BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   AB 571|
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                                 THIRD READING


          Bill No:  AB 571
          Author:   Hagman (R), et al.
          Amended:  4/25/11 in Assembly
          Vote:     21

           
           SENATE BANKING & FINANCIAL INST. COMMITTEE  :  6-0, 6/29/11
          AYES:  Vargas, Blakeslee, Kehoe, Liu, Padilla, Walters
          NO VOTE RECORDED:  Evans
           
          ASSEMBLY FLOOR  :  74-0, 5/9/11 - See last page for vote


           SUBJECT  :    Corporations:  distributions

           SOURCE  :     Corporations Committee of the Business Law 
                        Section of the California State Bar


           DIGEST  :    This bill updates sections of the Corporations 
          Code governing the issuance of dividends and redemption of 
          shares by California corporations.

           ANALYSIS  :    

          Existing law:

          1. Prohibits a California corporation or any of its 
             subsidiaries from making any distribution to the 
             corporation's shareholders, except as follows:

             A.    The distribution may be made if the amount of the 
                retained earnings of the corporation immediately 
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                prior to the distribution equals or exceeds the 
                proposed distribution (Corporations Code ÝCORP] 
                Section 500(a)).

             B.    The distribution may be made if, immediately 
                following the distribution, the sum of the assets of 
                the corporation would be at least equal to 125 
                percent of its liabilities, and:

                         Either the current assets of the 
                   corporation would be at least equal to its current 
                   liabilities, or, 

                         If the average of the earnings of the 
                   corporation before taxes on income and before 
                   interest expense for the two preceding fiscal 
                   years was less than the average of the interest 
                   expense for those fiscal years, the current assets 
                   of the corporation would be least equal to 125 
                   percent of its current liabilities, as specified 
                   (CORP Section 500(b)).

          2. Provides that the amount of any distribution payable in 
             property must be determined on the basis of the value at 
             which the property is carried on the corporation's 
             financial statements in accordance with generally 
             accepted accounting principles (CORP Section 500(c)).

          3. Prohibits a California corporation or its subsidiaries 
             from making any distribution to the corporation's 
             shareholders, if the corporation or the subsidiary 
             making the distribution is, or as a result of the 
             distribution would be, unable to meet its liabilities as 
             they mature, as specified (CORP Section 501; this bill 
             retains this provision).

          4. Provides that each dividend, other than one chargeable 
             to retained earnings, must be identified in a notice to 
             shareholders as being made from a source other than 
             retained earnings (CORP Section 507).

          This bill:

          1. Prohibits a California corporation or any of its 

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             subsidiaries from making any distribution to the 
             corporation's shareholders, unless the board of 
             directors of that corporation determines either of the 
             following in good faith:

             A.    The amount of retained earnings of the corporation 
                immediately prior to the distribution equals or 
                exceeds the sum of the amount of the proposed 
                distribution plus the preferential dividends arrears 
                amount; or 

             B.    The value of the corporation's assets immediately 
                after the distribution would equal or exceed the sum 
                of its total liabilities plus the preferential rights 
                amount.

          2. Defines the "preferential dividends arrears amount" as 
             the amount, if any, of cumulative dividends in arrears 
             on all shares having a preference with respect to 
             payment of dividends over the class or series to which 
             the applicable distribution is being made, as specified. 
              

          3. Defines the "preferential rights amount" as the amount 
             that would be needed if the corporation were to be 
             dissolved at the time of the distribution to satisfy the 
             preferential rights, including accrued but unpaid 
             dividends, of other shareholders upon dissolution that 
             are superior to the rights of the shareholders receiving 
             the distribution, as specified.

          4. Allows a board of directors to issue a distribution 
             based on financial statements prepared on the basis of 
             accounting practices and principles that are reasonable 
             under the circumstances, a fair valuation, or any other 
             method that is reasonable under the circumstances.  

          5. Clarifies that the effect of a distribution is measured 
             as of the date the distribution is authorized, if the 
             payment occurs within 120 days after the date of 
             authorization.

          6. Deletes the existing law requirement that each dividend, 
             other than one chargeable to retained earnings, be 

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             identified in a notice to shareholders as being made 
             from a source other than retained earnings.

          7. Adds a four year statute of limitations to any a cause 
             of action involving the obligation of a shareholder to 
             return a distribution.  

           FISCAL EFFECT :    Appropriation:  No   Fiscal Com.:  No   
          Local:  No

           SUPPORT  :   (Verified  6/30/11)

          Corporations Committee of the Business Law Section of the 
            California State Bar (source)
          Civil Justice Association of California


           ARGUMENTS IN SUPPORT  :    This bill is sponsored by the 
          Corporations Committee of the Business Law Section of the 
          California State Bar, to simplify the formula used by 
          corporations to determine whether and in what amounts they 
          may issue dividends and make other distributions to 
          shareholders.

          According to this bill's sponsor, this bill will accomplish 
          five things:  (1) simplify and clarify the formula pursuant 
          to which California corporations may make distributions to 
          shareholders; (2) remove unnecessarily rigid restrictions 
          on the ability of financial healthy California corporations 
          to make distributions to shareholders; (3) eliminate 
          material differences between the standards relating to 
          dividends and distributions by California corporations and 
          the standards relating to dividends and distributions by 
          California limited liability companies (LLCs) and limited 
          partnerships (LPs); (4) enable shareholders of 
          S-Corporations to receive dividends and/or distributions to 
          satisfy their tax obligations, just as partners or members 
          of LLCs and LPs are able to do; and (5) align the approach 
          used by California to restrict the issuance of dividends 
          and distributions with the approach used by other states, 
          and, in doing so, remove an existing competitive 
          disadvantage experienced by California corporations.  

          This bill's sponsor asserts that existing California law 

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          imposes unnecessary restrictions on the issuance of 
          dividends and other distributions by financially healthy 
          corporations, particularly those which have both historical 
          book losses and appreciated property.  Because these 
          corporations have no retained earnings, they are unable to 
          rely on CORP Section 500(a) to make distributions to their 
          shareholders.  These corporations might have assets with 
          values far in excess of liabilities, but cannot rely on 
          Section 500(b), because the carrying value of those assets 
          on their books is not reflective of their fair market 
          value.  


           ASSEMBLY FLOOR  :  74-0, 5/9/11
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, 
            Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, 
            Brownley, Buchanan, Charles Calderon, Campos, Carter, 
            Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, 
            Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, 
            Galgiani, Gatto, Gordon, Grove, Hagman, Halderman, Hall, 
            Harkey, Hayashi, Roger Hernández, Hill, Huber, Hueso, 
            Huffman, Jeffries, Jones, Knight, Lara, Logue, Bonnie 
            Lowenthal, Ma, Mendoza, Miller, Mitchell, Monning, 
            Morrell, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V. 
            Manuel Pérez, Portantino, Silva, Skinner, Solorio, 
            Swanson, Torres, Valadao, Wagner, Wieckowski, Williams, 
            Yamada, John A. Pérez
          NO VOTE RECORDED:  Butler, Garrick, Gorell, Mansoor, Smyth, 
            Vacancy


          JJA:kc  6/30/11   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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