BILL NUMBER: AB 2158 INTRODUCED
BILL TEXT
INTRODUCED BY Assembly Member Hagman
FEBRUARY 18, 2010
An act to amend Sections 154, 202, 203, 204, 300, 418, 602, 902,
1001, 1100, 1152, 1201, 1300, 1800, 1900, 1901, 1902, 1904, 2000, and
25103 of, to add Chapter 24 (commencing with Section 2400) to
Division 1 of Title 1 of, and to repeal Sections 158, 186, 421, and
1111 of, the Corporations Code, relating to corporations.
LEGISLATIVE COUNSEL'S DIGEST
AB 2158, as introduced, Hagman. Statutory close corporations.
Existing law, the General Corporation Law, regulates corporations,
including close corporations. Under existing law, a close
corporation is a corporation whose articles contain, among other
things, a provision that all of the corporation's issued shares of
all classes shall be held of record by not more than 35 persons, and
a statement describing itself as a close corporation. Existing law
authorizes these provisions to be deleted from the articles or for
the number of shareholders to be changed by amendment pursuant to
specified voting requirements. Existing law prescribes how to
determine the number of shareholders for the purposes of these
provisions. Under existing law, a corporation ceases to be a close
corporation upon the filing of a specified amendment to its articles
or under certain circumstances as a result of a specified transfer of
shares. Under existing law, any attempted voluntary inter vivos
transfer of the shares of a close corporation resulting in the number
of holders of record of its shares exceeding the maximum specified
in the articles is void if the certificate contains a specified
legend.
More generally, existing law governing corporations, including
close corporations, requires that the business and affairs of the
corporation be managed and all corporate powers be exercised by or
under the direction of a board and authorizes offices to be held by
the same person. Existing law also prohibits a shareholders'
agreement relating to the affairs of a close corporation from being
construed as invalid because it relates to corporate affairs or it is
an attempt to treat the corporation as if it were a partnership.
Existing law also requires shareholders to have an annual meeting.
Existing law authorizes a corporation to voluntarily dissolve by the
vote of shareholders representing 50% or more of the voting power.
For involuntary dissolution, existing law authorizes a verified
complaint to be filed by any shareholder of a close corporation.
This bill would replace the term "close corporation" with
"statutory close corporation" and would revise and recast those
provisions governing these corporations by consolidating them into a
chapter limited exclusively to statutory close corporations.
Specifically, the bill would modify the statement required to be
included in the articles and share certificates of a statutory close
corporation and would set forth a more detailed scheme for
determining the number of persons who are shareholders of record. The
bill would authorize shareholders to agree in writing pursuant to a
shareholders' agreement to dispense with the board, subject to
specified requirements. The bill would also authorize the
shareholders to dispense with the annual meeting requirement and
permit individuals with more than one office to execute, acknowledge,
or verify documents in more than one capacity.
The bill would authorize a statutory close corporation to only be
terminated by amending its articles in accordance with certain
requirements and, if the corporation eliminated or dispensed with the
board, would require the amendment to provide for a board, as
specified.
The bill would additionally authorize a statutory close
corporation's articles to contain a provision authorizing one or more
shareholders to elect to dissolve the corporation at will or upon
the occurrence of a certain event. The bill would also authorize the
articles to require a verified complaint for involuntary dissolution
to be filed by more than one shareholder.
The bill would specify that these provisions are applicable to
close corporations meeting certain requirements, prior to January 1,
2011, as well as those corporations meeting the requirements for a
statutory close corporation. The bill would make other conforming
changes.
Vote: majority. Appropriation: no. Fiscal committee: no.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 154 of the Corporations Code is amended to
read:
154. "Articles" includes the articles of incorporation,
amendments thereto, amended articles, restated articles, certificate
of incorporation and certificates of determination. All
references in this division to a vote required by the "articles"
include, in the case of a close corporation (Section 158), any vote
required by a shareholders' agreement.
SEC. 2. Section 158 of the Corporations Code is repealed.
158. (a) "Close corporation" means a corporation whose articles
contain, in addition to the provisions required by Section 202, a
provision that all of the corporation's issued shares of all classes
shall be held of record by not more than a specified number of
persons, not exceeding 35, and a statement "This corporation is a
close corporation."
(b) The special provisions referred to in subdivision (a) may be
included in the articles by amendment, but if such amendment is
adopted after the issuance of shares only by the affirmative vote of
all of the issued and outstanding shares of all classes.
(c) The special provisions referred to in subdivision (a) may be
deleted from the articles by amendment, or the number of shareholders
specified may be changed by amendment, but if such amendment is
adopted after the issuance of shares only by the affirmative vote of
at least two-thirds of each class of the outstanding shares;
provided, however, that the articles may provide for a lesser vote,
but not less than a majority of the outstanding shares, or may deny a
vote to any class, or both.
(d) In determining the number of shareholders for the purposes of
the provision in the articles authorized by this section, a husband
and wife and the personal representative of either shall be counted
as one regardless of how shares may be held by either or both of
them, a trust or personal representative of a decedent holding shares
shall be counted as one regardless of the number of trustees or
beneficiaries and a partnership or corporation or business
association holding shares shall be counted as one (except that any
such trust or entity the primary purpose of which was the acquisition
or voting of the shares shall be counted according to the number of
beneficial interests therein).
(e) A corporation shall cease to be a close corporation upon the
filing of an amendment to its articles pursuant to subdivision (c) or
if it shall have more than the maximum number of holders of record
of its shares specified in its articles as a result of an inter vivos
transfer of shares which is not void under subdivision (d) of
Section 418, the transfer of shares on distribution by will or
pursuant to the laws of descent and distribution, the dissolution of
a partnership or corporation or business association or the
termination of a trust which holds shares, by court decree upon
dissolution of a marriage or otherwise by operation of law. Promptly
upon acquiring more than the specified number of holders of record of
its shares, a close corporation shall execute and file an amendment
to its articles deleting the special provisions referred to in
subdivision (a) and deleting any other provisions not permissible for
a corporation which is not a close corporation, which amendment
shall be promptly approved and filed by the board and need not be
approved by the outstanding shares.
(f) Nothing contained in this section shall invalidate any
agreement among the shareholders to vote for the deletion from the
articles of the special provisions referred to in subdivision (a)
upon the lapse of a specified period of time or upon the occurrence
of a certain event or condition or otherwise.
(g) The following sections contain specific references to close
corporations: 186, 202, 204, 300, 418, 421, 1111, 1201, 1800 and
1904.
SEC. 3. Section 186 of the Corporations Code is repealed.
186. "Shareholders' agreement" means a written agreement among
all of the shareholders of a close corporation, or if a close
corporation has only one shareholder between such shareholder and the
corporation, as authorized by subdivision (b) of Section 300.
SEC. 4. Section 202 of the Corporations Code is amended to read:
202. The articles of incorporation shall set forth:
(a) The name of the corporation; provided, however, that in order
for the corporation to be subject to the provisions of this
division applicable to a close corporation (Section 158), the name of
the corporation must contain the word "corporation", "incorporated"
or "limited" or an abbreviation of one of such words.
a statutory close corporation pursuant to Chapter 24 (commencing with
Section 2400), the name of the corporation shall comply with
subdivision (b) of Section 2404.
(b) (1) The applicable one of the following statements:
(i) The purpose of the corporation is to engage in any lawful act
or activity for which a corporation may be organized under the
General Corporation Law of California other than the banking
business, the trust company business or the practice of a profession
permitted to be incorporated by the California Corporations Code; or
(ii) The purpose of the corporation is to engage in the profession
of ____ (with the insertion of a profession permitted to be
incorporated by the California Corporations Code) and any other
lawful activities (other than the banking or trust company business)
not prohibited to a corporation engaging in such profession by
applicable laws and regulations.
(2) In case the corporation is a corporation subject to the
Banking Law, the articles shall set forth a statement of purpose
which is prescribed in the applicable provision of the Banking Law.
(3) In case the corporation is a corporation subject to the
Insurance Code as an insurer, the articles shall additionally state
that the business of the corporation is to be an insurer.
(4) If the corporation is intended to be a "professional
corporation" within the meaning of the Moscone-Knox Professional
Corporation Act (Part 4 (commencing with Section 13400) of Division
3), the articles shall additionally contain the statement required by
Section 13404.
The articles shall not set forth any further or additional
statement with respect to the purposes or powers of the corporation,
except by way of limitation or except as expressly required by any
law of this state other than this division or any federal or other
statute or regulation (including the Internal Revenue Code and
regulations thereunder as a condition of acquiring or maintaining a
particular status for tax purposes).
(c) The name and address in this state of the corporation's
initial agent for service of process in accordance with subdivision
(b) of Section 1502.
(d) If the corporation is authorized to issue only one class of
shares, the total number of shares which the corporation is
authorized to issue.
(e) If the corporation is authorized to issue more than one class
of shares, or if any class of shares is to have two or more series:
(1) The total number of shares of each class the corporation is
authorized to issue, and the total number of shares of each series
which the corporation is authorized to issue or that the board is
authorized to fix the number of shares of any such series;
(2) The designation of each class, and the designation of each
series or that the board may determine the designation of any such
series; and
(3) The rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares or the
holders thereof, or that the board, within any limits and
restrictions stated, may determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly
unissued class of shares or any wholly unissued series of any class
of shares. As to any series the number of shares of which is
authorized to be fixed by the board, the articles may also authorize
the board, within the limits and restrictions stated therein or
stated in any resolution or resolutions of the board originally
fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then
outstanding) the number of shares of any such series subsequent to
the issue of shares of that series. In case the number of shares of
any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption
of the resolution originally fixing the number of shares of such
series.
SEC. 5. Section 203 of the Corporations Code is amended to read:
203. Except as specified in the articles or in any shareholders'
agreement pursuant to Section 2408 , no distinction shall
exist between classes or series of shares or the holders thereof.
SEC. 6. Section 204 of the Corporations Code is amended to read:
204. The articles of incorporation may set forth:
(a) Any or all of the following provisions, which shall not be
effective unless expressly provided in the articles:
(1) Granting, with or without limitations, the power to levy
assessments upon the shares or any class of shares.
(2) Granting to shareholders preemptive rights to subscribe to any
or all issues of shares or securities.
(3) Special qualifications of persons who may be shareholders.
(4) A provision limiting the duration of the corporation's
existence to a specified date.
(5) A provision requiring, for any or all corporate actions
(except as provided in Section 303, subdivision (b) of Section 402.5,
subdivision (c) of Section 708 , and Section 1900) the
vote of a larger proportion or of all of the shares of any class or
series, or the vote or quorum for taking action of a larger
proportion or of all of the directors, than is otherwise required by
this division.
(6) A provision limiting or restricting the business in which the
corporation may engage or the powers which
that the corporation may exercise or both.
(7) A provision conferring upon the holders of any evidences of
indebtedness, issued or to be issued by the corporation, the right to
vote in the election of directors and on any other matters on which
shareholders may vote.
(8) A provision conferring upon shareholders the right to
determine the consideration for which shares shall be issued.
(9) A provision requiring the approval of the shareholders
(Section 153) or the approval of the outstanding shares (Section 152)
for any corporate action, even though not otherwise required by this
division.
(10) Provisions eliminating or limiting the personal liability of
a director for monetary damages in an action brought by or in the
right of the corporation for breach of a director's duties to the
corporation and its shareholders, as set forth in Section 309,
provided, however, that (A) such a provision may not eliminate or
limit the liability of directors (i) for acts or omissions that
involve intentional misconduct or a knowing and culpable violation of
law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders
or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an
improper personal benefit, (iv) for acts or omissions that show a
reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or
its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation or its shareholders, (vi) under
Section 310, or (vii) under Section 316, (B) no such provision shall
eliminate or limit the liability of a director for any act or
omission occurring prior to the date when the provision becomes
effective, and (C) no such provision shall eliminate or limit the
liability of an officer for any act or omission as an officer,
notwithstanding that the officer is also a director or that his or
her actions, if negligent or improper, have been ratified by the
directors.
(11) A provision authorizing, whether by bylaw, agreement, or
otherwise, the indemnification of agents (as defined in Section 317)
in excess of that expressly permitted by Section 317 for those agents
of the corporation for breach of duty to the corporation and its
stockholders, provided, however, that the provision may not provide
for indemnification of any agent for any acts or omissions or
transactions from which a director may not be relieved of liability
as set forth in the exception to paragraph (10) or as to
circumstances in which indemnity is expressly prohibited by Section
317.
Notwithstanding this subdivision, in the case of a close
corporation any of the provisions referred to above may be validly
included in a shareholders' agreement. Notwithstanding this
subdivision, bylaws may require for all or any actions by the board
the affirmative vote of a majority of the authorized number of
directors. Nothing contained in this subdivision shall affect the
enforceability, as between the parties thereto, of any lawful
agreement not otherwise contrary to public policy.
(b) Reasonable restrictions upon the right to transfer or
hypothecate shares of any class or classes or series, but no
restriction shall be binding with respect to shares issued prior to
the adoption of the restriction unless the holders of such shares
voted in favor of the restriction.
(c) The names and addresses of the persons appointed to act as
initial directors.
(d) Any other provision, not in conflict with law, for the
management of the business and for the conduct of the affairs of the
corporation, including any provision which is required or permitted
by this division to be stated in the bylaws.
SEC. 7. Section 300 of the Corporations Code is amended to read:
300. (a) Subject to the
provisions of this division and any limitations in the articles
relating to action required to be approved by the shareholders
(Section 153) or by the outstanding shares (Section 152), or by a
less than majority vote of a class or series of preferred shares
(Section 402.5), the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the
direction of the board. The board may delegate the management of the
day-to-day operation of the business of the corporation to a
management company or other person provided that the business and
affairs of the corporation shall be managed and all corporate powers
shall be exercised under the ultimate direction of the board.
The business and affairs of a statutory close corporation, as
described in Section 2404, may be managed as provided in Chapter 24
(commencing with Section 2400).
(b) Notwithstanding subdivision (a) or any other provision of this
division, but subject to subdivision (c), no shareholders'
agreement, which relates to any phase of the affairs of a close
corporation, including but not limited to management of its business,
division of its profits or distribution of its assets on
liquidation, shall be invalid as between the parties thereto on the
ground that it so relates to the conduct of the affairs of the
corporation as to interfere with the discretion of the board or that
it is an attempt to treat the corporation as if it were a partnership
or to arrange their relationships in a manner that would be
appropriate only between partners. A transferee of shares covered by
such an agreement which is filed with the secretary of the
corporation for inspection by any prospective purchaser of shares,
who has actual knowledge thereof or notice thereof by a notation on
the certificate pursuant to Section 418, is bound by its provisions
and is a party thereto for the purposes of subdivision (d). Original
issuance of shares by the corporation to a new shareholder who does
not become a party to the agreement terminates the agreement, except
that if the agreement so provides it shall continue to the extent it
is enforceable apart from this subdivision. The agreement may not be
modified, extended or revoked without the consent of such a
transferee, subject to any provision of the agreement permitting
modification, extension or revocation by less than unanimous
agreement of the parties. A transferor of shares covered by such an
agreement ceases to be a party thereto upon ceasing to be a
shareholder of the corporation unless the transferor is a party
thereto other than as a shareholder. An agreement made pursuant to
this subdivision shall terminate when the corporation ceases to be a
close corporation, except that if the agreement so provides it shall
continue to the extent it is enforceable apart from this subdivision.
This subdivision does not apply to an agreement authorized by
subdivision (a) of Section 706.
(c) No agreement entered into pursuant to subdivision (b) may
alter or waive any of the provisions of Sections 158, 417, 418, 500,
501, and 1111, subdivision (e) of Section 1201, Sections 2009, 2010,
and 2011, or of Chapters 15 (commencing with Section 1500), 16
(commencing with Section 1600), 18 (commencing with Section 1800),
and 22 (commencing with Section 2200). All other provisions of this
division may be altered or waived as between the parties thereto in a
shareholders' agreement, except the required filing of any document
with the Secretary of State.
(d) An agreement of the type referred to in subdivision (b) shall,
to the extent and so long as the discretion or powers of the board
in its management of corporate affairs is controlled by such
agreement, impose upon each shareholder who is a party thereto
liability for managerial acts performed or omitted by such person
pursuant thereto that is otherwise imposed by this division upon
directors, and the directors shall be relieved to that extent from
such liability.
(e) The failure of a close corporation to observe corporate
formalities relating to meetings of directors or shareholders in
connection with the management of its affairs, pursuant to an
agreement authorized by subdivision (b), shall not be considered a
factor tending to establish that the shareholders have personal
liability for corporate obligations.
SEC. 8. Section 418 of the Corporations Code is amended to read:
418. (a) There shall also appear on the certificate, the initial
transaction statement, and written statements (unless stated or
summarized under subdivision (a) or (b) of Section 417) the
statements required by all of the following clauses to the extent
applicable:
(1) The fact that the shares are subject to restrictions upon
transfer.
(2) If the shares are assessable or are not fully paid, a
statement that they are assessable or the statements required by
subdivision (d) of Section 409 if they are not fully paid.
(3) The fact that the shares are subject to a voting agreement
under subdivision (a) of Section 706 or an irrevocable proxy under
subdivision (e) of Section 705 or restrictions upon voting rights
contractually imposed by the corporation.
(4) The fact that the shares are redeemable.
(5) The fact that the shares are convertible and the period for
conversion.
Any such statement or reference thereto (Section 174) on the face
of the certificate, the initial transaction statement, and written
statements required by paragraph (1) or (2) shall be conspicuous.
(b) Unless stated on the certificate, the initial transaction
statement, and written statements as required by subdivision (a), no
restriction upon transfer, no right of redemption and no voting
agreement under subdivision (a) of Section 706, no irrevocable proxy
under subdivision (e) of Section 705, and no voting restriction
imposed by the corporation shall be enforceable against a transferee
of the shares without actual knowledge of such restriction, right,
agreement or proxy. With regard only to liability to assessment or
for the unpaid portion of the subscription price, unless stated on
the certificate as required by subdivision (a), that liability shall
not be enforceable against a transferee of the shares. For the
purpose of this subdivision, "transferee" includes a purchaser from
the corporation.
(c) All certificates representing shares of a statutory
close corporation shall contain in addition to any other
statements required by this section, the following conspicuous legend
on the face thereof: "This corporation is a close corporation. The
number of holders of record of its shares of all classes cannot
exceed ____ [a number not in excess of 35]. Any attempted voluntary
inter vivos transfer which would violate this requirement is void.
Refer to the articles, bylaws and any agreements on file with the
secretary of the corporation for further restrictions."
shall comply with Section 2406.
(d) Any attempted voluntary inter vivos transfer of the shares of
a close corporation which would result in the number of holders of
record of its shares exceeding the maximum number specified in its
articles is void if the certificate contains the legend required by
subdivision (c).
SEC. 9. Section 421 of the Corporations Code is repealed.
421. Each holder of shares of a close corporation, whether
original or subsequent, by accepting the certificates for the shares
which contain the legend required by subdivision (c) of Section 418
agrees and consents that such holder cannot make any transfer of
shares which would violate the provisions of subdivision (d) of
Section 418 and waives any right which such holder might otherwise
have under any other law to sell such shares to a greater number of
purchasers or to demand any registration thereof under the Securities
Act of 1933, as now or hereafter amended, or as provided in any
statute adopted in substitution therefor, or otherwise, so long as
the corporation is a close corporation.
SEC. 10. Section 602 of the Corporations Code is amended to read:
602. (a) Unless otherwise provided in the articles, a majority of
the shares entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of the shareholders, but in no
event shall a quorum consist of less than one-third (or, in the case
of a mutual water company, 20 percent) of the shares entitled to
vote at the meeting or, except in the case of a statutory
close corporation, of more than a majority of the shares entitled to
vote at the meeting. Except as provided in subdivision (b), the
affirmative vote of a majority of the shares represented and voting
at a duly held meeting at which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the
required quorum) shall be the act of the shareholders, unless the
vote of a greater number or voting by classes is required by this
division or the articles.
(b) The shareholders present at a duly called or held meeting at
which a quorum is present may continue to transact business until
adjournment notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares
required to constitute a quorum or, if required by this division or
the articles, the vote of a greater number or voting by classes.
(c) In the absence of a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of the shares
represented either in person or by proxy, but no other business may
be transacted, except as provided in subdivision (b).
SEC. 11. Section 902 of the Corporations Code is amended to read:
902. (a) After any shares have been issued, amendments may be
adopted if approved by the board and approved by the outstanding
shares (Section 152), either before or after the approval by the
board.
(b) Notwithstanding subdivision (a), an amendment extending the
corporate existence or making the corporate existence perpetual may
be adopted by a corporation organized prior to August 14, 1929, with
approval by the board alone.
(c) Notwithstanding subdivision (a), unless the corporation has
more than one class of shares outstanding, an amendment effecting
only a stock split (including an increase in the authorized number of
shares in proportion thereto) may be adopted with approval by the
board alone.
(d) Notwithstanding subdivision (a), an amendment deleting the
names and addresses of the first directors or the name and address of
the initial agent may be adopted with approval by the board alone.
(e) Whenever the articles require for corporate action the vote of
a larger proportion or of all of the shares of any class or series,
or of a larger proportion or of all of the directors, than is
otherwise required by this division, the provision in the articles
requiring such greater vote shall not be altered, amended or repealed
except by such greater vote unless otherwise provided in the
articles.
(f)
Notwithstanding subdivision (a), any amendment reducing the
vote required for an amendment pursuant to subdivision (c) of Section
158 may not be adopted unless approved by the affirmative vote of at
least two-thirds of each class of outstanding shares or such other
vote as may then be specified by the articles of the corporation.
to the articles of a statutory close corporation, as
described in Section 2404, terminating its status as a statutory
close corporation or reducing the vote required for such an amendment
may not be adopted unless approved in accordance with Section 2420.
SEC. 12. Section 1001 of the Corporations Code is amended to read:
1001. (a) A corporation may sell, lease, convey, exchange,
transfer, or otherwise dispose of all or substantially all of its
assets when the principal terms are approved by the board, and,
unless the transaction is in the usual and regular course of its
business, approved by the outstanding shares (Section 152), either
before or after approval by the board and before or after the
transaction. A transaction constituting a reorganization (Section
181) is subject to the provisions of Chapter 12 (commencing with
Section 1200) and not this section (other than subdivision (d)). A
transaction constituting a conversion (Section 161.9) is subject to
the provisions of Chapter 11.5 (commencing with Section 1150) and not
this section. Any sale, lease, conveyance, exchange, transfer,
or other disposition of all or substantially all of the assets of a
statutory close corporation, as described in Section 2404, unless the
transaction is in the usual and regular course of business, shall be
approved as provided in subdivision (b) of Section 2418.
(b) Notwithstanding approval of the outstanding shares (Section
152), the board may abandon the proposed transaction without further
action by the shareholders, subject to the contractual rights, if
any, of third parties.
(c) The sale, lease, conveyance, exchange, transfer or other
disposition may be made upon those terms and conditions and for that
consideration as the board may deem in the best interests of the
corporation. The consideration may be money, securities, or other
property.
(d) If the acquiring party in a transaction pursuant to
subdivision (a) of this section or subdivision (g) of Section 2001 is
in control of or under common control with the disposing
corporation, the principal terms of the sale must be approved by at
least 90 percent of the voting power of the disposing corporation
unless the disposition is to a domestic or foreign corporation or
other business entity in consideration of the nonredeemable common
shares or nonredeemable equity securities of the acquiring party or
its parent.
(e) Subdivision (d) does not apply to any transaction if the
Commissioner of Corporations, the Commissioner of Financial
Institutions, the Insurance Commissioner or the Public Utilities
Commission has approved the terms and conditions of the transaction
and the fairness of those terms and conditions pursuant to Section
25142, Section 696.5 of the Financial Code, Section 838.5 of the
Insurance Code, or Section 822 of the Public Utilities Code.
SEC. 13. Section 1100 of the Corporations Code is amended to read:
1100. Any two or more corporations may be merged into one of
those corporations. A corporation may merge with one or more domestic
corporations (Section 167), foreign corporations (Section 171), or
other business entities (Section 174.5) pursuant to this chapter.
Mergers in which a foreign corporation but no other business entity
is a constituent party are governed by Section 1108, and mergers in
which an other business entity is a constituent party are governed by
Section 1113. If any disappearing corporation in a merger is a
statutory close corporation, as described in Section 2404, and the
surviving corporation is not a statutory close corporation, the
merger shall be approved as provided in subdivision (a) of Section
2418.
SEC. 14. Section 1111 of the Corporations Code is repealed.
1111. If any disappearing corporation in a merger is a close
corporation and the surviving corporation is not a close corporation,
the merger shall be approved by the affirmative vote of at least
two-thirds of each class of the outstanding shares of such
disappearing corporation; provided, however, that the articles may
provide for a lesser vote, but not less than a majority of the
outstanding shares of each class.
SEC. 15. Section 1152 of the Corporations Code is amended to read:
1152. (a) A corporation that desires to convert to a domestic
other business entity shall approve a plan of conversion. The plan of
conversion shall state all of the following:
(1) The terms and conditions of the conversion.
(2) The jurisdiction of the organization of the converted entity
and of the converting corporation and the name of the converted
entity after conversion.
(3) The manner of converting the shares of each of the
shareholders of the converting corporation into securities of, or
interests in, the converted entity.
(4) The provisions of the governing documents for the converted
entity, including the partnership agreement or limited liability
company articles of organization and operating agreement, to which
the holders of interests in the converted entity are to be bound.
(5) Any other details or provisions that are required by the laws
under which the converted entity is organized, or that are desired by
the converting corporation.
(b) The plan of conversion shall be approved by the board of the
converting corporation (Section 151), and the principal terms of the
plan of the conversion shall be approved by the outstanding shares
(Section 152) of each class of the converting corporation. The
approval of the outstanding shares may be given before or after
approval by the board. Notwithstanding the foregoing, if a converting
corporation is a statutory close corporation
, as described in Section 2404 , the conversion shall be
approved by the affirmative vote of at least two-thirds of
each class of outstanding shares of that converting corporation;
provided, however, that the articles may provide for a lesser vote,
but not less than a majority of the outstanding shares of each class.
as provided in subdivision (d) of Section 2418.
(c) If the corporation is converting into a general or limited
partnership or into a limited liability company, then in addition to
the approval of the shareholders set forth in subdivision (b), the
plan of conversion shall be approved by each shareholder who will
become a general partner or manager, as applicable, of the converted
entity pursuant to the plan of conversion unless the shareholders
have dissenters' rights pursuant to Section 1159 and Chapter 13
(commencing with Section 1300).
(d) Upon the effectiveness of the conversion, all shareholders of
the converting corporation, except those that exercise dissenters'
rights as provided in Section 1159 and Chapter 13 (commencing with
Section 1300), shall be deemed parties to any agreement or agreements
constituting the governing documents for the converted entity
adopted as part of the plan of conversion, irrespective of whether or
not a shareholder has executed the plan of conversion or those
governing documents for the converted entity. Any adoption of
governing documents made pursuant thereto shall be effective at the
effective time or date of the conversion.
(e) Notwithstanding its prior approval by the board and the
outstanding shares or either of them, a plan of conversion may be
amended before the conversion takes effect if the amendment is
approved by the board and, if it changes any of the principal terms
of the plan of conversion, by the shareholders of the converting
corporation in the same manner and to the same extent as was required
for approval of the original plan of conversion.
(f) A plan of conversion may be abandoned by the board of a
converting corporation, or by the shareholders of a converting
corporation if the abandonment is approved by the outstanding shares,
in each case in the same manner as required for approval of the plan
of conversion, subject to the contractual rights of third parties,
at any time before the conversion is effective.
(g) The converted entity shall keep the plan of conversion at (1)
the principal place of business of the converted entity if the
converted entity is a domestic partnership or (2) at the office at
which records are to be kept under Section 15614 or 15901.11 if the
converted entity is a domestic limited partnership or at the office
at which records are to be kept under Section 17057 if the converted
entity is a domestic limited liability company. Upon the request of a
shareholder of a converting corporation, the authorized person on
behalf of the converted entity shall promptly deliver to the
shareholder, at the expense of the converted entity, a copy of the
plan of conversion. A waiver by a shareholder of the rights provided
in this subdivision shall be unenforceable.
SEC. 16. Section 1201 of the Corporations Code is amended to read:
1201. (a) The principal terms of a reorganization shall be
approved by the outstanding shares (Section 152) of each class of
each corporation the approval of whose board is required under
Section 1200, except as provided in subdivision (b) and except that
(unless otherwise provided in the articles) no approval of any class
of outstanding preferred shares of the surviving or acquiring
corporation or parent party shall be required if the rights,
preferences, privileges and restrictions granted to or imposed upon
that class of shares remain unchanged (subject to the provisions of
subdivision (c)). For the purpose of this subdivision, two classes of
common shares differing only as to voting rights shall be considered
as a single class of shares.
(b) No approval of the outstanding shares (Section 152) is
required by subdivision (a) in the case of any corporation if that
corporation, or its shareholders immediately before the
reorganization, or both, shall own (immediately after the
reorganization) equity securities, other than any warrant or right to
subscribe to or purchase those equity securities, of the surviving
or acquiring corporation or a parent party (subdivision (d) of
Section 1200) possessing more than five-sixths of the voting power of
the surviving or acquiring corporation or parent party. In making
the determination of ownership by the shareholders of a corporation,
immediately after the reorganization, of equity securities pursuant
to the preceding sentence, equity securities which they owned
immediately before the reorganization as shareholders of another
party to the transaction shall be disregarded. For the purpose of
this section only, the voting power of a corporation shall be
calculated by assuming the conversion of all equity securities
convertible (immediately or at some future time) into shares entitled
to vote but not assuming the exercise of any warrant or right to
subscribe to or purchase those shares.
(c) Notwithstanding subdivision (b), the principal terms of a
reorganization shall be approved by the outstanding shares (Section
152) of the surviving corporation in a merger reorganization if any
amendment is made to its articles which would otherwise require that
approval.
(d) Notwithstanding subdivision (b), the principal terms of a
reorganization shall be approved by the outstanding shares (Section
152) of any class of a corporation which is a party to a merger or
sale-of-assets reorganization if holders of shares of that class
receive shares of the surviving or acquiring corporation or parent
party having different rights, preferences, privileges or
restrictions than those surrendered. Shares in a foreign corporation
received in exchange for shares in a domestic corporation have
different rights, preferences, privileges and restrictions within the
meaning of the preceding sentence.
(e) Notwithstanding subdivisions (a) and (b), the principal terms
of a reorganization shall be approved by the affirmative
vote of at least two-thirds of each class of the outstanding shares
of any close corporation if the reorganization would result in their
receiving shares of a corporation which is not a close corporation.
However, the articles may provide for a lesser vote, but not less
than a majority of the outstanding shares of each class.
as provided in subdivision (c) of Section 2418 if the
reorganization would result in the holders of outstanding shares of a
statutory close corporation, as described in Section
2404, receiving shares of a corporation that is not a statutory close
corporation.
(f) Notwithstanding subdivisions (a) and (b), the principal terms
of a reorganization shall be approved by the outstanding shares
(Section 152) of any class of a corporation which is a party to a
merger reorganization if holders of shares of that class receive
interests of a surviving other business entity in the merger.
(g) Notwithstanding subdivisions (a) and (b), the principal terms
of a reorganization shall be approved by all shareholders of any
class or series if, as a result of the reorganization, the holders of
that class or series become personally liable for any obligations of
a party to the reorganization, unless all holders of that class or
series have the dissenters' rights provided in Chapter 13 (commencing
with Section 1300).
(h) Any approval required by this section may be given before or
after the approval by the board. Notwithstanding approval required by
this section, the board may abandon the proposed reorganization
without further action by the shareholders, subject to the
contractual rights, if any, of third parties.
SEC. 17. Section 1300 of the Corporations Code is amended to read:
1300. (a) If the approval of the outstanding shares (Section 152)
of a corporation is required for a reorganization under subdivisions
(a) and (b) or subdivision (e) or (f) of Section
1201, or if approval by shareholders of a statutory close
corporation, as described in Section 2404, is required under
subdivision (c) of Section 2418, each shareholder of the
corporation entitled to vote on the transaction and each shareholder
of a subsidiary corporation in a short-form merger may, by complying
with this chapter, require the corporation in which the shareholder
holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any
appreciation or depreciation in consequence of the proposed action,
but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares
which come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o)
of Section 25100, and the notice of meeting of shareholders to act
upon the reorganization summarizes this section and Sections 1301,
1302, 1303 and 1304; provided, however, that this provision does not
apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply
to any class of shares if demands for payment are filed with respect
to 5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or were held of record on the
effective date of a short-form merger; provided, however, that
subparagraph (A) rather than subparagraph (B) of this paragraph
applies in any case where the approval required by Section 1201 is
sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with
Section 1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of
record.
SEC. 18. Section 1800 of the Corporations Code is amended to read:
1800. (a) A verified complaint for involuntary dissolution of a
corporation on any one or more of the grounds specified in
subdivision (b) may be filed in the superior court of the proper
county by any of the following persons:
(1) One-half or more of the directors in office.
(2) A shareholder or shareholders who hold shares representing not
less than 331/3 percent of (i) the total number of outstanding
shares (assuming conversion of any preferred shares convertible into
common shares) or (ii) the outstanding common shares or (iii) the
equity of the corporation, exclusive in each case of shares owned by
persons who have personally participated in any of the transactions
enumerated in paragraph (4) of subdivision (b), or any shareholder or
shareholders of a statutory close corporation , as
described in Section 2404, pursuant to Section 2426 .
(3) Any shareholder if the ground for dissolution is that the
period for which the corporation was formed has terminated without
extension thereof.
(4) Any other person expressly authorized to do so in the
articles.
(b) The grounds for involuntary dissolution are that:
(1) The corporation has abandoned its business for more than one
year.
(2) The corporation has an even number of directors who are
equally divided and cannot agree as to the management of its affairs,
so that its business can no longer be conducted to advantage or so
that there is danger that its property and business will be impaired
or lost, and the holders of the voting shares of the corporation are
so divided into factions that they cannot elect a board consisting of
an uneven number.
(3) There is internal dissension and two or more factions of
shareholders in the corporation are so deadlocked that its business
can no longer be conducted with advantage to its shareholders or
, unless the corporation is a statutory close corporation, as des
cribed in Section 2401, and is operating
without directors in accordance with subdivision (a) of Section 2410,
the shareholders have failed at two consecutive annual
meetings at which all voting power was exercised, to elect successors
to directors whose terms have expired or would have expired upon
election of their successors.
(4) Those in control of the corporation have been guilty of or
have knowingly countenanced persistent and pervasive fraud,
mismanagement or abuse of authority or persistent unfairness toward
any shareholders or its property is being misapplied or wasted by its
directors or officers.
(5) In the case of any corporation with 35 or fewer shareholders
(determined as provided in Section 605), liquidation is reasonably
necessary for the protection of the rights or interests of the
complaining shareholder or shareholders.
(6) The period for which the corporation was formed has terminated
without extension of such period.
(c) At any time prior to the trial of the action any shareholder
or creditor may intervene therein.
(d) This section does not apply to any corporation subject to the
Banking Law (Division 1 (commencing with Section 99) of the Financial
Code), the Public Utilities Act (Part 1 (commencing with 201) of
Division 1 of the Public Utilities Code), the Savings and Loan
Association Law (Division 2 (commencing with Section 5000) of the
Financial Code) or Article 14 (commencing with Section 1010) of
Chapter 1 of Part 2 of Division 1 of the Insurance Code.
(e) For the purposes of this section, "shareholder" includes a
beneficial owner of shares who has entered into an agreement under
Section 300 or 706 or 2408 .
SEC. 19. Section 1900 of the Corporations Code is amended to read:
1900. (a) Any corporation may elect voluntarily to wind up and
dissolve by the vote of shareholders holding shares representing 50
percent or more of the voting power ; provided, however, that if
the corporation is a statutory close corporation, as described in
Section 2404, the vote of shareholders required may be as otherwise
set forth in the articles pursuant to subdivision (a) of Section 2424
.
(b) Any corporation which that comes
within one of the following descriptions may elect by approval by
the board to wind up and dissolve:
(1) A corporation as to which an order for relief has been entered
under Chapter 7 of the federal bankruptcy law.
(2) A corporation which that has
disposed of all of its assets and has not conducted any business for
a period of five years immediately preceding the adoption of the
resolution electing to dissolve the corporation.
(3) A corporation which that has
issued no shares.
SEC. 20. Section 1901 of the Corporations Code is amended to read:
1901. (a) Whenever a corporation has elected to wind up and
dissolve a certificate evidencing such election shall forthwith be
filed.
(b) The certificate shall be an officers' certificate or shall be
signed and verified by at least a majority of the directors then in
office or by one or more shareholders authorized to do so by
shareholders holding shares representing 50 percent or more of the
voting power and shall set forth: or, in the
case of a statutory close corporation, as described in Section 2402,
such other percentage of the voting power or otherwise having the
power to dissolve the corporation as may be set forth in
the articles pursuant to subdivision (a) of Section 2424. The
certificate shall set forth all of the following:
(1) That the corporation has elected to wind up and dissolve.
(2) If the election was made by the vote of shareholders, the
number of shares voting for the election and that the election was
made by shareholders representing at least 50 percent of the voting
power or, in the case of a statutory close corporation, such
percentage of the voting power or otherwise having the power to
dissolve the corporation as may be set forth in the articles .
(3) If the certificate is executed by a shareholder or
shareholders, that the subscribing shareholder or shareholders were
authorized to execute the certificate by shareholders holding shares
representing at least 50 percent of the voting power or, in the
case of a statutory close corporation, such percentage of the voti
ng power as may be set forth in the articles .
(4) If the election was made by the board pursuant to subdivision
(b) of Section 1900, the certificate shall also set forth the
circumstances showing the corporation to be within one of the
categories described in said subdivision.
(c) If an election to dissolve made pursuant to subdivision (a) of
Section 1900 or subdivision (a) of Section 2414 is made
by the vote of all the outstanding shares and a statement to that
effect is added to the certificate of dissolution pursuant to Section
1905, the separate filing of the certificate of election pursuant to
this section is not required.
SEC. 21. Section 1902 of the Corporations Code is amended to read:
1902. (a) A voluntary election to wind up and dissolve may be
revoked prior to distribution of any assets by the vote of
shareholders holding shares representing a majority of the voting
power, or, in the case of a statutory close corporation, as
described in Section 2404, such percentage of the voting power as may
be set forth in the articles pursuant to subdivision (a) of Section
1900 and subdivision (a) of Section 2424, or by approval by the
board if the election was by the board pursuant to subdivision (b)
of Section 1900. Thereupon a certificate evidencing the revocation
shall be signed, verified and filed in the manner prescribed by
Section 1901.
(b) The certificate shall set forth all of the following
:
(1) That the corporation has revoked its election to wind up and
dissolve.
(2) That no assets have been distributed pursuant to the election.
(3) If the revocation was made by the vote of shareholders, the
number of shares voting for the revocation and the total number of
outstanding shares the holders of which were entitled to vote on the
revocation.
(4) If the election and revocation was by the board, that shall be
stated.
SEC. 22. Section 1904 of the Corporations Code is amended to read:
1904. If a corporation is in the process of voluntary winding up,
the superior court of the proper county, upon the petition of (a)
the corporation, or (b) a shareholder or shareholders who hold shares
representing 5 percent or more of the total number of any class of
outstanding shares, or (c) any shareholder or shareholders of a
statutory close corporation, as described in Section 2404,
or (d) three or more creditors, and upon such notice to the
corporation and to other persons interested in the corporation as
shareholders and creditors as the court may order, may take
jurisdiction over such voluntary winding up proceeding if that
appears necessary for the protection of any parties in interest. The
court, if it assumes jurisdiction, may make such orders as to any and
all matters concerning the winding up of the affairs of the
corporation and for the protection of its shareholders and creditors
as justice and equity may require. The provisions of Chapter 18
(commencing with Section 1800) (except Sections 1800 and 1801) shall
apply to such court proceedings.
SEC. 23.
Section 2000 of the Corporations Code is amended to read:
2000. (a) Subject to any contrary provision in the articles, in
any suit for involuntary dissolution, or in any proceeding for
voluntary dissolution initiated by the vote of shareholders
representing only 50 percent of the voting power , or less if
permitted pursuant to subdivision (a) of Section 2424 , the
corporation or, if it does not elect to purchase, the holders of 50
percent or more of the voting power of the corporation (the
"purchasing parties") may avoid the dissolution of the corporation
and the appointment of any receiver by purchasing for cash the shares
owned by the plaintiffs or by the shareholders so initiating the
proceeding (the "moving parties") at their fair value. The fair value
shall be determined on the basis of the liquidation value as of the
valuation date but taking into account the possibility, if any, of
sale of the entire business as a going concern in a liquidation. In
fixing the value, the amount of any damages resulting if the
initiation of the dissolution is a breach by any moving party or
parties of an agreement with the purchasing party or parties may be
deducted from the amount payable to such moving party or parties,
unless the ground for dissolution is that specified in paragraph (4)
of subdivision (b) of Section 1800. The election of the corporation
to purchase may be made by the approval of the outstanding shares
(Section 152) excluding shares held by the moving parties.
(b) If the purchasing parties (1) elect to purchase the shares
owned by the moving parties, and (2) are unable to agree with the
moving parties upon the fair value of such shares, and (3) give bond
with sufficient security to pay the estimated reasonable expenses
(including attorneys' fees) of the moving parties if such expenses
are recoverable under subdivision (c), the court upon application of
the purchasing parties, either in the pending action or in a
proceeding initiated in the superior court of the proper county by
the purchasing parties in the case of a voluntary election to wind up
and dissolve, shall stay the winding up and dissolution proceeding
and shall proceed to ascertain and fix the fair value of the shares
owned by the moving parties.
(c) The court shall appoint three disinterested appraisers to
appraise the fair value of the shares owned by the moving parties,
and shall make an order referring the matter to the appraisers so
appointed for the purpose of ascertaining such value. The order shall
prescribe the time and manner of producing evidence, if evidence is
required. The award of the appraisers or of a majority of them, when
confirmed by the court, shall be final and conclusive upon all
parties. The court shall enter a decree which shall provide in the
alternative for winding up and dissolution of the corporation unless
payment is made for the shares within the time specified by the
decree. If the purchasing parties do not make payment for the shares
within the time specified, judgment shall be entered against them and
the surety or sureties on the bond for the amount of the expenses
(including attorneys' fees) of the moving parties. Any shareholder
aggrieved by the action of the court may appeal therefrom.
(d) If the purchasing parties desire to prevent the winding up and
dissolution, they shall pay to the moving parties the value of their
shares ascertained and decreed within the time specified pursuant to
this section, or, in case of an appeal, as fixed on appeal. On
receiving such payment or the tender thereof, the moving parties
shall transfer their shares to the purchasing parties.
(e) For the purposes of this section, "shareholder" includes a
beneficial owner of shares who has entered into an agreement under
Section 300 or 706 or 2408 .
(f) For the purposes of this section, the valuation date shall be
(1) in the case of a suit for involuntary dissolution under Section
1800, the date upon which that action was commenced, or (2) in the
case of a proceeding for voluntary dissolution initiated by the vote
of shareholders representing only 50 percent of the voting power
, or less if permitted pursuant to subdivision (a) of Section 2424
, the date upon which that proceeding was initiated. However,
in either case the court may, upon the hearing of a motion by any
party, and for good cause shown, designate some other date as the
valuation date.
SEC. 24. Chapter 24 (commencing with Section 2400) is added to
Division 1 of Title 1 of the Corporations Code, to read:
CHAPTER 24. STATUTORY CLOSE CORPORATIONS
2400. (a) Except to the extent otherwise governed by the
provisions of this chapter, the other chapters of this division shall
apply to statutory close corporations organized under this chapter.
(b) This chapter shall apply to professional corporations
organized under the Moscone-Knox Professional Corporation Act (Part 4
(commencing with Section 13400) of Division 3) whose articles
conform to the requirements of subdivision (a) of Section 2404.
2404. (a) "Statutory close corporation" means a corporation whose
articles contain, in addition to the statements required by Section
202, the following special statements:
(1) That all of the corporation's issued shares of all classes
shall be held of record by not more than a specified number of
persons, not exceeding 35.
(2) "This corporation is a statutory close corporation. The rights
and obligations of shareholders of this statutory close corporation
may differ materially from the rights and obligations of shareholders
in other corporations, and transfer of shares in this statutory
close corporation may be restricted. This statutory close corporation
does not have the power to issue shares or to register a transfer of
shares that would cause the number of persons who are shareholders
of record to exceed the specified number set forth in these articles.
Refer to Chapter 24 (commencing with Section 2400) of Division 1 of
Title 1 of the Corporations Code, these articles, and any bylaws and
shareholders' agreement for restrictions."
(b) The name of the statutory close corporation, as set forth in
its articles, shall contain either the word "corporation,"
"incorporated" or "limited," or an abbreviation of one of those
words.
(c) No statutory close corporation shall issue shares or register
a transfer of shares, whether that transfer was made voluntarily or
involuntarily, by operation of law or otherwise, that would cause the
number of persons who are shareholders of record to exceed the
specified number set forth in the articles pursuant to subdivision
(a).
(d) The shares issued by the statutory close corporation and
outstanding shall be represented by certificates subject to the
requirements of Section 2406.
(e) The special statements referred to in subdivision (a) may be
included in the articles by amendment, but if that amendment is
adopted after the issuance of shares, it may be adopted only by the
affirmative vote of all of the issued and outstanding shares of all
classes.
(f) In determining the number of persons who are shareholders of
record for the purposes of subdivision (a), the following shall
apply:
(1) Spouses shall be counted as one person regardless of how many
shares may be held by either or both of them, and registered domestic
partners shall be counted as one person regardless of how many
shares may be held by either or both of them.
(2) All members of a family shall be counted as one person
regardless of how many shares may be held by them.
(3) A trust shall be counted as one person regardless of the
number of trustees or beneficiaries, except that any trust whose
beneficial interests were offered for sale or sold shall be counted
according to the number of holders of beneficial interests therein.
(4) A partnership, limited liability company, corporation, or
other form of business entity or association holding shares shall be
counted as one, except that any entity or association whose interests
or shares were offered for sale or sold shall be counted according
to the number of holders of beneficial interests therein.
(g) For the purposes of this section, the term "members of a
family" shall mean all common ancestors, any lineal descendant of
each common ancestor, and any spouse, adopted child, or registered
domestic partner, or former spouse, or former registered domestic
partner, of each common ancestor or any such lineal descendant, and
the estates of each of them. An individual shall not be considered to
be a common ancestor if the individual is more than six generations
removed from the youngest generation of shareholders who would
otherwise be members of a family. A spouse or registered domestic
partner, or former spouse or former registered domestic partner,
shall each be treated as being of the same generation as the
individual to whom the individual is or was married or registered as
domestic partners.
(h) Any of the provisions of subdivision (f) may be eliminated,
and the definition in subdivision (g) may be restricted, but only if
the elimination or restriction is set forth in the articles or, if
the articles so permit, in the bylaws, or in a shareholders'
agreement pursuant to Section 2408.
2406. (a) All certificates issued pursuant to subdivision (d) of
Section 2404 shall contain, in addition to any other statements
required by this section and Sections 409, 417, and 418, the
following conspicuous legend on the certificate, as defined in
Section 174: "This corporation is a statutory close corporation. The
rights and obligations of shareholders of this corporation may differ
materially from the rights and obligations of shareholders in other
corporations, and transfer of shares in this corporation may be
restricted. This corporation does not have the power to issue shares
or to register a transfer of shares that would cause the number of
persons who are shareholders of record to exceed the specified number
set forth in its articles. Refer to Chapter 24 (commencing with
Section 2400) of Division 1 of Title 1 of the Corporations Code, the
articles, and any bylaws and shareholders' agreement for
restrictions."
(b) A transferee of shares covered by a shareholders' agreement
authorized by Section 2408, who has actual knowledge or notice
thereof, or notice thereof by a legend on the certificate
representing those shares pursuant to subdivision (a), is bound by
its provisions and may be subject to liability under subdivision (c)
of Section 2408.
(c) A statutory close corporation shall provide without charge to
any shareholder, upon the shareholder's written request, copies of
the articles, bylaws, and any shareholders' agreement on file with
the secretary of the statutory close corporation.
2408. (a) All shareholders of a statutory close corporation may
agree, in writing, to regulate any phase of the affairs of the
corporation, including, but not limited to, the exercise of its
corporate powers, the management of its business and affairs, the
division of its profits or losses, the distribution of its assets on
liquidation, and the relationship among the shareholders, pursuant to
a shareholders' agreement made in accordance with and subject to
this section.
(1) If the corporation has only one shareholder, the shareholders'
agreement authorized by this section may be entered into by the
shareholder and the corporation.
(2) A copy of the shareholders' agreement shall be filed with the
secretary of the corporation.
(3) Any of the optional provisions that may be included in the
articles as described in Section 204 may be included in a
shareholders' agreement authorized by this section rather than in the
articles.
(4) All references in this division to a vote required or
permitted by the articles includes any vote required by a
shareholders' agreement authorized by this section.
(b) Notwithstanding Section 300 or any other provision of this
division, in a shareholders' agreement authorized by this section,
the shareholders may agree to any of the following:
(1) To eliminate or dispense with the board, subject to
subdivision (d).
(2) To interfere with or restrict the discretion or powers of the
board or to grant unequal voting rights to the board or shareholders.
(3) To conduct the affairs of the corporation in an attempt to
treat the corporation as if it were a partnership.
(4) To create a relationship among the shareholders or between the
shareholders and the corporation that would otherwise be appropriate
only among partners.
(c) To the extent and so long as the discretion or powers of the
board in its management of corporate affairs is controlled by a
shareholders' agreement, each shareholder shall have liability for
managerial acts performed or omitted by the shareholder pursuant
thereto that is otherwise imposed by this division upon directors,
and the directors shall be relieved to that extent from that
liability.
(d) A provision in a shareholders' agreement authorized by this
section agreeing to eliminate or dispense with the board is not
effective unless the articles contain a statement to that effect as
required by Section 2410.
(e) Any amendment, extension, or other modification to a
shareholders' agreement authorized by this section shall be approved
in writing by all shareholders who are parties, unless the
shareholders' agreement provides otherwise.
(f) A shareholder who receives an original issuance of shares by a
statutory close corporation, who has actual knowledge or notice of a
shareholders' agreement authorized by this section, or notice by a
legend on the certificate representing those shares pursuant to
subdivision (a) of Section 2406, is bound by its provisions and may
be subject to liability under subdivision (c). The statutory close
corporation shall provide without charge to any prospective recipient
of an original issuance of shares, upon request, copies of the
articles, bylaws, and any shareholders' agreements on file with the
secretary of the corporation.
(g) A shareholders' agreement authorized by this section shall
terminate when the corporation ceases to be a statutory close
corporation, except that if the shareholders' agreement so provides
it shall continue to the extent it is enforceable apart from this
section. No provision of this section is applicable to an agreement
authorized by subdivision (a) of Section 706.
(h) No shareholders' agreement entered into pursuant to this
section may alter or waive the provisions of this chapter, or
Sections 417, 418, 500, 501, 506, 2009, 2010, and 2011, or Chapter 15
(commencing with Section 1500), Chapter 16 (commencing with Section
1600), Chapter 18 (commencing with Section 1800), or Chapter 22
(commencing with Section 2200). All other provisions of this division
may be altered or waived as between the parties thereto in a
shareholders' agreement authorized by this section, including, but
not limited to, any other provision in this division for a vote
required or permitted by the articles, except the required filing of
any document with the Secretary of State.
(i) Nothing in this section invalidates or otherwise affects any
agreement that is not authorized by this section, by or among
shareholders of any corporation, whether or not the corporation is a
statutory close corporation.
2410. (a) A statutory close corporation may eliminate or dispense
with the board as defined in Section 155 if its articles contain a
statement to that effect.
(b) An amendment to the articles to eliminate or dispense with the
board shall be approved by all outstanding shares, whether or not
otherwise entitled to vote or, before shares have been issued, by all
the incorporators if directors were not named in the original
articles and have not been elected, or, if directors were named in
the original articles or have been elected, by all the directors.
(c) While the statutory close corporation is operating without a
board as authorized by subdivision (a), the following shall apply:
(1) All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the corporation managed
under the direction of, the shareholders.
(2) Each shareholder shall have liability for managerial acts
performed or omitted by the shareholder that is otherwise imposed by
this division upon directors.
(3) The corporation is not required to comply with subdivision (a)
of Section 212.
(4) Action requiring approval by the board or both the board and
shareholders is authorized if approved by the shareholders, as
defined in Section 153, or as otherwise required by a shareholders'
agreement.
(5) If a document delivered for filing is required to contain a
statement that specified action has been taken by the board, that
requirement shall be satisfied by a statement that the corporation is
a statutory close corporation without a board and that the action
was approved by the shareholders, as defined in Section 153, or as
otherwise required by a shareholders' agreement pursuant to Section
2408.
(6) When the board has been eliminated or dispensed with pursuant
to this section, the shareholders, by resolution, may appoint one or
more shareholders or other persons to sign documents as "signing
agent" of the statutory close corporation or with a similar
designation.
(d) An amendment to the articles deleting the statement, described
in subdivision (a), to eliminate or dispense with the board shall be
approved by the affirmative vote of at least two-thirds of each
class and series of outstanding shares, whether or not otherwise
entitled to vote.
2412. Notwithstanding Section 600, pursuant to a provision in the
articles, bylaws, or a shareholders' agreement authorized by Section
2408, the shareholders may dispense with an annual meeting.
2414. Subject to any contrary provision contained in the
articles, bylaws, shareholders' agreement authorized by Section 2408,
or a resolution adopted by the board or shareholders, an individual
who holds more than one office in a statutory close corporation may
execute, acknowledge, or verify in more than one capacity, and in the
capacities held, any document required to be executed, acknowledged,
or verified by the holders of two or more offices.
2416. The failure of a statutory close corporation to observe
corporate formalities relating to meetings of the board or
shareholders in connection with the management of its affairs,
pursuant to a shareholders' agreement authorized by Section 2408,
shall not be considered a factor tending to establish that the
shareholders have personal liability for corporate obligations.
2418. (a) If any disappearing corporation in a merger is a
statutory close corporation and the surviving corporation is not a
statutory close corporation, the merger shall be approved by the
affirmative vote of at least two-thirds of each class and series of
the outstanding shares of the disappearing corporation; provided,
however, that the articles or a shareholders' agreement authorized by
Section 2408 may provide for a greater or lesser vote, but not less
than a majority of the outstanding shares of each class and series.
(b) Any sale, lease, conveyance, exchange, transfer, or other
disposition of all or substantially all of the assets of a statutory
close corporation, unless the transaction is in the usual and regular
course of business, shall be approved by the affirmative vote of at
least two-thirds of each class and series of the outstanding shares
of the statutory close corporation; provided, however, that the
articles or a shareholders' agreement authorized by Section 2408 may
provide for a greater or lesser vote, but not less than a majority of
the outstanding shares of each class and series, and provided that
subdivision (d) of Section 1001 is not applicable.
(c) The principal terms of a reorganization, as defined in Section
181, shall be approved by the affirmative vote of at least
two-thirds of each class and series of the outstanding shares of a
statutory close corporation if the reorganization would result in the
holders receiving shares of a corporation that is not a statutory
close corporation; provided, however, that the articles or a
shareholders' agreement authorized by Section 2408 may provide for a
greater or lesser vote, but not less than a majority of the
outstanding shares of each class and series.
(d) If a converting corporation, as defined in subdivision (c) of
Section 1150, is a statutory close corporation, the conversion shall
be approved by the affirmative vote of at least two-thirds of each
class and series of the outstanding shares of that converting
corporation; provided, however, that the articles or a shareholders'
agreement authorized by Section 2408 may provide for a greater or
lesser vote, but not less than a majority of the outstanding shares
of each class and series.
2420. (a) The status of a corporation as a statutory close
corporation may be terminated only by amending its articles in
accordance with this section.
(1) The amendment shall delete the statements required by
subdivision (a) of Section 2404 and any other provision not
permissible for a corporation that is not a statutory close
corporation, including, but not limited to, any statement to
eliminate or dispense with the board as authorized by Section 2410.
(2) If, before the amendment, the corporation eliminated or
dispensed with the board pursuant to Section 2410, the amendment
shall fix the number of directors for the board of the corporation,
or state that the number of directors shall be not less than a stated
minimum nor more than a stated maximum, which in no case shall be
greater than two times the stated minimum minus one, with the exact
number of directors to be fixed within the limits specified by
approval of the shareholders, as defined in Section 153, in a manner
provided, or, if there is then in effect a bylaw setting forth such
provision, state that there is a bylaw then in effect, and the
corporation shall otherwise comply with Sections 212 and 300.
(3) The corporation shall cease to be a statutory close
corporation upon the filing of the amendment to its articles.
(b) An amendment terminating the status of a corporation as a
statutory close corporation shall be approved by the affirmative vote
of at least two-thirds of each class and series of the outstanding
shares, whether or not otherwise entitled to vote; provided, however,
that the articles may provide for a greater or lesser vote, but not
less than a majority of the outstanding shares of each class and
series, whether or not otherwise entitled to vote.
(c) Nothing contained in this section invalidates any agreement
among shareholders to vote for amending the articles to delete the
special statements referred to in subdivision (a) of Section 2404 at
the time or upon the occurrence of an event specified or otherwise.
2422. Termination of the status of a corporation as a statutory
close corporation does not affect any right of a shareholder or of
the corporation under any agreement or the articles or bylaws unless
otherwise prohibited by applicable law.
2424. (a) The articles of a statutory close corporation may
contain a provision authorizing one or more shareholders, or the
shareholders of a specified number or percentage of shares of any
class or series, to elect to dissolve the corporation at will or upon
the occurrence of a specified event or contingency, provided that
this authorization shall not abridge the right of a shareholder or
shareholders to elect voluntarily to wind up and dissolve pursuant to
subdivision (a) of Section 1900.
(1) The shareholder or shareholders electing to dissolve the
corporation pursuant to this section shall give written notice of the
election to dissolve to all the other shareholders.
(2) Thirty-one days after the effective date of the written
notice, the corporation shall begin to wind up and liquidate its
business and affairs and dissolve pursuant to Chapter 19 (commencing
with Section 1900) and Chapter 20 (commencing with Section 2000).
(b) Unless the articles expressly authorize the amendment by a
vote that is not less than two-thirds of all the outstanding shares,
whether or not otherwise entitled to vote, an amendment to the
articles to add, change, or delete a provision in the articles
authorizing dissolution pursuant to subdivision (a) shall be approved
by the affirmative vote of all the outstanding shares, whether or
not otherwise entitled to vote, or, if no shares have been issued, by
all the incorporators if directors were not named in the original
articles and have not been elected, or, if directors were named in
the original articles or have been elected, by all the directors.
2426. (a) A verified complaint for involuntary dissolution of a
statutory close corporation on any one or more of the grounds
specified in subdivision (b) of Section 1800 may be filed by any
shareholder of the corporation, unless the articles of the
corporation require more than one shareholder to do so pursuant to
subdivision (b).
(b) The articles of a statutory close corporation may contain a
provision requiring more than one shareholder to file a verified
complaint for involuntary dissolution, however, this provision shall
state that it does not abridge the right of a shareholder or
shareholders entitled under paragraph (2) or (3) of subdivision (a)
of Section 1800 to do so.
(c) Unless the articles expressly authorize the amendment by a
vote that is not less than two-thirds of all the outstanding shares,
whether or not otherwise entitled to vote, an amendment to the
articles to add, change, or delete a provision in the articles
requiring more than one shareholder to file a verified complaint for
involuntary dissolution of a statutory close corporation shall be
approved by the affirmative vote of all the outstanding shares,
whether or not otherwise entitled to vote, or, if no shares have been
issued, by all the incorporators if directors were not named in the
original articles and have not been elected, or, if directors were
named in the original articles or have been elected, by all the
directors.
(d) Any right of a shareholder to commence an involuntary
dissolution proceeding under this section is in addition to any other
right or remedy the shareholder may have under applicable law.
2428. (a) This chapter shall apply to (1) all close corporations
whose articles, prior to January 1, 2011, contain a provision that
all of the corporation's issued shares of all classes shall be held
of record by not more than a specified number of persons, not
exceeding 35, and the provision "This corporation
is a close corporation," and (2) all
corporations satisfying the requirements of a statutory close
corporation pursuant to Section 2404.
(b) Corporations described in paragraph (1) of subdivision (a)
shall be deemed statutory close corporations subject to this chapter.
However, these statutory close corporations shall be subject to the
following:
(1) Use of the word "statutory" in front of "close corporation"
shall not be required in the articles.
(2) Shares issued prior to January 1, 2011, need not be
represented by certificates.
(3) The legend on share certificates issued prior to January 1,
2011, need not comply with Section 2406, provided that the
certificate contains the legend required by subdivision (c) of
Section 418 as it read on December 31, 2010.
SEC. 25. Section 25103 of the Corporations Code is amended to
read:
25103. The following transactions are exempted from the
provisions of Section 25110 and Section 25120:
(a) Any negotiations or agreements prior to general solicitation
of approval by the holders of equity securities, and subject to that
approval, of (1) a change in the rights, preferences, privileges, or
restrictions of or on outstanding securities, (2) a merger,
consolidation, or sale of assets in consideration of the issuance of
securities, or (3) an entity conversion transaction.
(b) Any change in the rights, preferences, privileges, or
restrictions of or on outstanding securities or any entity conversion
transaction, unless the holders of at least 25 percent of the
outstanding shares or units of any class of securities that will be
directly or indirectly affected substantially and adversely by that
change or transaction have addresses in this state according to the
records of the issuer.
(c) Any exchange incident to a merger, consolidation, or sale of
assets in consideration of the issuance of securities of another
issuer, unless at least 25 percent of the outstanding securities of
any class, any holders of which are to receive securities in the
exchange, are held by persons who have addresses in this state
according to the records of the issuer of which they are holders.
This exemption is not available for a rollup transaction as defined
by Section 25014.6. The exemption is also not available for a
transaction excluded from the definition of rollup transaction by
virtue of paragraph (5) or (6) of subdivision (b) of Section 25014.6
if the transaction is one of a series of transactions that directly
or indirectly through acquisition or otherwise involves the
combination or reorganization of one or more rollup participants.
(d) For the purposes of subdivision (b) and subdivision (c) of
this section, (1) any securities held to the knowledge of the issuer
in the names of broker-dealers or nominees of broker-dealers and (2)
any securities controlled by any one person who controls directly or
indirectly 50 percent or more of the outstanding securities of that
class shall not be considered outstanding. The determination of
whether 25 percent of the outstanding securities are held by persons
having addresses in this state, for the purposes of subdivision (b)
and subdivision (c) of this section, shall be made as of the record
date for the determination of the security holders entitled to vote
on or consent to the action, if approval of those holders is
required, or, if not, as of the date of directors' approval of that
action.
(e) Any change, other than a stock split or reverse stock split,
in the rights, preferences, privileges, or restrictions of or on
outstanding equity securities, except the following if they
materially and adversely affect any class of equity securities: (1)
to add, change, or delete assessment provisions; (2) to change the
rights to dividends thereon; (3) to change the redemption provisions;
(4) to make them redeemable; (5) to change the amount payable on
liquidation; (6) to change, add, or delete conversion rights; (7) to
change, add, or delete voting rights; (8) to change, add, or delete
preemptive rights; (9) to change, add, or delete sinking fund
provisions; (10) to rearrange the relative priorities of outstanding
equity securities; (11) to impose, change, or delete restrictions
upon the transfer of equity securities in the organizational
documents for the entity; (12) to change the right of holders of
equity securities with respect to the calling of special meetings of
holders of equity securities; and (13) to change, add, or delete any
rights, preferences, privileges, or restrictions of, or on, the
outstanding shares or memberships of a mutual water company or other
corporation or entity organized primarily to provide services or
facilities to its shareholders or members. Changes in the rights,
preferences, privileges, or restrictions of or on outstanding equity
securities do not materially and adversely affect any class of
holders of equity securities within the meaning of this subdivision
if they arise from (i) (A) the addition
to articles of incorporation of the provisions
described or referred to in subdivision (a) of Section 158
2404 upon the conversion of an existing
corporation to a statutory close corporation as
described in Section 2404, pursuant to subdivision (b)
(e) of Section 158, (ii)
2404, (B) the deletion from the articles
of incorporation of the provisions described or
referred to in subdivision (a) of Section 158
2404 upon the voluntary termination of statutory
close corporation status pursuant to subdivisions (c) and
(e) subdivision (e) of Section 158
2404 and Section 2420 , (iii) the
involuntary cessation of close corporation status pursuant to
subdivision (e) of Section 158, or (iv) or (C)
the termination of a shareholders' agreement , as described in
Section 2408, pursuant to subdivision (b)
(g) of Section 300 that section
.
(f) Any stock split or reverse stock split, except the following:
(1) any stock split or reverse stock split if the corporation has
more than one class of shares outstanding and the split would have a
material effect on the proportionate interests of the respective
classes as to voting, dividends, or distributions; (2) any stock
split of a stock that is traded in the market and its market price as
of the date of directors' approval of the stock split adjusted to
give effect to the split was less than two dollars ($2) per share;
and (3) any reverse stock split if the corporation has the option of
paying cash for any fractional shares created by the reverse split
and as a result of that action the proportionate interests of the
shareholders would be substantially altered. Any shares issued upon a
stock split or reverse stock split exempted by this subdivision
shall be subject to any conditions previously imposed by the
commissioner applicable to the shares with respect to which they are
issued.
(g) Any change in the rights of outstanding debt securities,
except the following if they substantially and adversely affect any
class of securities: (1) to change the rights to interest thereon;
(2) to change their redemption provisions; (3) to make them
redeemable; (4) to extend the maturity thereof or to change the
amount payable thereon at maturity; (5) to change their voting
rights; (6) to change their conversion rights; (7) to change sinking
fund provisions; and (8) to make them subordinate to other
indebtedness.
(h) Any exchange incident to a merger, consolidation, or sale of
assets, other than a rollup transaction (as defined in Section
25014.6), in consideration of the issuance of equity securities of
another entity or any entity conversion transaction that meets the
following conditions:
(1) The exchange incident to a merger, consolidation, or sale of
assets or the entity conversion transaction, had the exchange
transaction involved the issuance of a security in a transaction
subject to the provisions of Section 25110, would have been exempt
from qualification by subdivision (f) of Section 25102, without
giving effect to paragraph (3) thereof, and either of the following
is applicable:
(A) (i) Not less than 75 percent of the outstanding equity
securities of each constituent or converting entity entitled to vote
on the proposed transaction voted in favor of the transaction, (ii)
not more than 10 percent of the outstanding equity securities of each
constituent or converting entity entitled to vote on the proposed
transaction voted against the transaction, and (iii) each constituent
or converting entity whose security holders are entitled to vote on
the proposed transaction is subject to a state statute that has
provisions for dissenters' rights for holders of equity securities
entitled to vote on the proposed transaction that do not vote in
favor of or voted against the transaction.
(B) (i) The transaction is solely for the purposes of changing the
issuer's state of incorporation or organization, or form of
organization, (ii) all the securities of the same class or series,
unless all the security holders of the class or series consent, are
treated equally, and (iii) the holders of nonredeemable voting equity
securities receive nonredeemable voting equity securities.
(2) The commissioner may, by rule, require the acquiring or
surviving entity to file a notice of transaction under this section.
However, the failure to file the notice or the failure to file the
notice within the time specified by the rule of the commissioner
shall not affect the availability of this exemption. An acquiring or
surviving entity that fails to file the notice as provided by rule of
the commissioner shall, within 15 business days after demand by the
commissioner, file the notice and pay to the commissioner a fee equal
to the fee payable had the transaction been qualified under Section
25110 or 25120.
(i) Any exchange of securities in connection with any merger or
consolidation or sale of corporate assets in consideration wholly or
in part of the issuance of securities or any entity conversion
transaction under, or pursuant to, a plan of reorganization that
pursuant to the provisions of the United States Bankruptcy Code
(Title 11 of the United States Code) has been confirmed or is subject
to confirmation by the decree or order of a court of competent
jurisdiction.