August 20, 2014

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In This Church Versus State Battle, The State Prevailed

Borrowing a bon mot from the riding arena, there are two kinds of California corporate lawyers, those who have had a filing rejected by the Secretary of State’s office and those that will.  As almost every corporate lawyer in California knows, it is frustrating and discomfiting to have a filing bounced.  But as Chernyshevsky, Tolstoy, and Lenin have all asked, what is to be done?  Usually, you have four options.

Concede

First, you can fix the deficiency identified by the Secretary of State’s office.  This is an especially appealing choice when the Secretary of State’s office is correct – a possibility that shouldn’t be dismissed out of hand.  After all, the reviewer in all likelihood sees more filings in a year than you’ll see in your entire career.

Persuade

Second, you can explain why the filing complies with the law.  This usually works when you’re actually correct, another possibility that shouldn’t be ignored entirely.  After all, even a blind pig finds an acorn once in awhile.

Opine

Third, you can in some cases submit a written legal opinion of a member of the State Bar of California to the effect that the specific provision does conform to law and stating the points and authorities upon which the opinion is based.  The Secretary of State is required to rely, with respect to any disputed point of law (with certain exceptions) upon the legal opinion.  This procedure is authorized by Corporations Code Section 110(b) (General Corporation Law); Section 5008 (Nonprofit Corporation Law); Section 12214 (Consumer Cooperative Corporations); Section 15902.06 (Uniform Limited Partnership Act of 2008); Section 17056 (Beverly-Killea Limited Liability Company Act); and Section 17702.03 (California Revised Uniform Limited Liability Company Act).

Sue

Fourth, you can sue the Secretary of State.  This was the course chosen by the Roman Catholic Bishop of San Jose when the Secretary of State refused to file articles of incorporation for “Pastor of Santee Catholic Mission, a corporation sole”.  The Roman Catholic Bishop of San Jose v. Bowen, Cal. Ct. Appeal Case No. C070516 (3rd App. Dist., Sept. 5, 2013).

In the Secretary of State’s view, the problem with the Bishop’s articles was that they provided for a distribution of remaining assets upon dissolution that conflicted with Corporations Code Section 10015.  I won’t get into the reasons as I doubt many readers are forming corporations sole.  Suffice it to say that the Bishop was unwilling to make a change and the Secretary of State was unwilling to file the articles as presented.  The result of this impasse was that the Bishop filed a petition for a writ of mandate and complaint for injunctive and declaratory relief.  The trial court denied the petition and judgment was entered in favor of the Secretary of State.

On appeal, the Bishop no doubt gave voice to hundreds of frustrated filers by arguing that the “there is no clear statutory delegation of authority to [the Secretary] to scrutinize or extract editorial concessions on [articles of incorporation] as a condition for filing.”  JusticeCole Blease. writing for the Court, rejected this argument finding that the Secretary of State’s authority extends to “determining whether submitted articles of incorporation on their face conform to the statutes governing corporations sole prior to filing the same.” (footnote omitted).

Just Because It’s Been Done A Hundred Times Before, Doesn’t Make It Right

What I found most interesting was that before filing the disputed articles of incorporation, the plaintiffs’ counsel had filed approximately 100 articles of incorporation containing dissolution provisions identical to that found in the disputed articles.  Here’s what Justice Blease had to say about that:

That she [Secretary of State Debra Bowen] previously filed articles of incorporation containing the same conflicting language does not make her refusal to file the proposed articles arbitrary, particularly where, as here, there is no evidence that she filed articles containing the same conflict after refusing to file the proposal.  To the contrary, the Secretary represents that the filing of the articles containing the same conflicting language was an oversight, and that since the conflict was discovered, members of her staff now careful review the dissolution provisions of all articles of incorporation for corporations sole to ensure they conform to law, including [Corporations Code] Section 10015.

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About this Author

Keith Paul Bishop, Business Attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients on compliance,...

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