BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
AB 434 (Hagman) Hearing Date: June 5,
2013
As Introduced: February 15, 2013
Fiscal: No
Urgency: No
SUMMARY Would correct a code section reference that was
inadvertently not corrected by AB 571, Hagman, Chapter 203,
Statutes of 2011.
DESCRIPTION
1. Would provide that, notwithstanding Corporations Code
Section 500(a), a distribution may be made without regard to
the preferential dividends arrears amount or any
preferential rights amount, or both.
EXISTING LAW
2. Pursuant to changes made by AB 571, Hagman, Chapter 203,
Statutes of 2011, 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.
3. 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
AB 434 (Hagman), Page 2
distribution is being made, as specified.
4. 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.
5. Provides that neither a corporation nor any of its
subsidiaries shall make 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, likely to be unable to meet its
liabilities, as specified.
COMMENTS
1. Purpose: This bill is sponsored by the Conference of
California Bar Associations to correct a drafting error in a
2011 bill sponsored by the Corporations Committee of the
Business Law Section of the California State Bar.
2. Background: AB 571 (Hagman), Chapter 203, Statutes of 2011,
updated sections of the Corporations Code governing the
issuance of dividends and redemption of shares by California
corporations. According to its sponsor, AB 571 did all of
the following: 1) simplified and clarified the formula
pursuant to which California corporations may make
distributions to shareholders; 2) removed unnecessarily
rigid restrictions on the ability of financial healthy
California corporations to make distributions to
shareholders; 3) eliminated 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) enabled
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)
aligned the approach used by California to restrict the
issuance of dividends and distributions with the approach
used by other states, and, in doing so, removed an existing
competitive disadvantage experienced by California
corporations.
AB 434 (Hagman), Page 3
AB 571 neglected to make a conforming change to Corporations
Code Section 402.5. This bill corrects that drafting
oversight.
3. Summary of Arguments in Support: The Conference of
California Bar Associations (CCBA) is sponsoring AB 434 to
correct the drafting oversight referenced above. AB 571
repealed Corporations Code Section 502 and amended Section
503. As amended, Section 503 addresses a subject very
different than the subject it addressed prior to enactment
of AB 571. Unfortunately, Corporations Code Section 402.5
references the now-repealed Section 502 and the old version
of Section 503. This not only creates confusion, but has
led to rejection by the Secretary of State's office of
corporate documents submitted for filing that include the
incorrect language from Section 402.5. According to CCBA, AB
434 "makes no substantive changes to shareholder rights, but
only corrects and clarifies rights the Legislature has
already endorsed."
4. Summary of Arguments in Opposition: None received.
5. Prior and Related Legislation:
a. AB 571 (Hagman), Chapter 203, Statutes of 2011:
Updated California's Corporations Code to simplify the
formula used by corporations to determine whether and in
what amounts they may issue dividends and make other
distributions to shareholders.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Conference of California Bar Associations (sponsor)
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102
AB 434 (Hagman), Page 4