BILL ANALYSIS
AB 2752
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Date of Hearing: April 22, 2004
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Patricia Wiggins, Chair
AB 2752 (Chu) - As Amended: April 14, 2004
SUBJECT : Corporations
SUMMARY : Requires publicly traded corporations to have
corporate elections procedures in place which provide a process
for its shareholders to nominate a candidate for election as
director. Requires those procedures to be filed with the
Secretary of State (SOS) and to be made available to
shareholders. Specifically, this bill :
1)Requires a publicly traded company, as defined, to have in
place a process for its shareholders to nominate a candidate
or candidates for election as directors. This process shall
be known as its corporate election procedures.
2)Requires a domestic or foreign corporation, other than a
foreign association, qualified to transact intrastate business
to file a copy of its corporate election procedures with the
SOS within 120 days after the end of its 2004-05 fiscal year
or within 120 days of the effective date of this section,
whichever is later, and again whenever the corporate election
procedures are changed or amended.
3)Requires a corporation to make available a copy of its
corporate election procedures upon request of any shareholder,
and to disclose its corporate election procedures on the
company's website.
EXISTING LAW :
1)Establishes that directors of a corporation elected to hold
office at an annual meeting shall hold office until the next
annual meeting unless the corporation adopts provisions to
divide the board of directors into two or three classes to
serve for terms of two or three years, respectively.
(Corporations Code, Section 301 and 301.5)
2)Establishes the General Corporation Law which requires
domestic and foreign corporations to file statements annually
with SOS disclosing specified information concerning their
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operations and makes the information contained in the
statements open to public inspection. (Corporations Code,
Section 100 et seq.) The California Corporate Disclosure Act
of 2002 requires corporations to disclose additional
information, including information concerning their auditors,
the compensation paid to board members, and securities law
violations.
FISCAL EFFECT : The bill is keyed fiscal.
COMMENTS : This bill is necessary because it will provide
access to information regarding a corporation's election
procedures. According to the sponsor, Secretary of State Kevin
Shelley, and the author, "Disclosure of a corporation's election
procedures will serve to educate and inform its current and
potential shareholders. Indeed, such disclosures will provide
consumers with a magnifying glass to judge the appropriateness
of investing in a corporation that may or may not provide
shareholders with a reasonable means to affect change."
Securities and Exchange Commission (SEC) proposed rule. The SEC
is currently considering adopting rules (Exchange Act Rules
14a-11 for Security Holder Director Nominations) that would
require, under certain circumstances, companies to include in
their proxy materials security holder nominees for election as
director. Under the proposed rules, if 35% of shareholders
withhold a vote against directors it would trigger a process
that would give a large investor or group of shareholders the
right to place a director on a company's proxy.
According to the SEC, "These proposed rules are intended to
improve disclosure to security holders to enhance their ability
to participate meaningfully in the proxy process for the
nomination and election of directors."
The proposed rules specifically state that they would not
provide security holders with the right to nominate directors
where it is prohibited by state law. If the proposed rules are
adopted, many corporations would be forced to change their
election procedures. This bill would ensure that those new
procedures are on file with SOS's office.
Opponents' concerns. As introduced, this measure established
specific procedures that would enable shareholders to access a
corporation's proxy in order to nominate directors. The bill
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has been significantly amended to eliminate the mandated
election procedures in response to the concerns of the business
community.
However, the California Bankers Association and the California
Chamber of Commerce still have concerns about the bill. First,
they believe that the election procedures should be available
only to shareholders. Thus, they would like to see the bill
amended to clarify that a corporation's election procedures
would be made available to a shareholder "upon receipt of a
written request from the shareholder to the investor relations
representative of the corporation." The author has agreed to
accept this clarification.
They also oppose the bill's requirement that the information be
posted on the company's website for three reasons. First, they
oppose any government mandate on information that is required on
a website. Second, they argue that even if the state mandates
the information on a California corporation's website, it
cannot mandate information that must be posted on a foreign
corporation's website. Third, there are some small, publicly
traded corporations that do not have a website. In order to
address the second and third concerns, the Committee recommends
that the bill be amended to require the information be posted on
a company's website if the company has a website and that this
requirement only be applicable to domestic corporations.
Finally, the opponents have concerns with the provision that
requires a corporation to have "a process for shareholders to
nominate a director for election." Under the Sarbanes-Oxley
Act, corporations, with few exceptions, are required to have
nominating committees in place. By requiring a corporation to
have a process in place for shareholders to nominate a director,
the bill may mandate a process that allows for the direct
nomination of shareholders rather than a process that includes
the nominating committee.
The opponents believe the bill should be amended to require a
corporation to have "a process for shareholders to propose a
director for election." The author, sponsor and the opponents
are continuing to work to find a resolution to this issue.
Technical amendment. The requirements of the bill apply to
foreign corporations qualified to transact "intrastate"
business. The Committee recommends a technical amendment to
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change the reference to "interstate".
Related legislation. AB 55 (Shelley), Chapter 1015, Statutes of
2002 required greater disclosure for corporations that file
statements with SOS. AB 55 also created a restitution fund for
victims of corporate fraud.
AB 1000 (Dutra), pending in the Assembly, makes various technical
and cleanup changes to AB 55.
SB 1496 (Romero), pending in the Senate, requires financial
institutions and insurers to file the same disclosure statement
required of publicly-traded corporations. Additionally, the bill
requires disclosure of various facts and figures currently found on
corporate tax returns.
REGISTERED SUPPORT / OPPOSITION :
Support
Secretary of State Kevin Shelley (sponsor)
American Federation of State, County, and Municipal Employees
(AFSCME)
California Labor Federation, AFL-CIO
Opposition
Aetna, Inc.
California Business Roundtable
Sempra Energy
The Boeing Company
Analysis Prepared by : Margaret Gladstein / B. & F. / (916)
319-3081