BILL ANALYSIS Ó
AB 571
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 571 (Hagman)
As Amended July 5, 2011
Majority vote
-----------------------------------------------------------------
|ASSEMBLY: |74-0 |(May 9, 2011) |SENATE: |37-0 |(July 14, |
| | | | | |2011) |
-----------------------------------------------------------------
Original Committee Reference: B. & F.
SUMMARY : Seeks to amend and delete portions of the General
Corporation Law concerning dividends and reacquisitions of
shares. Specifically, this bill :
1)Provides that a corporation cannot distribute to its
shareholders unless the board of directors has determined in
good faith the following:
a) The amount 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) Immediately after the distribution the value of the
corporation's assets would equal or exceed the sum of its
total liabilities plus the preferential rights amount.
2)Defines "preferential dividends arrears amount" as an amount
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,
provided that a distribution can be made without regard to
preferential dividends arrears amount, then the amount shall
be zero.
3)Defines "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.
4)Allows the board of directors to determine that distributions
are not prohibited on the following:
a) Financial statements prepared on the basis of accounting
AB 571
Page 2
practices and principles;
b) A fair valuation; and,
c) Any other method that is reasonable under the
circumstances.
5)Deletes the requirement that corporations provide notice to
shareholders with respect to a dividend other than one
chargeable to retained earnings, stating that dividend is
being made from a source other than retained earnings.
The Senate amendments correct code section references and delete
unnecessary code sections.
EXISTING LAW establishes the Corporations Code to provide the
fundamental terms and provisions for the governance of
corporations. Corporations Code Sections 500-511 relate to
dividends and requisition of shares.
AS PASSED BY THE ASSEMBLY , this bill was substantially similar
to the version passed by the Senate.
FISCAL EFFECT : None
COMMENTS : According to the sponsor, the Business Law Section,
Corporations Committee, of the State Bar of California, this
measure is necessary to replace the unnecessarily complicated
and rigid balance sheet and liquidity tests in the existing
statute with tests that permit a corporation to distribute cash
or property to shareholders (whether as a dividend or repurchase
or redemption of shares) if, after giving effect to the
distribution, the value of the corporation's assets equals or
exceeds the sum of its liabilities and the liquidation
preference of any preferred stock, and provides the corporation
with greater flexibility in how to value assets and liabilities.
This bill would provide that a corporation's board of directors
may base a determination that the value of its assets exceeds
the amount of its liabilities on financial statements prepared
on the basis of accounting practices and principles that are
reasonable in the circumstances, a fair valuation, or any other
method that is reasonable under the circumstances. The proposed
statute would not change the ability of a corporation's board of
directors to declare a dividend out of retained earnings as
provided under the existing statute. All distributions will
AB 571
Page 3
continue to be subject to the same solvency test that is applied
under the existing statute.
According to the author, this measure will simplify and clarify
the formula pursuant to which corporations may make
distributions to shareholders; remove unnecessarily rigid
restrictions contained in the existing balance sheet and
liquidity tests on the ability of financially, healthy
corporations to make distributions to shareholders; eliminate
material substantive differences in the standards relating to
dividends and distributions applicable to California
corporations, on the one hand, and California limited liability
companies and limited partnerships, on the other hand; enable
shareholders of S-corporations to receive dividends or
distributions to satisfy their tax obligations related to their
ownership interests to the same extent that partners or members
of a limited partnership or limited liability company can
receive such distributions; and, make the approach used by
California to restrict distributions more consistent with the
approach used in other states so that California will not be
competitively disadvantaged in attracting new businesses.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0001533