BILL ANALYSIS �
AB 2260
Page 1
ASSEMBLY THIRD READING
AB 2260 (Hagman)
As Amended March 29, 2012
Majority vote
BANKING & FINANCE 11-0
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|Ayes:|Eng, Achadjian, Charles |
| |Calderon, Fuentes, Gatto, |
| |Harkey, |
| |Roger Hern�ndez, Lara, |
| |Morrell, Perea, Torres |
| | |
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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
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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)
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 a 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
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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
state of incorporation. This is the Internal Affairs Doctrine.
In California, however, Corporations Code 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
Corporations Code Section 2115. 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% of a
corporation's property be located in California, over 50% of its
payroll be paid in California, and over 50% 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% 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; and,
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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. This bill would conform California
law 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.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0003439