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Does California Place Your Company At Risk?

Is doing business in California risky?  More than a few companies seem to think so.  Below are few California related risks that I noticed in the risk factors section of recently filed Form 10-Ks. 

Many of these focus on particular laws, for example:

"The California Low Carbon Fuel Standard may decrease demand for corn based ethanol which could negatively impact our profitability."

Granite Falls Energy, LLC (filed 1/30/2018) and Heron Lake BioEnergy, LLC (1/29/2018)

"Governmental agency determinations or attempts by others to make us responsible for subcontractors' labor practices or obligations, whether under "joint employer" theories, specific state laws or regulations, such as under the California Labor Code, or otherwise, could create substantial adverse exposure for us in situations that are not within our control and could be material to our consolidated financial statements."

KB Home (1/26/2018)

"For example, "Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986," in California exposes all food companies to the possibility of having to provide warnings on their products in that state. If we were required to add warning labels to any of our products or place warnings in locations where our products are sold in order to comply with Proposition 65, the sales of those products and other products of our company could suffer, not only in those locations but elsewhere."

McCormick & Company, Incorporated (1/25/2018)

Others cite California's natural environment as the risk, for example:

"In addition, some of the areas we serve in California have recently experienced extreme or exceptional drought conditions, and we can offer no assurance as to the conservation measures, including impact fees or penalties, that might be imposed by local water agencies/suppliers if such conditions recur that could limit, impair or delay our ability to sell and deliver homes; increase our production costs; or decrease the value of land we own or control, which may result in inventory impairment or land option contract abandonment charges, or both."

KB Home (1/26/2018)

"Moreover, our corporate headquarters, a significant portion of our research and development activities, our data centers, and certain other critical business operations are located in California, near major earthquake faults."

Synopsys, Inc. (12/14/2017)

California isn't the only jurisdiction cited as a risk in my quick review of recent filings.  However, as the locus of many public company headquarters and a significant market, issuers are not overlooking its risks.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities 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...

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