BILL ANALYSIS
SENATE BANKING, COMMERCE AND INTERNATIONAL TRADE
Senator Michael J. Machado, Chairman Bill No:AB 55
Author:Shelley
Amended: August 22,
2002
Hearing: August 26, 2002 Fiscal: Yes
SUBJECT: Corporations
DIGEST -- WHAT THE BILL DOES
EXISTING LAW requires that companies incorporated in
California file within 90 days after filing original
Articles of Incorporation, and biennially thereafter, a
statement of officers with the Secretary of State's Office.
This statement must contain all of the following:
1. The names and complete business or residence
addresses of its incumbent directors.
2. The number of vacancies on the board, if any.
3. The names and complete business or residence
addresses of its chief executive officer, secretary,
and chief financial officer.
4. The street address of its principal executive
office.
5. A statement of the general type of business
that constitutes the principal business activity of
the corporation.
Current law also requires that each foreign
corporation (those not incorporated in California) must
file a Statement and Designation by Foreign Corporation
biennially (and whenever the agent for service of process
or the agent's address is changed). This form simply
provides the name and address of the company, what type of
business it is, the names and addresses of each director
and officer, and the name and address for an agent for
service of process.
Penalties for failing to submit these filings under
current California law is $25 per day up to a maximum fine
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of $1,500 per shareholder making the complaint. The
maximum number of shareholder claims that can be made for
the same violation is ten, resulting in a maximum fine of
$15,000 per violation. Filing a fraudulent statement by a
director or officer is a felony (Corporations Code Section
2254).
THIS BILL would require that every foreign company as
well as those incorported in California to file statements
annually (rather than biennially) with the Secretary of
State's Office and would require that the following
information also be disclosed:
1. The name of the independent auditor used by the
corporation and the date of the last report prepared
for the corporation by the independent auditor. The
corporation would be required to attach a copy of
the report to the statement.
2. The annual compensation paid to each director
and officer, including the number of any shares, or
options for shares, provided to each director and
officer that were not available to other employees
of the corporation.
3. A description of any loans made to a director
by the corporation at a preferential loan rate
during the previous 24 months, including the amount
and terms of the loans.
4. A statement indicating whether any bankruptcy
was filed by the corporation, its officers, or
directors within the previous 10 years.
5. A statement indicating whether any director or
officer of the corporation was convicted of fraud
during the previous 10 years.
6. A statement indicating whether the corporation
violated any federal security laws or any provision
of California law during the previous 10 years for
which the corporation was found liable or fined.
This bill would require that these statements filed
with the Secretary of State be made available to the public
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for inspection. Further, the bill would require that the
Secretary of State make this information available to the
public via an online data base by December, 2004.
This bill would require that a corporation pay a $5
disclosure fee when filing its statement. Half of this fee
will be utilized for the development and maintenance of the
online data base, and the other half would be deposited
into the Victims of Corporate Fraud Compensation Fund.
This bill would create the Victims of Corporate Fraud
Compensation Fund, within the State Treasury, for the sole
purpose of providing restitution to the victims of
corporate fraud. The Secretary of State would administer
the fund and adopt regulations regarding the administration
of the fund and the eligibility of victims to receive
compensation.
FISCAL EFFECT: Unknown.
COMMENTS:
A. Purpose of the bill
The author states, "the California Corporate
Disclosure Act will give Californians the information they
need to protect themselves and their families. It provides
consumers a magnifying glass to take a much closer look at
companies and their officers."
B. 2002 California Corporate Reform Package
Assembly Bill 55 is part of the 2002 California
Corporate Reform Package. The other measures in this
package include:
q SB 110 (Dunn) - "IT Consultant Conflict of Interest" --
This bill would prohibit companies and contractors who
provide information technology or consulting services to
state energy regulatory bodies from providing
substantially similar services during the next two years
to private companies that are regulated by the regulatory
agency.
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q AB 13 (Florez and Matthews) - "Corporate Lobbying Reform"
-- This bill would amend the Political Reform Act to
prevent the sort of influence that is suspected to have
occurred with the Oracle contract.
q AB 2375 (Cardoza and Matthews) - "Pension and Shareholder
Protection" -- This bill prevents California from doing
buisness with corporations that leave the United States
to incorporate offshore in order to avoid taxes.
C. Governor's Corporate Accountability Reform Efforts
The Governor has announced a series of reforms
designed to strengthen California's corporate
accountability laws. The cornerstone of his initiatives is
an increase in prison terms for criminal violations of the
securities law that will complement federal law. At the
Governor's direction, the Department of Corporations will
seek sanctions for securities law violations.
Specifically:
The criminal fine for general securities law
convictions would increase from $1 million to $5
million, with prison terms ranging from one to five
years; and
The criminal fine for securities fraud convictions
would increase from $10 million to $25 million, with
prison terms of 2, 3, or 5 years rising to 5,10, or 20
years.
Governor Davis also announced the establishment of an
interagency task force that will review the implementation
of the new federal corporate accountability law.
In addition, he has already signed three bills relating
to increased corporate security. These measures include:
AB 2873 (Frommer) -- requires audit documents and records
to be retained for a minimum of seven years. It also
specifies information standards for audit documents and
prohibits intentional document destruction. Also
included is a provision that creates a "rebuttable
presumption," meaning that failure to meet the state
standards constitutes unprofessional conduct and allows
for the punishment of violators with license discipline;
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AB 270 (Correa) -- makes California the first state in
the nation to have a public-member majority on the Board
of Accountancy. It also beefs up provisions of state
accounting laws, including requiring mandatory reporting
of civil judgements, as well as settlements and
arbitration awards of $30,000 or more. The bill eases
the standard for taking enforcement action against
accountants for repeated violations, granting the Board
direct subpoena power and requiring mandatory reporting
of restatements of financial statements; and
AB 2970 (Wayne) -- prohibits any employee of an
accounting firm from working for a client within 12
months of providing audit services.
D. Arguments in Support
According to the author's office, given the daily news
stories about fraud, bankruptcies, and misdealing among
corporations and corporate executives, California consumers
need to have greater understanding of the companies doing
business in this state.
E. Arguments in Opposition
The California Chamber of Commerce (Chamber) believes
that existing state and federal law provides adequate
reporting and public access to the information referred to
in this bill.
Specifically, the Chamber bases its opposition on the
following:
q The bill does not make any distinction between
privately held and publicly held corporations.
Privately held corporations have no fiduciary duty to
stockholders and do not solicit investment from the
general public.
q Virtually all of this information is required to
report in quarterly and annual filings with the
Federal Securities and Exchange Commission (SEC).
Under various provisions of the Securities and
Exchange Act of 1934, corporations that are traded on
public stock exchanges are required to report
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information that is substantially similar to that
required under the provisions of this bill.
q This bill will offer an incentive for increased
litigation as it requires companies to file
information concerning directors and officers' loans,
compensation as well as any bankruptcies they may have
filed or any fraud conviction they may have sustained.
Moreover, the bill requires the corporation to
include information containing any violations of or
fines levied under state statute. We believe that
this provision will induce litigation by providing
overly litigious attorneys with the pretextual basis
for lawsuits that are often only "fishing
expeditions."
F. Points of Consideration
1.As drafted, this bill would apply to all companies
incorporated in California, regardless of whether they
are private or publicly traded. If it is the intent of
the author to provide more consumer protection to
California investors and shareholders, should the bill be
narrowed to only include only those corporations that are
publicly traded?
2.This bill would require that each director and officer
disclose his/her annual compensation. Would it be more
prudent to require that only the top executives divulge
such information as would be consistent with Federal SEC
filing requirements?
In the the Annual Report on Form 10-K Subsection (a)(9),
public companies must report the compensation paid to
directors. In addition, for the five most highly
compensated officers, they must provide a very detailed
table showing all components of compensation for the past
three years. This information also includes stock option
and restricted stock grants. Subsection (a)(10) the Form
10-K or proxy statement must also describe any loans in
excess of $60,000 to directors.
3.Some of the additional information required in the bill,
including compensation figures and descriptions of loans
made to corporate executives, may be difficult to verify.
The bill is silent on which state entity is responsible
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for verifying that such information is true and correct.
Does this leave the state open for potential lawsuits?
Should it be specified that a sworn statement declaring
that the information provided by the corporations is true
and correct (pursuant to Section 2015.5 of the Code of
Civil Procedure)?
SUPPORT AND OPPOSITION:
A. Support: None received by the Committee
B. Oppose: California Chamber of Commerce
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Consultant: Trudi E. Sprague (916) 445-6306
Date: August 23, 2002