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California Corporate and Securities Law

Blogs 1 - 25 of 1000
californiacorporate&securities 7/20/2018
For What Possible Reason Did The SEC Eschew All Consistency In Rule 144?

Like Agur, I find some things are beyond my ken.  It is, for example, beyond my understanding why the Securities and Exchange Commission thought it would be a good idea to use three different measures of time in Rule 144.   

californiacorporate&securities 7/19/2018
Franchise Tax Board Loses LLC Class Certification Battle

When the legislature enacted the former Beverly-Killea Limited Liability Company Act in 1994 it included a levy on LLCs equal to specified dollar amounts based on the total income from all sources reportable to this state for the taxable year.  In 2008, two Courts of Appeal found this provision (former Corporations Code Section 17942)  to be unconstitutional. Northwest Energetic Services, LLC v. California Franchise Tax Bd., 159 Cal.App.4th 841 (2008) and Ventas Finance I, LLC v. Franchise Tax Bd., 165 Cal.App.4th 1207 (2008).  By June of the following year, over 43,000 LLCs had filed claims for refunds.

californiacorporate&securities 7/18/2018
By Adding Commas, Did The Legislature Expand Shareholder Inspection Rights?

Section 1601(a) of the California Corporations Code currently subjects to shareholder inspection the "accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board".  Professor Marsh's treatise asserts:

californiacorporate&securities 7/17/2018
A Not So Fabulous Fable (Part II)

Yesterday's post told of Dick Plantagenet's "winter of discontent" when learned of Henry Tudor's demand to inspect the books, records, and minutes of his small Delaware corporation, Cwmni Cyfyngedig, Inc. ("CCL").  Henry based his demand on Section 1601 of the California Corporations Code and the fact that CCL's ultimate parent, Aksjeselskap, Inc., a Nevada corporation ("Aks"), had stored a handful of its records in the Golden State.  

californiacorporate&securities 7/16/2018
A Not So Fabulous Fable Of Shareholder Inspection

This not so fabulous fable is about a small Nevada corporation, Cwmni Cyfyngedig, Inc. ("CCL").  It is set in the not too distant future.

californiacorporate&securities 7/13/2018
Legislature And Governor Provide Another Reason For Foreign Corporations To Avoid California

Two years ago, I wrote about Justice Mark B. Simons' opinion in Innes v. Diablo Controls, 248 Cal. App. 4th 139 (2016) that California's shareholder inspection statute does not require that the records be brought to this state for inspection.  This conclusion did not sit well with the Conference of California Bar Associations which sponsored a bill to reverse that holding.  In June, the legislature enacted the bill, AB 2237 (Maienschein), without a single "no" vote.  Governor Brown signed the bill into law on Monday of this week.

californiacorporate&securities 7/12/2018
Why You Might Want To Aim Higher When Seeking Equity Plan Approval

Yesterday's post highlighted one company's confusion about the vote required for shareholder approval of an equity compensation plan under the California General Corporation Law.  Because the GCL does not impose a specific requirement for shareholder approval of equity compensation plans, the default rule for shareholder action in Section 602 applies unless the corporation's articles of incorporation prescribe a higher vote.  The default standard is the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum).  I can think of at least two good reasons why companies may want to set their sights a bit higher when seeking shareholder approval.

californiacorporate&securities 7/11/2018
What, If Anything, Is The Matter With This Statement?

I came across a recent preliminary proxy filing that described the vote required for approval of a new equity compensation plan as "the affirmative vote of a majority of the shares of common stock present and voting on the matter, provided that the affirmative vote cast constitutes a majority of a quorum".  That doesn't seem unusual but is it an accurate statement?

californiacorporate&securities 7/10/2018
California Legislature Mulls Rewrite Of  "Broker" Definition In CFL

California's default lender licensing law is the California Financing Law, a law which had until recently been known as the California Finance Lenders Law.  The CFL generally prohibits anyone from engaging in the business of a finance lender or broker without obtaining a license.  The CFL currently defines "broker" to include anyone who is engaged in the business of negotiating or performing any act as a broker in connection with loans made by a finance lender.  Cal. Fin. Code § 22004.  The Commissioner of Business Oversight has adopted a regulation prohibiting a finance lender, with certain exceptions, from paying any compensation to an unlicensed person or company for soliciting or accepting applications for loans.  10 CCR § 1451(c).

californiacorporate&securities 7/9/2018
Money, Money, Money . . .

Last Friday's post was inspired by a recent article written by Daniel Sanches entitled"Bitcoin vs. the Buck: Is Currency Competition a Good Thing?Economic Insights (Vol. 3, Issue 2, p. 9) in which he observes:

"Indeed, for 150 years, U.S. financial firms such as commercial banks had been prohibited from issuing currency. And even though financial deregulation in the past two decades has provided U.S. banks with the opportunity to issue electronic currency to compete with official money, banks have not ventured into the business of private currency issuance."

This immediately reminded me that California continues to maintain a statutory prohibition on private money:

californiacorporate&securities 7/6/2018
Why The General Corporation Law Still Prohibits The Issuance Of Money By Corporations

Five years ago, I noted that Section 107 of the California Corporations Code prohibits any corporation, flexible purpose corporation, association or individual from issuing or putting in circulation, as money, anything but the lawful money of the United States.  The following year, Forbes reported that "California Gov. Jerry Brown signed a law repealing a section of the state’s corporation code that prohibited the issuance of currencies other than the dollar".  Forbes was not the only publication to announce the demise of Section 107.  The Los Angeles Times, for example, wrote "AB 129 will allow Bitcoins and other digital currency to be legally used in transactions in California by repealing a provision of state law that bars the use of 'anything but the lawful money of the United States.'"

californiacorporate&securities 7/5/2018
What Is So Beneficial About Beneficial Ownership?

Shareholders are the persons who enjoy the most rights under the California General Corporation Law.  A "shareholder" is not just anyone with rights in the shares, Corporations Code Section 185 defines a "shareholder" as "a holder of record of shares".  Beneficial owners who do not hold of record have relatively few rights that the corporation is bound to respect.  As U.S. District Court Judge William Alsup has observed:

californiacorporate&securities 7/2/2018
Impossibility And California's Proposed Gender Quota Law
I have devoted several recent posts to California's proposed board gender quota bill, SB 826, that seems destined for the Governor's desk.  The bill  would require "a  publicly held domestic or foreign corporation whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California" to have a minimum of one female director on its board no later than the end of next year.  By the end of 2021, the corporation would be required to have a minimum of:
  • three female directors, if its number of directors is six or more;
  • two female directors, if its number of directors is five; or
  • one female director, if its number of directors is four or fewer.

First offenders would face penalties equal to the average annual cash compensation for the directors of the corporation.  The penalty for repeat offenders would be three times the average annual cash compensation of the directors.  

californiacorporate&securities 6/29/2018
Why Comment On Proposed Regulations?

I like to say that administrative law is the most useful course that I didn't take in law school.  My service in California state government was my principal schooling in administrative law.  Since then, I have been fortunate to teach classes in administrative law at the University of California, Irvine. 

californiacorporate&securities 6/28/2018
Increasing The Size Of The Board And Rounding Out The Hours

Yesterday, I noted that California's proposed board gender quota bill, SB 826, includes the following provision: "A corporation may increase the number of directors on its board to comply with this section".  I'm not sure what to make of this provision.  Is it intended to be simply a statement of what a corporation might do or is it intended to empower corporations to take action not heretofore authorized in applicable corporate law?  If it is the former, it is essentially meaningless.  If it is the latter, it is unprecedented.

Generally, the number of directors is set in a corporation's articles and/or its bylaws.  As a result, action on the part of the shareholders and/or the board of directors is usually required to effect an amendment changing the size of the board.  In other words, the corporation has no inherent power to change the authorized number of its own directors.  Thus, it would be unprecedented for the California legislature to allow a corporation to change the authorized number of its directors without shareholder and/or director approval.  The change wouldn't be to just the California General Corporation Law.  Remember, SB 826 purports to apply to publicly held domestic corporations and foreign corporations whose principal executive offices, according to the corporation’s annual report on Form 10-K, are located in California.  

In this case, rounding was no problem . . .

Several of this week's posts have been dedicated to the topic of rounding numbers.  The context has been reports that the Securities and Exchange Commission is looking at whether companies are rounding earnings per share improperly.  One can't know whether rounding is improper without a rule defining what is proper.

californiacorporate&securities 6/27/2018
Will California's Board Gender Quota Bill Encourage Corporations To Dump Male Directors?

California's board of directors gender quota bill, SB 826, continues its journey through the legislature.  Having passed out of the Senate at the end of last month, SB 826 has already been voted out of two Assembly committees (Banking & Finance and Judiciary). 

californiacorporate&securities 6/26/2018
Why Round When Truncating Is So Much Easier?

Yesterday, I wrote that the Securities and Exchange Commission is reportedly looking into rounding of earnings per share.  The point of my post was to call attention to the fact that there is more than one way to round numbers.  Rounding is intended to make numbers less cumbersome reducing the number of digits.  Rounding necessarily results in a reduction of precision and the technique used can bias data when applied repeatedly. 

This lack of precision can have real consequences.  In Germany, for example, a political party must achieve at least 5% of the vote to be seated in Parliament.  In 1992, it was reported that the Green Party had achieved this threshold in a regional election.  Then it was discovered that the computer had been programmed to round up.  To make matters worse, this rounding software had been used for years and no one had ever noticed.  See Debora Weber-Wulff, Rounding error changes Parliament makeupThe Risks Digest (Vol. 13, Issue 37, April 9, 1992).

californiacorporate&securities 6/25/2018
Rounding Numbers; Let Me Count The Ways

Last week, Dave Michaels at The Wall Street Journal reported that the Securities and Exchange Commission is looking into whether companies were improperly rounding up their earnings per share to the next highest cent.  The SEC's inquiry was reportedly incited by a paper by Nadya Malenko and Joseph GrundfestQuadrophobia: Strategic Rounding of EPS Data.  However, Professors Malenko and Grundfest are not the only academics to claim that managers are using rounding to manipulate earnings per share.  See Miller, Martin & Bahnson, A Penny For Your Thoughts: Sizing Up Manipulative EPS RoundingStrategic Finance (July 2012).  Oddly, Professors Malenko and Grundfest fail to mention this paper in the current version of their paper (last revised in 2014).

californiacorporate&securities 6/22/2018
Legislature Passes Bill Requiring In State Inspection of Corporate Records

Corporations Code Section 1601 requires that records "be open to inspection . . . at any reasonable time during usual business hours . . .".  The statute is silent on where the inspection must occur. In Innes v. Diablo Controls, Inc., 248 Cal. App. 4th 139 (2016), the Court of Appeal held that Section 1601 requires that the records be made available for inspection at the office where those records are kept.  See Court Holds Inspection Statute Does Not Require That Records Be Brought To California.  

californiacorporate&securities 6/21/2018
Why The Right To A Jury Trial May Depend On The Year

Yesterday's post discussed the Court of Appeal's holding in  Nationwide Biweekly Administration, Inc. v. Superior Court, 2018 Cal. App. LEXIS 541, that a defendant in a civil proceeding by the Department of Business Oversight for statutory penalties is entitled to a jury trial on the question of liability.  If liability is found, then the amount of damages may be determined by the court in its discretion.  In the course of analyzing federal and state precedent, the Court of Appeal noted:

californiacorporate&securities 6/20/2018
Department Of Business Oversight Fails In Bid To Deny The Right To A Jury Trial

Article I, Section 16 of the California Constitution "Trial by jury is an inviolate right and shall be secured to all. . . ."  The right may be "inviolate" but it does have limits.  Thus, it is limited to the right as it existed in 1850, when California became a state.  Shaw v. Superior Court, 2 Cal. 5th 983, 994-95 (2017).  The Department of Business Oversight did not then exist.  Thus, there could be no precedent from 1850 establishing a right to a jury trial in an enforcement action brought by the DBO.  Does this mean that when the DBO goes to court in quest of statutory penalties, the target has no right to a jury trial?

californiacorporate&securities 6/19/2018
Do Limited Liability Corporations Exist In California Law?

If you skimmed the title of today's post, you might have concluded that it asks a question with an obvious answer: Do limited liability companies exist in California law?  The answer is that they have been statutorily recognized since at least 1994 when the former Beverly-Killea Limited Liability Company Act took effect.  My question, however, related to "limited liability corporations", not "limited liability companies". 

californiacorporate&securities 6/18/2018
Whom Do You Serve (Part 2)?

The point of last Friday's post is that Section 1502 of the California Corporations Code does not apply to foreign limited liability companies.  That statute requires a "corporation", as defined in Section 162, to file a statement with the Secretary of State that, among other things, designates "as the agent of the corporation for the purpose of service of process, a natural person residing in this state or a corporation that has complied with Section 1505 and whose capacity to act as an agent has not terminated".  

californiacorporate&securities 6/15/2018
Whom Do You Serve?

Suppose you were asked to serve Nation Credit Adjusters, L.L.C.  Your first step would likely be to try to identify the LLC's agent for service of process.  If you perform a business entity search on the California Secretary of State's website, you will find the following:

californiacorporate&securities 6/14/2018
Why Not Let The Market Decide The Fate Of Quarterly Reporting?

Yesterday, Liz Dunshee revisited the debate over quarterly reporting of financial results. In her post, she notes "the Business Roundtable (BRT) (press release), the National Association of Corporate Directors (NACD) (press release) and the National Investor Relations Institute (NIRI) (press release) have joined the chorus – calling for an end to short-termism by eliminating quarterly earnings guidance." 

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