BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 2158
                                                                  Page  1

          Date of Hearing:   May 3, 2010

                                   Mike Eng, Chair
                    AB 2158 (Hagman) - As Amended:  April 22, 2010
          SUBJECT  :   Corporations.

           SUMMARY  :   Makes changes to a closely held corporation formed  
          and organized that may elect to be a close corporation.   
          Specifically,  this bill  :  

          1)Reorganizes the Corporations Code applicable to close  
            corporations into a separate chapter.

          2)Replaces the term "close corporation" with "statutory close  

          3)Revises the number of persons who are shareholders of record  
            to conform more closely to the S corporation rules.   An S  
            corporation, is a corporation that makes a valid election to  
            be taxed under Subchapter S of Chapter 1 of the Internal  
            Revenue Code.

          4)Authorizes a close corporation to eliminate or dispense with  
            the general requirement of a board of directors while it has  
            statutory close corporation status.  

          5)Provides that a close corporation would not have the power to  
            have more shareholders of record than the statute allows and  
            the close corporation's status would terminate only as the  
            result of an amendment to its articles.  

          6)Allows shareholders to agree that one shareholder or  
            shareholders with less than 50% of the voting power could  
            elect to dissolve voluntarily. 

          7)Provides that shareholders would be able to agree that more  
            than one shareholder could be required for standing to  
            petition for involuntary dissolution.  

          8)Deletes the sunset date that provides that "all members of the  
            board" includes an "interested director" or a "common  
            director" who abstains in writing from providing consent if  
            specified disclosures have been made to certain directors, the  


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            disclosures are included in the written consent, and these  
            directors approve the action by a specified vote.  

           EXISTING LAW  

          1)Defines a "close corporation" as a corporation whose articles  
            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 a  
            statement "This corporation is a close corporation."  
            [Corporations Code Section 158]

          2)Provides that a close 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 share.  [Corporations Code Section 158]

          3)Provides 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.  [Corporations Code Section 158]

          4)Establishes that an involuntary dissolution of a close  
            corporation requires a verified complaint to be filed by any  
            shareholder of a close corporation.  [Corporations Code  
            Section 158]

           FISCAL EFFECT  :   Although deemed non-fiscal, this measure may  
          bring unintended costs absorbed by the SOS's office.  

           COMMENTS  :   

          AB 2158 seeks to organize the Corporations Code related to close  
          corporations by moving the subject into a separate chapter and  
          changing "close corporations" to "statutory close corporations."  
           The new section would be added to the Corporations Code,  
          Chapter 24, commencing with Section 2400, titled Statutory Close  
          Corporations.  Statutory close corporations status is available  
          for professional corporations organized under the Moscone-Knox  
          Professional Corporation Act.  

          In addition to consolidating the close corporation code sections  
          into one chapter, this bill makes other changes including: 


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          1)Providing that a corporation would not have the power to issue  
            shares or to register a transfer of shares that would cause  
            the number of shareholders or record to exceed its maximum  
            permitted number and requiring all outstanding shares of the  
            corporation to be certificated.

          2)Expanding the counting rules for determining the number of  
            persons who are shareholders of record which would make  
            California law more similar to an S corporation as defined  
            under the Internal Revenue Code (26 U.S.C 1361) which is a  
            corporation that has elected to be taxed like a partnership,  
            muck like the statutory close corporation is an election by a  
            corporation to be governed like a partnership.  

          3)Providing a mechanism for the shareholders to restrict or  
            eliminate any of the expanded counting rules to further limit  
            the number of persons that may be shareholders of record. 

          4)Requiring the legend on the certificates representing shares  
            of a statutory close corporation to be "on the certificate"  
            rather then "on the face."

          5)Requiring a corporation to provide to any shareholder, upon  
            request and without charge, copies of the articles, bylaws,  
            and any shareholders' agreement on file with the corporation.   

          6)Adding to the list of expressly permitted deviations from  
            general corporate law that shareholders of a statutory close  
            corporation may, in a shareholder's agreement, agree to  
            eliminate or dispense with the general requirement of a board  
            of directors.  

          7)Expressly providing that any agreement to eliminate or  
            dispense with the board must be effectuated by a statement in  
            the articles.  

          8)Expressly providing that termination of statutory close  
            corporation status would not affect the rights of shareholders  
            under any other agreement or the articles or bylaw unless  
            prohibited by law.  

          9)Authorizing that shareholders of a statutory close corporation  
            to agree that as few as one shareholder, or shareholders with  
            less than 50% of the voting power, could elect to dissolve.   


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            Requires notice to all other shareholders and commencement of  
            wind up and liquidation within 31 days.  

          ARGUMENTS IN SUPPORT:  According to the sponsor, the Business  
          Law Section, Corporations Committee, of the California State  
          Bar, "provisions that specifically apply to close corporations  
          were enacted as a part of the broad adoption of the General  
          Corporation Law of 1975.  These provisions are scattered  
          throughout the Corporations Code, making the rules governing  
          these corporations difficult to find."  

          According to the Sponsor, the reorganization of the Corporations  
          Code will allow statutory close corporations to work more  
          efficiently and effectively.  

          ARGUMENTS IN OPPOSITION:  According to the opposition, Secretary  
          of State, Debra Bowen, AB 2158 does not address what the  
          statement of information, filed with the Secretary of State's  
          office, should include if the shareholders eliminate the Board  
          of Directors.  

          Current law requires corporations to file a statement of  
          information with the SOS's office listing the entity's address,  
          the name and address of the agent for service of process and the  
          name and address of the principals of the entity, which includes  
          the Board of Directors.  The names and addresses of the  
          principals of a corporation are used by enforcement and taxing  
          agencies, banks and the general public to validate individuals  
          acting on behalf of a corporation, as well as for contacts and  
          for legal process.  Under AB 2158, this information is not  
          provided when the Board of Directors is eliminated, so  
          enforcement and taxing agencies, banks and the general pubic  
          will have no or limited ability to take action against a  

          The SOS's office is recommending amendments to require judicial  
          dissolution in all instances for statutory close corporations,  
          or to specifically address the certificate of dissolution when  
          the shareholders have eliminated the board of directors.  

          Current law requires a certificate of dissolution to be filed  
          for a voluntary dissolution which is required to be signed by a  
          majority of directors in office.  AB 2158 may cause confusion by  
          allowing the board of directors to be eliminated by the  
          shareholders with the potential outcome that the required  


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          signatures could not be provided and the corporation could not  


          Business Law Section, State Bar of California (Sponsor)

          Secretary of State, Debra Bowen
          Analysis Prepared by  :    Kathleen O'Malley / B. & F. / (916)