BILL ANALYSIS
AB 1233
Page 1
Date of Hearing: May 12, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1233 (Silva) - As Amended: May 6, 2009
PROPOSED CONSENT
SUBJECT : NONPROFIT AND CONSUMER COOPERATIVE CORPORATIONS
KEY ISSUE : SHOULD VARIOUS TECHNICAL AND CLARIFYING CHANGES BE
MADE TO SECTIONS OF THE CORPORATIONS CODE PERTAINING TO
NONPROFIT AND CONSUMER COOPERATIVE CORPORATIONS, SO THAT THOSE
CORPORATIONS MAY HAVE MORE CERTAINTY IN THEIR OPERATIONS?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This non-controversial bill, sponsored by the Business Law
Section of the State Bar, seeks to make technical and clarifying
changes to sections of the Corporations Code pertaining to
nonprofit and consumer cooperative corporations, so that those
corporations may carry out their operations with more certainty.
This bill makes these changes to code concerning a wide range
of topics affecting the organization and operation of these
nonprofit corporations, including directors' rights, the
authorized number of directors, quorum requirements, board
committees, officer titles and board reliance on committees.
The bill also seeks, among other things, to authorize
streamlined merger and liquidation processes as well as default
provisions in the case of third party approvals, and a procedure
for reducing the size of the board of directors. This bill
passed the Banking and Finance Committee by a 9-0 vote and has
no known opposition.
SUMMARY : Seeks to make technical, clarifying and
non-controversial changes to various sections of the
Corporations Code pertaining to the organization and operation
of nonprofit and consumer cooperative corporations.
Specifically, this bill :
1)Clarifies that a person who does not have authority to act as
a member of the governing board is not a director, but if the
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articles or bylaws designate that a natural person is a
director or a member of the governing body because he or she
occupies a certain position, then that person is a director
for all purposes and shall have the same rights, including
voting rights, as the other directors.
2)Provides that any requirement for approvals to be made by
non-members or non-directors shall not apply if any of the
following circumstances exist:
a) The specified person or persons have died or ceased to
exist.
b) If the right of the specified person or persons to
approve is in the capacity of an officer, trustee, or other
status and the office, trust, or status has ceased to
exist.
c) If the corporation has specific proposal for amendment
or repeal, and the corporation has provided written notice
of that proposal, including a copy of the proposal, to the
specified person or person at the most recent address for
each of them, based on the corporation's records, and the
corporation has not received written approval or
nonapproval within the period specified in the notice,
which shall not be less than 10 nor more than 30 days
commencing at least 20 days after the notice has been
provided.
3)Provides that where directors are authorized to hold office by
virtue of designation by a specified designator, as provided
by the articles or bylaws rather than by election, the
entitlement to designate shall not apply if any of the
following circumstances exist:
a) The specified designator or designators have died or
ceased to exist.
b) If the entitlement of the specified designator or
designators to designate is in the capacity of an officer,
trustee, or other status, and the office, trust, or status
has ceased to exist.
4)Authorizes the articles or bylaws to require the presence of
one or more specified directors in order to constitute a
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quorum of the board to transact business;
5)Allows the bylaws to provide for a method or formula for
determining the number of directors on the board of directors.
6)Prohibits a committee exercising the authority of the board
from including, as members, persons who are not directors;
clarifies that each director of a nonprofit corporation has
only one vote and no director may vote by proxy.
7)Authorizes the board to create other committees with
nondirectors that do not exercise the authority of the board,
and clarifies that board committees may only have directors as
members.
8)Allows a corporation to use any of four titles (similar to
"chairman of the board") to designate the individual who
serves in this statutory officer role, and further allows a
corporation to have a "treasurer or chief financial officer or
both" in the interest of providing consistency in officer
titles.
9)Authorizes a nonprofit corporation under certain
circumstances, including when it is impossible to find a
sufficient number of directors to constitute a quorum, to
proceed with steps to voluntarily dissolve without requiring
an election of more directors simply to accomplish that
purpose.
10)Clarifies the types of committees can be relied upon by the
board of directors for the purpose of delegating certain
authorized functions to those committees.
11)Allows a nonprofit religious corporation that is a private
foundation to meet intermediate requirements for tax exempt
status under federal law without obligating the corporation to
include specified language in its governing instrument.
12)Clarifies that as long as a nonprofit medical association
maintains a liability insurance policy that is applicable to a
particular claim, then the directors and officers shall enjoy
limited liability, as specified.
13)Authorizes a one-step merger process for nonprofit
unincorporated associations to merge with nonprofit or
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consumer cooperative corporations.
EXISTING LAW , the Nonprofit Corporation Law, regulates the
organization and operation of nonprofit public benefit
corporations, nonprofit mutual benefit corporations, and
nonprofit religious corporations, as defined. (Division 2 of
Title 1 of the Corporations Code, commencing with Section 5000.)
In addition, existing law, the Consumer Cooperative Corporation
Law, regulates the organization and operation of consumer
cooperative corporations, as defined. (Part 2 of Division 3 of
Title 1 of the Corporations Code, commencing with Section 12200.
All further references are to sections of the Corporations
Code, unless otherwise noted.) Specifically, existing law:
1)Defines "directors" as a natural person, designated in the
articles or bylaws or elected by the incorporators, as well as
natural persons designated, elected or appointed by any other
name or title to act as members of the governing body of the
corporation. (Section 5047.)
2)Authorizes the articles of incorporation and bylaws of
nonprofit corporations and consumer cooperatives to contain
certain provisions, including, but not limited to, a provision
requiring that an amendment or repeal of those articles or
bylaws be approved in writing by a specified person or persons
other than the board. (Section 5132 (c).) Also authorizes
the articles or bylaws to provide for the designation or
selection of directors by a specified person or persons rather
than by election by a member or members and similarly to
authorize a specified person or persons to remove a designated
or selected director. (Section 5220.)
3)Specifies that a majority of the number of directors,
authorized in the articles or bylaws, constitutes a quorum for
the transaction of business of a nonprofit corporation or a
consumer cooperative corporation. (Sections 5211, 7211, 9211,
and 12351.)
4)Authorizes a board of a nonprofit corporation or a consumer
cooperative to form one or more committees consisting of 2 or
more directors to serve at the pleasure of the board and
provides that these committees have the authority of the
board. (Sections 5210, 7210, 9210, and 12350.)
5)Requires a nonprofit corporation or consumer cooperative to
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have a chairman or a president or both, a secretary, a chief
financial officer, and other officers as provided in the
bylaws or determined by the board. (Sections 5213, 7213,
9213, and 12353.)
6)Authorizes a nonprofit corporation or consumer cooperative to
elect to voluntarily wind up and dissolve by approval of a
majority of the members, as defined, or by approval of the
board and approval of the members, as defined. (Section
6610.)
7)Provides that certain public benefit corporations deemed to be
private foundations, as defined, are subject to Federal
Internal Revenue Code requirements. (Section 5260.)
8)Prohibits a cause of action for monetary damages from arising
against any director or officer of a nonprofit corporation or
a nonprofit medical association, who serves without
compensation, on account of any specified negligent act or
omission if the nonprofit corporation or nonprofit medical
association has a general liability insurance policy in a
specified amount that is in force both at the time of the
injury and at the time the claim is made. (Section 24001.5.)
9)Authorizes an unincorporated association to merge into a
specified corporation, limited partnership, general
partnership, or limited liability company. (Section 5063.5 &
12242.5.)
COMMENTS : This non-controversial bill, sponsored by the
Business Law Section of the California State Bar, seeks to
clarify and improve the application of existing Corporations
Code sections for the benefit of nonprofit and consumer
cooperative corporations. These code sections concern a wide
range of topics affecting the organization and operation of
these corporations, including directors' rights, the authorized
number of directors, quorum, board committees, officer titles
and board reliance on committees. This bill also seeks to
authorize streamlined merger and liquidation processes, default
provisions in the case of third party approvals, and procedures
for board reductions, among other things.
The Bill Clarifies the Role of "Designators "to Designate
Directors in Specified Situations . The bill seeks to clarify
the role and authority of so-called "designators" when the
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articles or bylaws call for the designation of directors rather
than election. Importantly, the bill does not change existing
law concerning the rights of members, directors, boards of
directors and/or other persons or entities to designate or
select directors.
Section 5220(d) allows for designation of the directors by a
third party ("designator") entity or individual rather than
election by members. However, internal changes and turnover at
an institution with authority to designate a director may result
in no response at all when requests are made for appointment of
a replacement director. In some cases, the designating entity
may have dissolved or merged, or an individual with designating
authority is dead, in poor health, or otherwise incapable of
responding to a request for designation of a replacement
director. In those situations, failure to designate a
replacement director can have the effect of preventing the
corporation from conducting its business in the ordinary course
of events.
The bill revises Sections 5220(d) & 5222(f), 7220(d) & 7222(f),
and 12360(d) & 12362(h) with respect to "designators." These
three pairs of code provisions are structurally similar to each
other. In each case, the last sentence of the subdivision
(starting with "After this death?") has been deleted because if
a designator no longer exists, the ordinary statutory election
procedure for directors should apply to that directorship once
the incumbent's term expires and a vacancy arises.
Required Approvals by Nonmembers or Nondirectors . Part 2 of the
Nonprofit Corporation Law in two specified circumstances
requires approval of certain changes to the articles or bylaws
to be made by specified persons who are not members nor
directors of the corporation. First, Section 5132(c)(4) allows
the articles of incorporation to provide that amendment or
repeal of the articles of incorporation or bylaws must be
approved by a specified person or persons other than the board
or the members. Second, Section 5150(d) allows for the bylaws
to provide that amendment of the bylaws must be approved by a
specified person or persons other than the board or the members.
A problem arises where the specified person is unavailable to
fulfill his or her prescribed role to approve those changes. In
those situations, failure to provide for a replacement person
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who has the authority to make the approval can have the unwanted
effect of preventing the corporation from conducting its
business in the ordinary course of events.
This bill proposes a default solution to address this problem if
drafters of articles or bylaws do not. In such a situation the
authority defaults to the members or, if no members, to the
directors. Section 5222(f), relating to removals of directors,
is also amended to mesh with Section 5220(d) as amended.
Sections 7132(c)(5), 7150(d), 7220(d) and 7222(f) in the
Nonprofit Mutual Benefit Corporation Law and Sections 12330(d),
12360(d) and 12362(g) in the Consumer Cooperative Corporation
Law are amended similarly. Section 9132(c)(4) in the Nonprofit
Religious Corporation Law is amended to correspond with Section
5132(c)(4); there is no Religious Corporation Law provision
similar to Sections 5150(d) or 5220(d).
Clarification of Directors' Rights : According to the sponsor,
many nonprofit corporations utilize titles, including the word
"director", although such persons are not part of the governing
body of the corporation as specified in Corporation Code
Sections 5047 and 12233. AB 1233 would amend the definition of
"director" in Sections 5047 and 12233 to clarify that (1)
persons who have a title suggesting they are directors (e.g.,
"honorary directors," "directors emeritus," "advisory
directors") but who have not been designated, elected or
appointed to act as members of the corporation's governing body
and vote on actions or decisions taken by it on behalf of the
corporation are not directors for purposes of the code, and (2)
persons who become directors by reason of having a particular
status or holding a specified position ("ex officio directors")
are directors for all purposes. This would eliminate common
misperceptions and confusion about the ability of a nonprofit or
consumer cooperative corporation to have nonvoting directors and
about the voting rights of "ex officio" directors.
Method of Determining the Authorized Number of Directors :
According to the sponsor, nonprofit corporations sometimes wish
to determine the size of the board of directors by a formula
tied to specific objective factors. The Corporations Code
currently provides that the bylaws may fix the number of
authorized directors within a range specified by them, or the
board may determine the number of directors within that range by
resolution. However, there is no provision clearly permitting
the number of directors to be determined by a formula set forth
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in the bylaws.
AB 1233 would amend Sections 5151, 7151, 9151 and 12331 to allow
the bylaws to provide for a method of determining the number of
directors.
Quorum; One Director One Vote; No Proxy Voting by Directors :
According to the sponsor, nonprofit corporations may wish to
ensure that certain board actions may not be taken without the
presence, at the meeting where such action is taken, of certain
directors or constituencies who are on or represented on the
board. Sections 5211(a)(7), 7211(a)(7), 9211(a)(7), and
12351(a)(7) do not expressly provide that the requisite quorum
must include certain specified directors. This practice is
relatively common and expressly permitted in some other states.
The bill would state that the articles or bylaws may specify
that certain directors must be present for a quorum to exist, as
long as that does not prevent efficient decision-making for the
corporation when those directors die or the person or persons
authorized to appoint or elect them died or ceased to exist.
In addition, Sections 5211(a)(7), 7211(a)(7), 9211(a)(7), and
12351(a)(7) refer to the authorized number of directors as
stated in the articles or bylaws. In many cases, the bylaws
provide for a range of directors (for example from three to
nine) and the authorized number is set by the board in a
resolution. AB 1233 adds the language "or pursuant to" before
the articles or bylaws to clarify that the authorized number may
be the number authorized by resolution and not the highest end
of a range in the articles or bylaws.
Constituents of nonprofit corporations sometimes wish to permit
certain directors to possess more than one vote. However, that
is inconsistent with the Corporations Code and a director's
fiduciary duties. While existing law indicates that an action
or decision taken by a board of directors is determined by a
headcount of directors present rather than a vote cast by them,
that subtlety is not always clearly recognized by volunteers
trying to manage the affairs of a nonprofit corporation. In
addition, although the code does not expressly forbid a director
from participating in a decision by proxy, this restriction
should be made clear as such volunteers may not recognize the
risk of that being inconsistent with fiduciary duties.
AB 1233 adds a new subdivision (c) to Sections 5211, 7211, 9211
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and 12351 to state that each director has only one vote and no
director may vote by proxy.
Contrast Between Board Committees and Advisory Committees :
Sections 5212(a), 7212(a), 9212(a), and 12352(a) list
restrictions on the authority of board committees, including
"the approval of any action for which this part also requires
approval of the members ? or approval of a majority of all
members." This restriction applies to actions the law states
require approval by members as defined in Sections 5034 and 5033
(and Sections 12224 and 12223), regardless of whether the
corporation has or does not have members. To prevent confusion
in these situations, AB 1233 would add language clarifying that
the restriction applies regardless of whether the corporation
has members.
According to the sponsor, it is common practice for bylaws to
provide for the creation of both "board" committees - committees
comprised entirely of directors, to whom the board of directors
may delegate its authority, except as provided- and "advisory"
committees - committees that may be partially or wholly
comprised of non-directors, and which advise the board or board
committees or implement their decisions, but do not hold the
authority of the board.
AB 1233 amends Sections 5212(b), 7212(b), 9212(b), and 12352(b)
to clarify that board committees may only have directors as
members but that other committees with non-director members may
be created as long as they do not exercise the authority of the
board.
Consistent Nomenclature for Officers: "Chairman of the Board"
and "Chief Financial Officer" : Section 5213(a) of the
California Corporations Code currently sets forth the required
officers for a nonprofit public benefit corporation, requiring
that the corporation have a "chairman of the board or a
president or both." It also requires that the corporation have
a "chief financial officer" and a secretary. The same
requirements apply to mutual benefit corporations (Section
7213(a)), religious corporations (Section 9213(a)), and consumer
cooperative corporations (Section 12353(a)). For nonprofit
corporations in existence on December 31, 1979, which are
currently subject to the transition rule of Section 9916, and
consumer cooperative corporations subject to Section 12694, the
"treasurer" is deemed to be the "chief financial officer."
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Section 5062 defines an officers' certificate as a document
signed and verified by the chairman of the board or president
(or any vice president), and the secretary, chief financial
officer or treasurer (or any assistant secretary or treasurer).
This definition applies to public benefit, mutual benefit and
religious corporations. The same definition is found in section
12241 for consumer cooperative corporations.
The language of the current law allows the titles of "other
officers" to be at the board's discretion, but does not
expressly allow the board to change the title given to the
"chairman of the board." Many corporations prefer to use a
gender-neutral term for this officer, such as "chair of the
board" or "chairperson of the board," or to grant the
alternative title of "chairwoman of the board" when the person
holding this office is female. In recent years, the Secretary
of State's office has rejected officers' certificates signed
under a title that does not exactly match the statutory text
("chairman of the board"). AB 1233 would add Sections 5039.5
and 12228.5, and amend Sections 5213(a), 7213(a), 9213(a) and
12353(a) to state that a corporation may use any of these four
titles to designate the individual who serves in this statutory
officer role.
The "chief financial officer" is a named and required office in
Section 5213(a), 7213(a), 9213(a), and 12353(a), but a
"treasurer" is not. This language is inconsistent with the
treatment of the office of "president" and role of "chief
executive officer" in the same code section. This language also
causes confusion because many nonprofit corporations have both a
"treasurer" and a "chief financial officer," where the treasurer
is a board officer and the chief financial officer is an
executive staff member.
To provide consistency in officer titles in a manner that
conforms with many corporations' existing practices, this bill
would permit a corporation to have a "treasurer or a chief
financial officer or both." These sections and the transition
rule in section 9916 would also be changed to note that unless
otherwise provided in the corporation's articles or bylaws, the
treasurer will fulfill the role of "chief financial officer" if
there is no separate chief financial officer.
Reducing the Size of the Board : According to the sponsor, a
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nonprofit corporation occasionally will be engaged in a board
dispute whereby the board wishes to reduce the size of the
board, and the director occupying the seat that will be
terminated looks to the language "until a successor has been
elected and qualified" in Section 5220(b) as evidence that
unless that director is actually removed from the board, the
director continues to serve. Section 5222(c) further states
that any reduction of the authorized number of directors does
not remove any director prior to the expiration of that
director's term of office.
To remedy this problem, AB 1233 amends Sections 5220(b) and
5222(c) to state that this is the case unless the director has
been removed from office. The corresponding sections in the
Religious, Mutual Benefit and Consumer Cooperative Corporation
Law, i.e., Sections 7220(b), 7222(c), 9220(c), 9222(c),
12360(b), and 12362(d) would also be amended.
Board Reliance on Committees. Under Sections 5210, 7210, 9210,
and 12350, the board may delegate the management of the
activities of the corporation to anyone, although it retains
ultimate responsibility. Under Sections 5212, 7212, 9212, and
12352, the board may delegate board authority, within specified
limits, to committees of the board composed only of two or more
directors. Under subsection (b)(3) of Sections 5231, 7231,
9241, and 12371, in discharging their fiduciary duties,
directors may rely on "information, opinions, reports or
statements prepared or presented by" a "committee of the board
upon which the director does not serve," as to matters within
its designated authority. It is assumed in practice the only
committee on which a director may rely is a committee that
complies with Section 5212 (and its parallel sections), but
Section 5231(b)(3) does not expressly provide this limitation.
The proposed amendment to Sections 5231(b)(3), 7231(b)(3),
9241(b)(3), and 12371(b)(3) clarifies what committees can be
relied upon by substituting the ambiguous phrase, "committee of
the board," with a description of committees composed entirely
of directors. AB 1233 also widens the reliance category to
include advisory committees composed of (i) those with fiduciary
duties to the corporation (e.g., officers and employees), (ii)
those with relevant professional expertise (e.g., attorneys and
accountants), and (iii) directors.
Voluntary Dissolution When No Quorum of Directors Exists.
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Section 6610 currently requires "approval of the board" for
voluntary dissolution of a nonprofit public benefit corporation
if there are no members and in certain other situations.
Similar rules apply to mutual benefit and religious corporations
in Sections 8610 and 9680 and to consumer cooperative
corporations in Section 12630.
By the time corporations find it appropriate to dissolve, it is
often impossible to find a sufficient number of directors to
make up the quorum necessary for that approval. Although
Section 5224 of the Code (and similar provisions in Sections
7224, 9224 and 12364) would allow the remaining directors to
elect new directors to create a quorum in order to make this
election, it can be difficult to find directors willing to join
a board for the limited purpose of dissolving and winding up the
corporation. This technical step should not be necessary before
dissolving.
AB 1233 would revise the requirement for board approval of a
voluntary dissolution under Section 6610, by adding a new
Subsection 6610(c). Under subsection (c), if the corporation
would be permitted to dissolve by approval of the board, but the
number of directors then in office is less than a quorum, an
action by the board to elect to dissolve could be taken by the
same vote as would be required under Section 5224 for the
election of additional directors (that is, by a unanimous
consent of all remaining directors, a vote of a majority of the
remaining directors at a meeting, or the approval of the sole
remaining director). Furthermore, after such an election to
dissolve, any actions by the board during the period of winding
up and dissolving, including an election to revoke the
dissolution, would also require only the same vote that was
required for the dissolution. AB 1233 eliminates the need for a
board that is less than a quorum to recruit and elect more board
members to operate the corporation during this period.
Corresponding changes would be made to Sections 8610, 9680, and
12630 to apply the same rules to mutual benefit corporations,
religious corporations and consumer cooperative corporations.
Allowing Religious Corporations to More Easily Satisfy IRS
Requirements. A private foundation is not tax exempt under
federal law unless its governing instrument contains special
provisions in addition to those required of all other
organizations holding tax-exempt status under Internal Revenue
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Code Section 501(c)(3). A private foundation's governing
instrument is considered to satisfy this requirement if
applicable state law obligates it: (i) to act or refrain from
acting so as not to subject the foundation to the taxes imposed
on prohibited transactions, or (ii) to treat the mandatory
provisions as contained in the foundation's governing
instrument. Currently, Corporations Code Section 5260 allows a
public benefit corporation that is a private foundation as
described in that section to satisfy the IRS requirement without
including this language in its governing instrument. AB 1233
creates a new Section 9260 which makes the provisions of Section
5260 applicable to religious corporations.
Limitation of Personal Liability for Directors and Officers of
Nonprofit Medical Associations. Sections 5047.5 and 24001.5 of
the Corporations Code provide a limitation of personal liability
for officers and directors of nonprofit medical associations.
Both sections apply only if the nonprofit association maintains
a "general liability" insurance policy that is in force both at
the time of injury and at the time that the claim is made.
According to the sponsor, "general liability" insurance policies
often do not cover employment-related or other claims that are
brought against directors and officers. These claims frequently
are covered by director's and officer's liability policies or
employment practices liability policies. In practice, it is
often unnecessary to condition the limitation on liability on
whether the insurance policy was in force both at the time of
injury and at the time of claim, as long as the policy is
applicable to the claim.
This bill removes these two conditions, thus enabling nonprofit
medical associations to assure their directors and officers that
the statute provides the type of limitation on liability that
the Legislature intended.
Streamlining the Merger Process for Unincorporated Nonprofit
Associations . Under existing law, unincorporated nonprofit
associations may not merge into nonprofit or consumer
cooperative corporations due to the exclusion of nonprofit
associations from the definition of "other business entity" in
Corporation Code Sections 5063.5 and 12242.5. As a consequence,
such mergers presently occur in a two-step process: the
nonprofit association is first incorporated and then the merger
is consummated.
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To authorize a one-step merger process for nonprofit
unincorporated associations and streamline their merger with
nonprofit or consumer cooperative corporations, it is
recommended that Sections 5063.5 and 12242.5 be amended to
delete "other than a nonprofit association" so that all
unincorporated associations are included in the definition of
"other business entity."
This bill would also remove the restriction which limits
unincorporated associations to one-way mergers "into" a
corporation, limited or general partnership, or limited
liability company under Corporations Code Section 18360. The
bill would replace the word "into" with the word "with", which
is used in other sections of the Corporations Code to permit
two-way mergers by for-profit corporations, nonprofit
corporations, partnerships and limited liability companies.
REGISTERED SUPPORT / OPPOSITION :
Support
Nonprofit and Unincorporated Organizations Committee, Business
Law Section of the State Bar of California (sponsor)
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334