September 21, 2020

Volume X, Number 265

September 18, 2020

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California's Proxy Rule

The federal proxy rules, with certain exceptions, apply to solicitations of proxies with respect to securities registered under Section 12 of the Securities and Exchange Act of 1934.  Very few California corporations, however, need concern themselves with these rules because very few of them have a class of securities registered under Section 12.  This does not mean that there are no rules.

If a corporation has shares held of record by 100 or more persons and a form of proxy is distributed to 10 or more shareholders of the corporation, then the proxy must:

  • Afford an opportunity on the proxy to specify approval and disapproval of each matter or group of related matters intended to be acted upon at the meeting for which the proxy is solicited, other than elections to office; and
  • Provide, subject to reasonable specified conditions, that when the person solicited specifies a choice with respect to any such matter, the shares will be voted in accordance with the specification.

Cal. Corp. Code § 605(a).  The same requirements pertain to written consents.  Id.  If a shareholder marks a proxy "withhold" as to the election of directors (or in some other manner indicating that authority to vote is withheld) in a proxy naming the candidates, then the shares subject to the proxy may not be voted for election of a director.  Cal. Corp. Code § 605(b).  

The good news is that a failure to comply with these requirements will not invalidate any corporate action taken.  Cal. Corp. Code § 605(c).  However, the failure may be the basis for challenging any proxy at a meeting and the Superior Court may compel compliance with these requirements.  Id.

These requirements do not apply to any corporation that has an outstanding class of securities registered under Section 12 of the Exchange Act or whose securities are exempt from registration pursuant to Section 12(g)(2) (e.g., securities issued by a registered investment company).  Section 605 establishes certain rules for determining whether shares are held of record by 100 or more persons.  Apparently, Section 604 has not fomented much controversy as there are no reported decisions interpreting or applying it.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 255


About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

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...