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Referring To Extraneous Agreements In Corporate Articles of Incorporation

I didn’t take note of AB 1535 (Maienschein) when it was introduced earlier this year because I thought it was a “spot” bill.  As introduced, the bill simply added “which may include a reference to a separate shareholder agreement” to the introductory clause of Corporations Code Section 2000(a).  When I was later asked to look at the bill, I was thrown by the fact that the bill referred to a “shareholder agreement” which I took to be a reference to a “shareholders’ agreement”.  Eventually, the author’s office explained that it was unaware of the fact that “shareholders’ agreement” is a defined term under the General Corporation Law.  As defined in Section 186, a “shareholders’ agreement” only pertains to statutory close corporations, which are defined in Section 158.

According to the bill analysis prepared for June 7, 2017 hearing of the Senate Committee on Insurance, Banking & Financial Institutions, the bill was intended to permit the articles of incorporation to refer to buy-sell agreements between or among shareholders.  According to the bill’s sponsor, the Conference of California Bar Associations, the Secretary of State has sometimes accepted and sometimes rejected articles of incorporation including such references.  The bill is essentially an attempt to require the Secretary of State’s office to include such references.

AB 1535 Creates New Problems In Attempt To Solve No Problem At All

The more fundamental question is why include the reference at all?  Nothing in the Corporations Code, including Section 2000, requires such a reference for a buy-sell agreement to be enforceable. If the shareholders are concerned that the statutory buy-out rights either override or exist in addition to a buy-sell agreement, the obvious answer is to simply negate the statutory rights as contemplated by current Section 2000.

The proposed amendment does raise significant concerns. The General Corporation Law generally contemplates that the shareholders’ rights, preferences and privileges will be set forth in a public filing – the articles.  In 1987, the legislature amended the Corporations Code to permit certain provisions of the articles or an agreement of merger to be made dependent upon facts ascertainable outside the articles or agreement of merger through a reference to an agreement.  Cal. Corp. Code § 109.5.  In doing so, the legislature imposed certain protections.  Thus, the statute requires the corporation to maintain a copy of the agreement at its principal executive office and to provide a copy of the agreement, without charge, to a shareholder upon request.  The legislature further mandated that amendments to the agreement be subject to shareholder approval in specified situations.

These provisions are quite obviously intended to preclude “secret deals” and to preserve the rights of all shareholders to vote on changes to extraneous agreements that are tantamount to amending the articles.  AB 1535 provides none of these protections and should not be enacted.

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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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