The world of California corporate law does not change very often but recently three new laws were signed by Governor Newsom which stand to impact a number of our clients.
Senate Bill 218 (Section 119)-Corporate Ratification
Section 119 is added to the California Corporations Code allowing Board of Directors to ratify prior corporate actions that were noncompliant at the time the acts were taken. This allows a California corporation to validate an otherwise lawful corporate action not in compliance with the California Corporation 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. Ratification generally requires the Board to adopt resolutions describing the corporate action to be ratified, the nature of the noncompliance and related information. It must be approved by the Shareholders if their approval would have been required if the action had been approved in a timely manner. Notification of the ratification must be provided to all shareholders promptly after it is approved.
This new law is important in that it allows Boards with a remedy to resolve void or voidable corporate actions that was not previously available and will make it easier for corporate counsel to issue legal opinions that may be required in connection with the sale of the company or a financing transaction.
Senate Bill 49-One Step Conversion
This new law amends existing California law to permit California corporations to convert into foreign corporations or other forms of foreign business entities in one step (provided the jurisdiction into which the corporation converts allows that type of conversion). Previously, a California corporation that wanted to convert into a Delaware corporation, for example, had to go through a multi-step process, often involving a merger. This is an important change because it removes a hurdle for clients that want to incorporate in California but who anticipate re-domesticating to Delaware in the future for fundraising purposes or in connection with an acquisition.
Fincen Issues Final Regulations for the Corporate Transparency Act
This issue will be handled in more detail in the next issue of Perspectives but beginning in January 1, 2024 nearly all of our clients will be required to report beneficial ownership to the California Secretary of State on an annual basis. This rule will apply both for domestic (i.e. California entities and also foreign entities that are registered here in California, such as a Delaware corporation). A “beneficial owner” is defined under the rule as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”
As with any new laws, there are various nuances, exceptions and additional requirements that must be met. We strongly recommend that before relying on any of the above new laws that you confer with your legal counsel to confirm the availability of the new law and the best way to comply with the respective requirements.
We here at Scherer Smith & Kenny LLP remain available to address any questions you may have related to these or other corporate or intellectual property issues. For additional information, please contact Brandon Smith at bds@sfcounsel.com or Heather Sapp at hgs@sfcounsel.com.
-Written by Brandon Smith