July 5, 2020

Volume X, Number 187

July 03, 2020

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When Shares May Be Convertible At Corporation's Option

Section 409 of the California Corporations Code authorizes a corporation to issue shares that are convertible "within the time or upon the happening of one or more specified events and upon the terms and conditions that are stated in the articles" provided certain conditions are met.  Shares may be convertible either at the option of the holder or automatically upon either the vote of at least a majority of the outstanding shares of the class or series to be converted or upon the happening of one or more specified events, into shares of any class or series.  

The circumstances under which shares may be converted at the option of the corporation, however, are limited to two situations:

  • If the corporation has a license or franchise from a governmental agency to conduct its business or it is a member corporation of a national securities exchange registered under the United States Securities Exchange Act of 1934, the license, franchise or membership of which is conditioned upon some or all of the holders of its stock possessing prescribed qualifications, to the extent necessary to prevent the loss of such license, franchise or membership or to reinstate it, at the option of the corporation, shares may be converted into shares of any class or series or into any other security of the corporation.

  • If the corporation is a “listed corporation” as defined in Section 301.5(d), both at the time of the original issuance of the convertible shares and at the time of the conversion,  at the option of the corporation shares may be converted into shares of any class or series or into any other security of the corporation, provided that any such securities received upon conversion are listed or qualified for trading on a stock exchange or market system defined in Section 301.5(d).

Section 301.5(d) defines a "listed corporation" to mean a corporation with outstanding shares listed on the New York Stock Exchange, the NYSE Amex, the NASDAQ Global Market, or the NASDAQ Capital Market.  The statute has not been amended to reflect the change in name of the NYSE Amex to NYSE American, LLC.  See SEC Release No. 34-80283 (3/21/2017) and SEC Release No. 34-67037 (5/21/2017).

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 156


About this Author

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

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...