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When Non-Voting Shares Must Approve A Reorganization

The California General Corporation Law permits a corporation to issue shares with no voting rights, provided that at the time one or more classes or series of outstanding shares or debt securities, singly or in the aggregate, are entitled to full voting rights.  Cal. Corp. Code § 400(a).  The phrase "no voting rights" is deceptive, however.  For example, Section 117 provides that any requirement in the GCL for a vote of each class of outstanding shares "means such a vote regardless of limitation or restrictions upon the voting rights thereof, unless expressly limited to voting shares".  

Section 1201(a) of the Corporations Code sets forth the approval requirements for "reorganizations", as defined Section 181.  If the reorganization requires the approval of the corporation's board pursuant to Section 1200, the principal terms of the reorganization must be "approved by the outstanding shares", as defined in Section 152, of each class.  Putting Sections 117 and 1201(a) together, the shareholder approval requirement is a separate class vote of each class of outstanding shares of the corporation and approval by a majority of the outstanding shares of each class.

There are several exceptions to the above rule.  First, the articles of incorporation may require a greater vote than a majority of the outstanding shares.  See Cal. Corp. Code § 204(a)(5).  Second, no shareholder approval may be required under California's 5/6 rule.  Cal. Corp. Code § 1201(b).  Finally, no approval of any class of outstanding preferred shares of the surviving or acquiring corporation or parent party is required if the rights, preferences, privileges, and restrictions granted to or imposed upon that class of shares remain unchanged.  There is an exception to this last exception in the case of a merger reorganization if there is an amendment to the surviving corporation's articles of incorporation that would otherwise require approval of the outstanding shares.  Cal. Corp. Code § 1201(c).  

Finally, a special rule applies when a corporation has two classes of common shares that differ only as to voting rights.  The last sentence of Section 1201(a) specifies that the two classes are to be considered as a single class of shares.  Thus, only a majority vote of all of the outstanding shares of both classes will be required to approve the reorganization. 

© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 340
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About this Author

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

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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