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: 7/5/11 in Senate
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.
Senate Floor Amendments of 7/5/11 correct code section
references and delete unnecessary code sections.
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:
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A. The distribution may be made if the amount of the
retained earnings of the corporation immediately
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).
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This bill:
1. Prohibits a California corporation or any of its
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.
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6. Deletes the existing law requirement that each dividend,
other than one chargeable to retained earnings, be
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 7/5/11)
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.
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This bill's sponsor asserts that existing California law
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 7/5/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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