BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 2668 (Committee on Banking & Finance)
As Introduced
Hearing Date: June 12, 2012
Fiscal: No
Urgency: No
RD
SUBJECT
Corporate Agents: Indemnification
DESCRIPTION
This bill would update internal cross-references and
descriptions of employee benefit plan fiduciaries in specified
sections of the Corporations Code.
The bill would make other technical, non-substantive changes.
BACKGROUND
Within California's General Corporation Law, Corporations Code
Section 317 generally governs the indemnification of a
corporation's agents, as specified, upon meeting certain
requirements. Additionally, under Section 204(a)(11), a
corporation's articles may authorize the indemnification of the
corporation's agents for breaches of duty to the corporation or
its shareholders in excess of that expressly permitted by
Section 317. However, the articles may not provide for
indemnification in circumstances expressly prohibited by Section
317, or for acts or omissions as to which a director may not be
relieved of liability, as specified. (Corp. Code Sec.
204(a)(11); see 9 Witkin Sum. Cal. Law Corp. Sec. 81.)
Section 317 generally does not apply to proceedings against
trustees, investment managers, and other fiduciaries of employee
benefit plans, even though these persons may be agents of the
employer corporation. However, pursuant to subdivision (j) of
Section 317, a corporation may instead indemnify these persons
to the extent it is separately authorized by Corporations Code
(more)
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Section 207(f). (See 9 Witkin Sum. Cal. Law Corp. Sec. 81.)
Section 207(f) provides that a corporation has the power to pay
pensions, and establish and carry out pension, profit-sharing,
share bonus, share purchase, share option, savings, thrift and
other retirement, incentive and benefit plans, trusts and
provisions for any or all of the directors, officers and
employees of the corporation or any of its subsidiary or
affiliated corporations, and to indemnify and purchase and
maintain insurance on behalf of any fiduciary of such plans,
trusts or provisions.
Separately, other divisions of the Corporations Code govern,
among other things, nonprofit public benefit corporations,
nonprofit mutual benefit corporations, nonprofit religious
corporations, and consumer cooperative corporations. (See
Corp. Code Secs. 5110 et seq., 7110 et seq., 9110 et seq., 12200
et seq.) Within these are sections modeling Section 317 in the
General Corporation Law, that provide for indemnity of agents of
these specific types of corporations in a manner consistent with
Section 317. Each of those sections similarly contains a
cross-reference to Section 207(f), thereby applying the
indemnification standard of Section 207(f) to any trustee,
investment manager or other fiduciary of an employee benefit
plan when acting in that capacity on behalf of a nonprofit
public benefit, mutual benefit, religious, and consumer
cooperative corporation, respectively. (Corp. Code Secs.
5238(j), 7237(j), 9246(j), and 12377(j).)
At the same time, however, within the same sections of law
governing these specified corporations, there are sections that
provide nearly identical indemnification authority as found in
Section 207(f)-specifically in Sections 5140(f), 7140(e),
9140(f), and 12320(e). These sections leave out references to
profit-sharing, share bonus, share purchase, and share option
plans that are otherwise made in Section 207(f)-assumedly
because they specifically apply to nonprofit corporations and
consumer cooperative corporations.
This bill, sponsored by the Nonprofit and Unincorporated
Organizations Committee of the Business Law Section of the State
Bar of California, would remove the cross-references made to
Section 207(f) instead insert cross-references to the
correlating internal sections that are substantially similar to
207(f), but specific to those nonprofit public benefit
corporations, nonprofit mutual benefit corporations, nonprofit
religious corporations, and consumer cooperative corporations.
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The bill would also clarify the meaning of "employee benefit
plans" for the purposes of those corporations' indemnification
provisions.
CHANGES TO EXISTING LAW
Existing law provides that a corporation may indemnify its
agents, as defined, against certain actions, as specified.
(Corp. Code Sec. 317.)
Existing law provides that a nonprofit public benefit
corporation, nonprofit mutual benefit corporation, nonprofit
religious corporation, and consumer cooperative corporation, may
indemnify its agents, as defined, against certain actions, as
specified. (Corp. Code Secs. 5238, 7237, 9246, and 12377,
respectively.)
Existing law provides that this indemnification authority does
not apply to a proceeding against a trustee, investment manager
or other fiduciary of an employee benefit plan, even though
those persons may be agents of the corporation. Existing law
permits a corporation to indemnify a trustee, investment
manager, or other fiduciary to the extent permitted by Section
207(f) of the Corporations Code. (Corp. Code Sec. 317(j).)
Existing law provides that this indemnification authority does
not apply to a proceeding against a trustee, investment manager
or other fiduciary of an employee benefit plan, even though
those persons may be agents of the corporation. Existing law
permits a corporation to indemnify such trustee, investment
manager or other fiduciary to the extent permitted by Section
207(f) of the Corporations Code. (Corp. Code Secs. 5238(j),
7237(j), 9246(j), and 12377(j).)
Existing law provides that the powers of a corporation, among
other things, include, without limitation, the power to: pay
pensions, and establish and carry out pension, profit-sharing,
share bonus, share purchase, share option, savings, thrift and
other retirement, incentive and benefit plans, trusts and
provisions for any or all of the directors, officers and
employees of the corporation or any of its subsidiary or
affiliated corporations, and to indemnify and purchase and
maintain insurance on behalf of any fiduciary of such plans,
trusts or provisions. (Corp. Code Sec. 207(f).)
Existing law provides that the powers of a corporation, among
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other things, include, without limitation, the power to: pay
pensions, and establish and carry out pension, deferred
compensation, saving, thrift and other retirement, incentive and
benefit plans, trusts and provisions for any or all of its
directors, officers, employees, and persons providing services
to it or any of its subsidiary or related or associated
corporations, and to indemnify and purchase and maintain
insurance on behalf of any fiduciary of such plans, trusts, or
provisions. (Corp. Code Secs. 5140(f), 7140(e), 9140(f), and
12320(e).)
This bill would replace the reference to "employee benefit
plans" in Sections 5238(j), 7237(j), 9246(j), 12377(j), above,
to provide instead that their indemnification authority does not
apply to any proceeding against any trustee, investment manager
or other fiduciary of a pension, deferred compensation, saving,
thrift, or other retirement, incentive, or benefit plan, trust,
or provision for any or all of the corporation's directors,
officers, employees, and persons providing services to the
corporation or any of its subsidiary or related or affiliated
corporations, in that person's capacity as such, even though he
or she may otherwise be defined as an agent, as specified.
This bill would replace the cross-references to Section 207(f)
of the Corporations Code in Sections 5238(j), 7237(j), 9246(j),
12377(j) with a cross-reference to Section 5140(f), 7140(e),
9140(f), and 12320(e), respectively.
This bill would make other technical, non-substantive changes.
COMMENT
1. Stated need for the bill
According to the author, "�t]his �bill] would eliminate the
ambiguity in the Corporations Code regarding the indemnification
standards applicable to fiduciaries of an employee benefit plan
when acting on behalf of a nonprofit public benefit, mutual
benefit, religious or consumer cooperative corporation." The
author explains the need to amend the cross-reference made to
Section 207(f) in Sections 5238, 7237, 9246 and 12377 of the
Corporations Code:
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Each of these sections makes the indemnification standards
provided by Corporations Code �S]ection 207(f) applicable to
any trustee, investment manager or other fiduciary of an
employee benefit plan when acting in that capacity on behalf
of a nonprofit public benefit, mutual benefit, religious and
consumer cooperative corporation, respectively. Such
indemnification is authorized even if the person would also be
considered that corporation's agent under �these sections],
which describe�] the scope of the indemnification generally
applicable to a corporation's agents. �AB 2668] would
eliminate ambiguity arising from the internal cross-reference
to a section of the General Corporation Law (Corporations Code
section 207(f)) where an analogous statute already contained
in the Nonprofit Corporation Law (Corporations Code sections
5140(f), 7140(e), and 9140(f)) and the Consumer Cooperative
Corporation Law (Corporations Code Section 12320(e)).
The �bill] would also eliminate further ambiguity between
different descriptions of employee benefit plan fiduciaries
contained in Corporations Code sections 207(f), on the other
hand, and sections 5140(f), 7140(e), 9140(f), and subdivision
(j) of sections 5238, 7237, 9246, and 12377, on the other
hand.
2. Current ambiguity in cross-references
This bill would remove cross-references made to Section 207(f)
in Sections 5238, 7237, 9246 and 12377 of the Corporations Code
(relating to nonprofit public benefit corporations, nonprofit
mutual benefit corporations, nonprofit religious corporations,
and consumer cooperative corporations, respectively), replacing
them with the appropriate internal cross-reference for each of
those sections.
As described in the Background, various divisions of the
Corporations Code specifically govern, among other things,
nonprofit public benefit corporations, nonprofit mutual benefit
corporations, nonprofit religious corporations, and consumer
cooperative corporations. (See Corp. Code Secs. 5110 et seq.,
7110 et seq., 9110 et seq., and 12200 et seq., respectively.)
Within each of those areas are separate sections that provide
for indemnity of those specific corporations' agents, much like
Section 317 does in the General Corporation Law. As seen in
Section 317, the indemnification provided for by these sections,
by their own terms, does not extend to trustees, investment
managers, or other fiduciaries of an employee benefit plan, even
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though those persons might qualify under the definition of
agents in those very sections. Instead, also as found in
Section 317, each of these sections contains a cross-reference
to Section 207(f), thereby applying the indemnification standard
of Section 207(f) to any trustee, investment manager or other
fiduciary of an employee benefit plan when acting in that
capacity on behalf of these specific types of corporations.
(Corp. Code Secs. 5238(j), 7237(j), 9246(j), and 12377(j).)
At the same time, however, a nearly identical indemnification
provision for plan fiduciaries as is found in Section 207(f)
already exists within other sections of law that are specific to
those nonprofit and consumer cooperative corporations.
Accordingly, these more specific sections leave out references
to profit-sharing, share bonus, share purchase, and share option
plans that are made in Section 207(f).
The sponsor of this bill, the Nonprofit and Unincorporated
Organizations Committee of the Business Law Section of the State
Bar of California notes that the current ambiguity created by
having a cross-reference to Section 207(f) instead of to its
analogous provisions within the appropriate divisions of law,
likely arose as a result of the reliance upon Section 317 in
drafting Section 5238: "It appears that the drafters of Section
5238(j) simply copied wholesale Section 317(j) without
adjustment for the existence of Section 5140(f), the Nonprofit
Public Benefit Corporation Law's corollary to Section 207(f)."
While general rules of statutory interpretation would suggest
that the language, including the cross-references, was
purposeful, it does appear possible that Sections 317 and 207(f)
formed the basis of the analogous sections found in the
Nonprofit Corporations law division and the division relating to
corporations created for specific purposes. Committee Staff
notes that Section 317 was added in 1975, as was Section 207(f),
whereas the corollaries to Section 317 (Secs. 5238, 7247, 9246,
and 12377) were added between the years of 1978 and 1982.
Committee staff also notes that the corollaries to Section
207(f) (Secs. 5140, 7140, 9140, and 12320) were added in that
same timeframe. The proponents' position is arguably supported
by the fact the enacting legislation for Sections 5238, 7247,
9246, and 12377, not only added specific sections in the
nonprofit corporations law sections that are analogous to
Section 317, but they also added specific sections in those
division that are analogous to Section 207(f). If the
Legislature intentionally retained the cross-reference to
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Section 207(f) in those sections analogous to Section 317, it is
questionable as to why those bills would also add into law those
sections analogous to Section 207(f).
Nonetheless, it would appear appropriate to amend the current
cross-references to the internal sections that are analogous to
Section 207(f), as this bill would do.
3. Current ambiguity in description of employee benefit plans
The bill would also eliminate ambiguity between the different
descriptions of employee benefit plan fiduciaries contained in
these sections and the description in Section 207(f).
Existing law provides in relevant part that the indemnification
authority of a corporation, nonprofit public benefit
corporation, nonprofit mutual benefit corporation, nonprofit
religious corporation, or consumer cooperative corporation does
not apply to a proceeding against a trustee, investment manager
or other fiduciary of an employee benefit plan, even though
those persons may be agents of the corporation, as specified.
(See Corp. Code Secs. 317, 5238(j), 7237(j), 9246(j), and
12377(j).)
This bill would replace the general reference to "employee
benefit plan" in the nonprofit corporation sections and consumer
cooperative corporation section and instead provide, again in
relevant part, that the indemnification authority of these
nonprofit and consumer cooperative corporations does not apply
to a proceeding against a trustee, investment manager or other
fiduciary of a pension, deferred compensation, saving, thrift,
or other retirement, incentive, or benefit plan, trust, or
provision for any or all of the corporation's directors,
officers, employees, and persons providing services to the
corporation or any of its subsidiary or related or affiliated
corporations, in that person's capacity as such, even though he
or she may otherwise be defined as an agent, as specified. This
language is consistent with the description of plan fiduciaries
in the indemnification sections that are the corollaries of
Section 207(f) for the nonprofit and consumer cooperative
corporations. By making this change to the nonprofit
corporations sections and the consumer cooperative corporations
section, this bill would help clarify in law the difference
between benefit plan fiduciaries covered by these corporations'
indemnification sections and those covered by the General
Corporation Law.
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Support : None Known
Opposition : None Known
HISTORY
Source : Nonprofit and Unincorporated Organizations Committee of
the Business Law Section of the State Bar of California
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Assembly Floor (Ayes 71, Noes 0)
Assembly Committee on Banking & Finance (Ayes 12, Noes 0)
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