BILL ANALYSIS Ó
AB 434
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Date of Hearing: April 29, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AB 434 (Hagman) - As Introduced: February 15, 2013
SUBJECT : Preferred shares: rights and preferences distributions.
SUMMARY : Provides clarity to the California Corporations Code by
cleaning up references to old code sections previously repealed
and altered in 2011.
EXISTING LAW
1)Establishes the Corporations Code to provide the fundamental
terms and provisions for the governance of corporations.
Corporations Code Sections 400-423 relate to shares and share
certificates. Corporations Code Sections 500-511 relate to
dividends and requisition of shares.
2)Provides the rights, preferences, privileges, and restrictions
granted to or imposed upon a class or series of preferred shares
the designation of which includes either the word "preferred" or
the word "preference" may:
a) Provision requiring a vote of a specified percentage or
proportion of the outstanding shares of the class or series
that is less than a majority of the class or series to
approve any corporate action, except where the vote of a
majority or greater proportion of the class or series is
required by this division, regardless of restrictions or
limitations on the voting rights thereof.
b) Provide that a corporation may voluntarily wind up and
dissolve only upon the vote of a specified percentage (which
shall not exceed 662/3 percent) of such class or series.
c) Provide that Section 502 or 503 not apply in whole or in
part with respect to distributions on shares junior to the
class or series. (Corporations Code, Section 402.5)
3)Provides that neither a corporation nor any of its subsidiaries
shall make any distribution to the corporation's shareholders
unless the board of directors has determined in good faith
either of the following:
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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.
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.
(Corporations Code, Section 500)
4)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 if the articles of incorporation provide that a
distribution can be made without regard to preferential
dividends arrears amount, then the preferential dividends
arrears amount shall be zero. (Corporations Code, Section 500)
5)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, including
accrued but unpaid dividends, of other shareholders upon
dissolution that are superior to the rights of the shareholders
receiving the distribution, provided that if the articles of
incorporation provide that a distribution can be made without
regard to any preferential rights, then the preferential rights
amount shall be zero. (Corporations Code, Section 500)
FISCAL EFFECT : None.
COMMENTS :
AB 434 is a clean-up measure to AB 571 (Hagman) signed into law in
2011. AB 571 updated sections of the Corporations Code governing
the issues of dividends and redemption of shares by California
Corporations. AB 571 repealed Corporations Code 502 and amended
section 503 to address a completely different matter than it did
before. However, both section 502 and the pre-revision version of
section 503 are referenced in current Corporations Code 402.5.
According to the sponsor, the Conference of California Bar
Associations, "this creates confusion and, more importantly, could
lead to the rejection by the Secretary of State's (SOS) office in
regards to corporate documents submitted for filing that include
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incorrect language in Section 402.5 (c)."
AB 434 corrects this problem by amending Corporations Code,
Section 402.5 to remove the incorrect statutory references, to
substitute the appropriate reference to Section 500, and to
include the terms defined in that section to allow the articles of
incorporation to waive the restriction on corporate distribution
to junior shares where senior shareholders preferential rights are
not met in full.
In addition, according to the author, "documents filed by
businesses with the SOS are being rejected because they include
language with references to code sections that are now nonexistent
or incorrect. AB 434 would correct the improper references in
California's Corporation Code to alleviate this additional burden
on our state's businesses."
PREVIOUS LEGISLATION :
AB 571 (Hagman, Chapter 203, Statutes of 2011) amended and deleted
portions of the General Corporation Law concerning dividends and
reacquisitions of shares.
REGISTERED SUPPORT / OPPOSITION :
Support
Conference of California bar Association (Sponsor)
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081