September 23, 2019

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The CSL And Foreign Subsidiaries

I suspect that many lawyers do not give a great deal of thought to the application of the California Corporate Securities Law of 1968 to the issuance of shares in connection with the incorporation of a wholly owned subsidiary.  Section 25102(i)(2) is one possible exemption but it is available only to corporations with outstanding securities registered under Section 12 of the Securities Exchange Act of 1934.  Section 25102(h) and (f) are also possibilities, but they require a notice filing.

If the subsidiary is being organized under the laws of a foreign country, Commissioner's Rule 260.105.22 offers an alternative with no requirement of a notice filing.  The rule imposes the following three conditions:

  • After the offer and sale, 100% of the outstanding capital stock of the issuer is owned by a corporation, directly or indirectly, in its own name or in the name of nominees or other persons holding for the sole benefit of the corporation;

  • the corporation acquiring the shares represents that they are being acquired for its own account for investment and not with a view to, or for sale in connection with, any distribution of shares; and

  • All the shares are evidenced by certificates with the legend prescribed by Rule 260.141.11 stamped or printed on the face of the certificate.

By its terms, the rule does not exempt securities issued by entities that are not corporations nor does it exempt securities other than common shares.  However, unlike Section 25102(i)(2), there is no requirement that the corporation have securities registered under Section 12 of the Exchange Act.  Nor is any notice filing required.

The legend specified in Rule 260.141.11 prohibits a sale or transfer of the shares or any interest therein without the Commissioner's prior written consent.  However, Rule 260.105.22 provides that no consent is required for a transfer to the corporation or to any nominee or other person holding for the sole benefit of the corporation.

"The web of our life is of mingled yarn, good an ill together . . . ." William Shakespeare, All's Well That Ends Well (Act IV, Sc. 3)

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About this Author

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

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