BILL ANALYSIS �
AB 2260
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Date of Hearing: April 30, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2260 (Hagman) - As Amended: March 29, 2012
SUBJECT : Foreign corporations.
SUMMARY : Makes various changes to California's foreign
corporation law. Specifically, this bill :
1)Repeals provisions of California's foreign corporation law
pertaining to conducting business in the state, meeting
certain tests, and meeting specified provisions of the
Corporations Code.
2)Specifies that the Corporations Code shall not be construed to
authorize the state to regulate the organization or internal
affairs of a foreign corporation qualified to do business in
this state.
EXISTING LAW
1)Defines "foreign corporation" as any corporation other than a
domestic corporation and does not include a corporation or
association chartered under the laws of the United States.
�Corporations Code, Section 171]
2)Requires foreign corporations qualified to conduct business in
California to meet specified requirements including provisions
relating to the election and removal of directors,
shareholders'' rights, vote requirements, and mergers.
�Corporations Code, Section 2115]
3)Provides that directors of a foreign corporation transacting
intrastate business are liable to the corporation, its
shareholders, creditors, receiver, liquidator or trustee in
bankruptcy for the making of unauthorized dividends, purchase
of shares or distribution of assets or false certificates,
reports or public notices or other violation of official duty
according to any applicable laws of the state or place of
incorporation or organization, whether committed or done in
this state or elsewhere. Such liability may be enforced in the
courts of this state. �Corporations Code, Section 2116]
AB 2260
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FISCAL EFFECT : None.
COMMENTS :
According to the Author, "Historically, corporations have not
encountered conflicts between state laws. Controversies have
been resolved by involving a corporation's internal affairs by
applying the law of the state that created the corporation,
irrespective of where that corporation is located or does
business. This principle, known as the Internal Affairs
Doctrine, is an established principle underlying the American
free enterprise system, a state has an interest in promoting
stable relationships among parties involved in the corporations
it charters, as well as in ensuring that investors have an
effective voice in corporate affairs.
AB 2260 takes the proactive step of repealing Section 2115
before the federal courts strike it down and the state is forced
to spend additional taxpayer dollars defending and regulation
that keeps companies out of California. All this section of
code accomplishes is confusing well established national
corporate governance law. Why would a company take the chance of
subjecting itself to the extra regulation? We are seeing the
results of this type of short sighted and arrogant legislation
every time a company works to ensure that the "property" and
"payroll" triggers are never met. Thus, a new plant will be
built, and new jobs will be created but not in California."
The "internal affairs doctrine" of a corporation refers to the
relationship between and among the corporation and its
shareholders, creditors, officers and directors. Most
corporations do not need to be incorporated under the laws of
the state where they have their headquarters which brings
attention to why this measure may be needed. Promoters forming
a new corporation are free to select any state's laws to form
their new corporation. State laws differ with respect to their
requirement they impose on the internal affairs doctrine.
The efficient and profitable operation of a corporation demands
certainty and predictability regarding the corporate law that
applies to the company. In most states, there is no question
about which law applies to corporations regarding their
corporate governance. Indeed, it is a long-standing and
fundamental principle of corporate law that a corporation's
internal affairs are governed exclusively by the law of the
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state of incorporation. This is the Internal Affairs Doctrine.
In California, however, Section 2115 attempts to supplant that
law with California law. This situation can and does create
great uncertainty for foreign corporations operating in
California because the conflicting provisions come into play at
critical times, such as when a corporation is trying to
determine its shareholder vote for a merger. A corporation may
find that its local state law requires it to take one course of
action, while California state law requires it to take a
different course of action.
California has created statutes that conflict with the Internal
Affairs Doctrine for certain foreign corporations, i.e.,
corporations created under the laws of other states by enacting
Section 2115 of the Corporations Code. For those foreign
corporations to which it applies, Section 2115 can have
significant impacts.
A foreign corporation becomes subject to Corporations Code,
Section 2115 if: its shares are not traded on the New York Stock
Exchange (NYSE) or NASDAQ; and it meets the requirements
specified under current law which requires: over 50 percent of a
corporation's property be located in California, over 50 percent
of its payroll be paid in California, and over 50 percent of its
sales occur in California.
These factors are calculated annually in every corporation's
California tax return, and each can change from year-to-year.
If these criteria are met, 50 percent of the corporation's
voting shares must be held "of record" by Californians. The
statute allows a corporation to: ignore the beneficial owners,
request that nominee holders certify the number of shares held
by persons with addresses inside and outside California; request
that nominees provide the names and addresses of the beneficial
owners who do not object to such disclosures
Corporations Code, Section 2115 imposes 22 sections of the
Corporations Code on corporations organized in other states that
have substantial business in California. Corporations Code,
Section 2115 does not apply to publicly traded corporations.
These provisions include such fundamental matters as shareholder
voting requirements, the election and removal of directors, and
mergers and acquisitions. Corporations Code, Section 2115 thus
attempts to supplant the law of the state in which the foreign
corporation is organized. AB 2260 would conform California law
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to the corporate law that prevails in most other jurisdictions:
that the internal affairs of a corporation are governed by the
law of the State in which the corporation is organized and which
the organizers and shareholders have selected.
REGISTERED SUPPORT / OPPOSITION :
Support
The State Bar of California
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081