Selected 2022 Developments in California Corporate Law
| Publication year | 2023 |
| Author | Written by Rachelle Cohen, Nate Emeritz, Andrew Hirsch, Julia Reigel, and Shannon Treviño |
Written by Rachelle Cohen, Nate Emeritz, Andrew Hirsch, Julia Reigel, and Shannon Treviño*
The following summarizes selected California legislative, case law, and other related developments from January 1, 2022 through December 1, 2022.
On September 2, 2022, Governor Newsom signed Senate Bill 49, 2021-2022 Reg. Sess. ("SB 49), which was proposed by the Corporations Committee of the Business Law Section of the California Lawyers Association. SB 49 amends existing law to allow California corporations to convert into foreign corporations or other forms of foreign business entities in one step, as long as the law of the jurisdiction into which the corporation converts allows that type of conversion. Prior law allowed one-step conversions for California corporations into other forms of California business entities (such as LLCs and partnerships), but California corporations seeking to convert into foreign business entities or foreign corporations (e.g., to a Delaware corporation) typically needed to engage in a series of transactions to accomplish a conversion. Delaware General Corporation Law ("DGCL") already allows a foreign corporation to convert into a Delaware corporation by filing a certificate of conversion.1 SB 49 took effect on January 1, 2023.
After the effective date, corporate conversions may be handled through the California Secretary of State's online filing service, bizfile Online,2 which offers options depending on the business entity type that is seeking to convert. The conversion fee is $150.
The foregoing amendments promise to streamline the corporate conversion process and to potentially alleviate hesitancy to select California as the initial jurisdiction of incorporation for certain new businesses.
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On August 29, 2022, Governor Newsom signed Senate Bill 218, 2021-2022 Reg. Sess. ("SB 218"), which was proposed by the Corporations Committee of the California Lawyers Association's Business Law Section. SB 218 adds an important new section 119 to the California Corporations Code providing for corporate ratification and judicial validation of noncompliant corporate actions. Similar laws for ratification and validation of corporate actions have been adopted in Delaware, Nevada, and other states.
Pursuant to section 119, a California corporation may ratify or a California superior court may validate otherwise lawful corporate actions not in compliance, or purportedly not in compliance, with the California Corporations Code, the articles, bylaws, or a plan or agreement to which the corporation is a party, in effect at the time of the corporate action. A ratification generally requires the board of directors to adopt resolutions setting forth the corporate action to be ratified, the nature of the noncompliance, and related information. Shareholders must also approve the ratification if their approval would be required, at the time of the ratification, for the type of corporate action now proposed to be ratified. The ratification is also subject to any higher approvals that were required for the original corporate action when that action was taken.
Notice of the ratification must be given promptly after the ratification to all shareholders as of the time of the ratification. Unlike the analogous Delaware law, notice of the ratification is not required to be given to any shareholders as of the time of the defective action who are no longer shareholders as of the ratification. The ratification of any corporate action that would have required the filing of an instrument with the California Secretary of State also requires the corporation to file a certificate of ratification to make, amend, or correct any such instrument.
As a counterpart to the corporate self-help component of the statute, section 119 also allows the corporation, any successor entity, directors, shareholders, and any other person who claims to be substantially and adversely affected by the ratification to petition the California Superior Court to determine or declare the validity or effectiveness of any corporate action (including a ratification or a ratified corporate action) or security of the corporation, and to declare the date of such validity or effectiveness. The superior court has significant latitude to consider facts, circumstances, and remedies appropriate for such a proceeding. If the superior court orders the validation of any corporate action that would have required the filing of an instrument with the Secretary of State, then the corporation must file a certificate of validation making, amending, or correcting any such instrument.
A few additional notes regarding SB 218:
- By its terms, section 119 does not limit the authority of the board, the shareholders, or the corporation to effect any other lawful means of ratification or validation of a corporate action or correction of a record.
- Unless otherwise stated in the applicable ratification resolutions or determined by the superior court ordering validation, a corporate action or security ratified or validated under section 119 relates back to the date of the original corporate action.
- Certain corporate actions are excluded from the scope of section 119. Dissolved corporations and foreign corporations may not ratify corporate actions under section 119, nor may a judicial petition be filed under section 119 in respect of a corporate action or security of such a corporation. Section 119 also provides, in subdivision (a)(5), that it cannot be used to ratify or validate any corporate action "in respect of" noncompliance with California Corporations Code provisions for statutory fiduciary duties; void or voidable interested transactions; or prohibited distributions, repurchases, redemptions, or loans. A ratification or validation petition is also subject to judicial scrutiny pursuant to a proceeding brought under section 119, where the superior court may consider all legal and equitable facts, circumstances, and remedies as it deems appropriate.
- Section 119 requires a corporation to retain records related to a ratification or validation in accordance with section 1500 of the California Corporations Code.
- Section 119 contains notice requirements with respect to legal proceedings where the validity, ratification, or validation of a corporate action would have a meaningful impact.
- Section 110 has been amended by SB 218 to provide that certificates of ratification and validation may not contain future effective times.
In practice, section 119 provides corporations and their shareholders with a remedy to resolve void or voidable
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corporate actions that was not previously available to California corporations.
For a thorough discussion of considerations regarding the development of law and practice around section 119, please refer to Julia Reigel, Jack McBride, Angie Flaherty, and Nate Emeritz, Perspective on the New California Ratification Law Based on California Corporate and Delaware Ratification Practices, in this Annual Review issue.
The Corporate Transparency Act ("CTA") (codified in its entirety at 31 U.S.C. § 5336), part of the federal Anti-Money Laundering Act of 2020, establishes beneficial ownership reporting requirements for a wide variety of corporations and other business entities created in or registered to do business in the United States. The goal of the legislation is to protect the U.S. financial system from illicit use and to prevent bad actors from using shell companies to conceal proceeds of corrupt and criminal acts. Certain entities, including public reporting companies, banks, insurance companies, larger operating companies (defined to mean businesses employing more than 20 full-time employees, reporting more than $5 million in gross receipts or sales during the prior year, and who have a physical presence in the U.S.), and entities registered with the Securities and Exchange...
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