BILL ANALYSIS
AB 2158
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Date of Hearing: May 3, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2158 (Hagman) - As Amended: April 22, 2010
SUBJECT : Corporations.
SUMMARY : Makes changes to a closely held corporation formed
and organized that may elect to be a close corporation.
Specifically, this bill :
1)Reorganizes the Corporations Code applicable to close
corporations into a separate chapter.
2)Replaces the term "close corporation" with "statutory close
corporation."
3)Revises the number of persons who are shareholders of record
to conform more closely to the S corporation rules. An S
corporation, is a corporation that makes a valid election to
be taxed under Subchapter S of Chapter 1 of the Internal
Revenue Code.
4)Authorizes a close corporation to eliminate or dispense with
the general requirement of a board of directors while it has
statutory close corporation status.
5)Provides that a close corporation would not have the power to
have more shareholders of record than the statute allows and
the close corporation's status would terminate only as the
result of an amendment to its articles.
6)Allows shareholders to agree that one shareholder or
shareholders with less than 50% of the voting power could
elect to dissolve voluntarily.
7)Provides that shareholders would be able to agree that more
than one shareholder could be required for standing to
petition for involuntary dissolution.
8)Deletes the sunset date that provides that "all members of the
board" includes an "interested director" or a "common
director" who abstains in writing from providing consent if
specified disclosures have been made to certain directors, the
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disclosures are included in the written consent, and these
directors approve the action by a specified vote.
EXISTING LAW
1)Defines a "close corporation" as a corporation whose articles
contain a provision that all of the corporation's issued
shares of all classes shall be held of record by not more than
a specified number of persons, not exceeding 35, and a
statement "This corporation is a close corporation."
[Corporations Code Section 158]
2)Provides that a close corporation ceases to be a close
corporation upon the filing of a specified amendment to its
articles or under certain circumstances as a result of a
specified transfer of share. [Corporations Code Section 158]
3)Provides any attempted voluntary inter vivos transfer of the
shares of a close corporation resulting in the number of
holders of record of its shares exceeding the maximum
specified in the articles is void if the certificate contains
a specified legend. [Corporations Code Section 158]
4)Establishes that an involuntary dissolution of a close
corporation requires a verified complaint to be filed by any
shareholder of a close corporation. [Corporations Code
Section 158]
FISCAL EFFECT : Although deemed non-fiscal, this measure may
bring unintended costs absorbed by the SOS's office.
COMMENTS :
AB 2158 seeks to organize the Corporations Code related to close
corporations by moving the subject into a separate chapter and
changing "close corporations" to "statutory close corporations."
The new section would be added to the Corporations Code,
Chapter 24, commencing with Section 2400, titled Statutory Close
Corporations. Statutory close corporations status is available
for professional corporations organized under the Moscone-Knox
Professional Corporation Act.
In addition to consolidating the close corporation code sections
into one chapter, this bill makes other changes including:
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1)Providing that a corporation would not have the power to issue
shares or to register a transfer of shares that would cause
the number of shareholders or record to exceed its maximum
permitted number and requiring all outstanding shares of the
corporation to be certificated.
2)Expanding the counting rules for determining the number of
persons who are shareholders of record which would make
California law more similar to an S corporation as defined
under the Internal Revenue Code (26 U.S.C 1361) which is a
corporation that has elected to be taxed like a partnership,
muck like the statutory close corporation is an election by a
corporation to be governed like a partnership.
3)Providing a mechanism for the shareholders to restrict or
eliminate any of the expanded counting rules to further limit
the number of persons that may be shareholders of record.
4)Requiring the legend on the certificates representing shares
of a statutory close corporation to be "on the certificate"
rather then "on the face."
5)Requiring a corporation to provide to any shareholder, upon
request and without charge, copies of the articles, bylaws,
and any shareholders' agreement on file with the corporation.
6)Adding to the list of expressly permitted deviations from
general corporate law that shareholders of a statutory close
corporation may, in a shareholder's agreement, agree to
eliminate or dispense with the general requirement of a board
of directors.
7)Expressly providing that any agreement to eliminate or
dispense with the board must be effectuated by a statement in
the articles.
8)Expressly providing that termination of statutory close
corporation status would not affect the rights of shareholders
under any other agreement or the articles or bylaw unless
prohibited by law.
9)Authorizing that shareholders of a statutory close corporation
to agree that as few as one shareholder, or shareholders with
less than 50% of the voting power, could elect to dissolve.
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Requires notice to all other shareholders and commencement of
wind up and liquidation within 31 days.
ARGUMENTS IN SUPPORT: According to the sponsor, the Business
Law Section, Corporations Committee, of the California State
Bar, "provisions that specifically apply to close corporations
were enacted as a part of the broad adoption of the General
Corporation Law of 1975. These provisions are scattered
throughout the Corporations Code, making the rules governing
these corporations difficult to find."
According to the Sponsor, the reorganization of the Corporations
Code will allow statutory close corporations to work more
efficiently and effectively.
ARGUMENTS IN OPPOSITION: According to the opposition, Secretary
of State, Debra Bowen, AB 2158 does not address what the
statement of information, filed with the Secretary of State's
office, should include if the shareholders eliminate the Board
of Directors.
Current law requires corporations to file a statement of
information with the SOS's office listing the entity's address,
the name and address of the agent for service of process and the
name and address of the principals of the entity, which includes
the Board of Directors. The names and addresses of the
principals of a corporation are used by enforcement and taxing
agencies, banks and the general public to validate individuals
acting on behalf of a corporation, as well as for contacts and
for legal process. Under AB 2158, this information is not
provided when the Board of Directors is eliminated, so
enforcement and taxing agencies, banks and the general pubic
will have no or limited ability to take action against a
corporation.
The SOS's office is recommending amendments to require judicial
dissolution in all instances for statutory close corporations,
or to specifically address the certificate of dissolution when
the shareholders have eliminated the board of directors.
Current law requires a certificate of dissolution to be filed
for a voluntary dissolution which is required to be signed by a
majority of directors in office. AB 2158 may cause confusion by
allowing the board of directors to be eliminated by the
shareholders with the potential outcome that the required
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signatures could not be provided and the corporation could not
dissolved.
REGISTERED SUPPORT / OPPOSITION :
Support
Business Law Section, State Bar of California (Sponsor)
Opposition
Secretary of State, Debra Bowen
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081