The possible application of California's Corporate Securities Law of 1968 may not be the first thing that comes to mind when amending charter documents. However, Section 25120 of the California Corporations Code makes it unlawful for any person to offer or sell a security in California in an issuer transaction in connection with any change in the rights, preferences, privileges, or restrictions of or on outstanding securities unless qualified or exempt (or not subject to) qualification.
Fortunately, there are numerous exemptions from this qualification requirement. One such exemption is Section 25103(b) which exempts any change in the rights, preferences, privileges or restrictions of or on outstanding securities unless the holders of at least 25% of the outstanding shares or units of any class of securities that will be directly or indirectly affected substantially and adversely by that change have addresses in California according to the records of the issuer.
The CSL adds an interesting twist to this exemption by providing that any securities controlled by any one person who controls directly or indirectly 50% or more of the outstanding securities of that class are not considered outstanding for purposes of the exemption. Cal. Corp. Code § 25103(d). This can lead to some unexpected results.
For example, assume that a corporation has 100 shares issued and outstanding and that they are held by three shareholders, A, B and C. Assume further that A holds 50 shares and has a Nevada address, B holds 30 shares and has a New York address, and C holds 20 shares and has a California address. A's shares will not be considered outstanding for purposes of Section 25103(b). Thus, C will hold 40% of the outstanding shares (i.e., 20 out of 50). Because C holds at least 25% of the outstanding shares and has an address in California an amendment that substantially and adversely affects the shares will not be exempt pursuant to Section 25103(b). All may not be lost, however, because it is possible that the change will be exempt pursuant to another exemption such as Section 25103(e) or 10 CCR § 260.103.