the Uniform Law Commission (ULC), the members of which are among the nation's foremost thinkers on non-corporate entities. Some 16 states have already adopted the Uniform Act. A common body of case law has and will continue to coalesce around this uniform act. Connecticut lawyers and judges will have greater guidance on questions of interpretation. Parties entering into business relationships and negotiating operating agreement language will be able to better predict and understand the meaning of the language to which they are agreeing. This will keep Connecticut competitive in the area of business formations and business-friendly legislation.

Our committee did not merely adopt blindly the Uniform Act language verbatim. We were mindful of current Connecticut LLC law and did our bes.t to preserve it, even where it diverted from the Uniform Act. Our committee was comprised of a cross section of solo and small firm lawyers, medium-sized and large firm lawyers and a lawyer for the Connecticut Secretary of State. Our orientation was decidedly focused on closely-held businesses, which is the bulk of Connecticut's business entity constituency.

You have already received testimony from my co-chair on this drafting committee, Marcel Bernier, and from CBA Business Law Section Chairperson Mark Sklarz, who also served the committee with distinction drafting among the most substantive provisions of the Act. Both gentlemen highlighted certain provisions contained with HB 5259 before you. I have highlighted a few more as follows:

• Section 5l(a) ofULLCA was modified in the Connecticut version to preserve existing substantive Connecticut partnership law v.-ith regard to the effect of charging orders.

• Section 5I(c) through (f) ofULLCA were modified in the Com1ecticut version, which follows a number of other Uniform Act states in designating the entry of a charging order as the exclusive remedy by which a judgment creditor may satisfy the judgment from the debtor's membership interest (called a "transferable interest") in the Act. I I 001110

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• Section 56(a)(2) ofULLCA provides as a default rule that a majority-in-interest must agree to dissolve the LLC and is consistent with existing substantive Connecticut law (§34-206) but represents a departure from the Uniform Act which requires unanimous consent of members. This was one of those instances in which our committee elected to preserve existing Connecticut law as a default rule to avoid disruption to existing business relationships and because the committee felt it was the better rule as a matter of policy.

• Section 56(a)(4) ofULLCA contains a clarification not contained in the Uniform Act that in the absence of a principal office in Connecticut, the court having jurisdiction over a dissolution action is the district in which the registered agent is located.

• Section 56(b) authorizes the court to order a remedy other than dissolution in an action for judicial dissolution under 701(a)(5)(a) or (b). It should be noted that this is an additional remedy not provided under existing substantive Connecticut law.

• Sections 81 through 97 deal with fundan1ental change transactions such as mergers and were carefully drafted to remain consistency between ULLCA and the Connecticut Entity Transactions Act (CETA).

• Section 9 requires professional services LLCs formed on or after the date of enactment to include the word "professional" with the words "limited liability company" in their name, or to use the designation "PLLC" instead of LLC.

Thank you for allowing me the opportunity to testify before the Judiciary Committee.

Respectfully submitted,

David M. Levine, Esq. Cohen and Wolf, P.C. 1115 Broad Street Bridgeport, Connecticut 06604 001111

bia ..J

Testimony of Louise DiCocco Assistant Counsel, CBIA Before the Judiciary Committee February 29, 2016

R :Testimony in Support of HB 5259, AAC Adoption of the Connecticut Uniform Limited Liability Company Act.

G ::>od afternoon Senator Coleman, Representative Tong, members of the Judiciary committee. Thank you for the o Jportunity to testify today. My name is Louise DiCocco, and I am Assistant Counsel at the Connecticut Business a 1d Industry Association (CBIA). CBIA represents more than 10,000 companies throughout the state of C mnecticut, but most of our members are small businesses of SO or fewer employees.

C 31A supports HBS2S9, AAC Adoption of the Connecticut Uniform Limited Liability Company Act. (ULLCA).With t e ULLCA, states will have a set of rules by which to regulate the formation, dissolution and overall regulation o · LLC's. In Connecticut, there are ·as many as 7 times as many LLCs being formed as corporations. Because of the p >ssible issues that may arise from states' varying laws, the ULLCA was created by the National Conference of C >mmissioners on Uniform State Laws in the 1990's to give states the benefit of some consistency in governing L C's. It was revised in 2006 with language easier for the public to understand.

T 1e ULLCA is more comprehensive, well written and modern than our current LLC act. The ULLCA represents a si ~nificant advancement in this area of law. Some of the benefits of adoption of this act include streamlined a ministration, which in turn is likely to reduce costs to states and decisive and predictable consistency across jurisdictions.

T 1e final report of the Commission on Connecticut's Leadership in Corporation and Business Law to the General A .sembly recommends "updating and revising the Connecticut LLC statutes patterned after the revised ULLCA. " A you are aware, the Commission was created during the 20141egislative session (P.A. 14-89, sec. SO) to study a ,d recommend measures Connecticut could implement over the next 10 years to attract businesses to operate a d expand by making Connecticut a more business- friendly state.

C :lA is in support HB S2S9 and urges the Judiciary committee to approve it. Thank you for your consideration. If have any questions, please contact Louise DiCocco at [email protected] or 860244-1169.

Connecticut Business a Industry Association 350 Church Street. Hartford, CT 06103-1126 I 860.244.1900 I 860.278.8562 (f) I cbia.com I @CBIANews I II 001112 ijJJ4Gc: I ~.-,~e. 3 111 N. Wabash Ave. Suite 1010 · Uniform Law Commission Chicago, IL 60602 NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS (312) 450-6600 www.uniformlaws.org

----· -Statement-of-Barry-llawkins,--from-the-Hniform-baw-€ommission,-to-the-Joint-€ommittee------• on Judiciary in Support of House Bill 5259- The Connecticut Uniform Limited Liability Company Act

Co-Chairs Coleman and Tong and Members of the Committee:

I am Barry Hawkins and I appear here today on behalf of the Uniform Law Commission (ULC). Connecticut has a long history of enacting uniform acts. Connecticut has enacted the Uniform Commercial Code, Uniform Partnership Act, Uniform Anatomical Gift Act, Uniform Transfers to Minors Act, among others. I am here today to express my support for another uniform· act, House Bill 5259, the Connecticut Uniform Limited Liability Company Act. This bill is a comprehensive update to the State's existing limited liability company law, and· is drawn substantially from the ULC's Uniform Limited Liability Company Act, also called "ULLCA."

ULLCA was first approved by the ULC in 1994, and has undergone multiple revisions since that time, most recently in 2013. Eighteen states have adopted some version ofULLCA to date. Four states, including Connecticut, have introduced legislation this year to enact the most updated form of ULLCA.

HB 5259 is the product of a multi-year revision and drafting effort by a Connecticut Bar · Assoc1at10n committee comprised of business lawyers. This group scrutinized ULLCA, · as drafted by the ULC, and made adjustments to ensure that the bill's content and structure are appropriate for Connecticut. The committee has worked with the ULC during the entire drafting process to confirm that the bill meets the goals and purposes of the uniform act. Some of the features of HB 5259 include: clarifying the purposes and limitations of LLC operating agreements; specif:Yillg default governance rules, and identifying fiduciary duties to the LLC, etc.

First, HB 5259 provides a centralized operating agreement provision, which lists the purposes of an operatmg agreement: (1) relations among the members and between the members and the LLC; (2) the rights and duties of the LLC's manager(s); (3) the activities and affairs ofthe LLC and the conduct of those activities and affairs; and (4) the means and conditions for amending the operating agreement. This new section also articulates which provisions of ULLCA may not be altered through the operating agreement. · ·

Next, HB 5259 establishes clear default rules for the internal governance of an LLC. For instance, if the LLC's operating agreement is silent on the type of management structure, the LLC will be a member-managed company as a default. This provision also provides a consolidated list of matters requiring member consent, such as admitting a new member; deciding on matters outside the ordinary course of business; amending the operating agreement; etc.

Additionally, HB 5259 specifies that members and managers of the company owe the ~duciary duties of loyalty and care to the LLC. The bill also clarifies the contractual status of the duty of 001113

good faith and fair dealing. The operating agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not "manifestly unreasonable." In addition, the operating agreement may alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misco1;1duct, or knoWing violation of law.

HB 5259 also changes the way in which a member or manager can bind an LLC based on his or her actiOns. HB 5259 uses agency law to determine if a member or manager can bind an LLC, rather than the person's status as a member or manager of the LLC.

Another update made by HB 5259 is with regard to charging orders, the exclusive remedy for a creditor of a member to obtain a member's financial rights to distributions from the LLC. The bill simplifies the rules governing charging orders and explains the ways in which a,coUrt may effectuate the collection of distributions, if necessary.

In summary, HB 5259 is a carefully crafted and comprehensive update to Connecticut's LLC law. Implementing the Connecticut Uniform Limited Liability Company Act through HB 5259 would provide·necessary clarity and change to this complex area of the law. ·

Thank you very much for allowing me to testify, and I am happy to address any questions that you may have.

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