October 20, 2019

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Why California Can't Buy Stock

If you are looking to sell shares in your company to the State of California, you might want to reconsider.  Article XVI, Section 17 of the California Constitution expressly forbids the state from subscribing to, or being interested in the stock of any company, association, or corporation with two exceptions.  First, the state may acquire and hold shares of the capital stock of any mutual water company or corporation when the stock is acquired or held for the purpose of furnishing a supply of water for public, municipal or governmental purposes.  Second, and more significantly, retirement boards of public pensions or retirement systems have plenary authority for investment of money, subject to specified conditions.

Why does the constitution prohibit the purchase of stock?  In the beginning of years, when the state was new and all, "this prohibition responded to local agencies becoming insolvent as a result of issuing debt to purchase railroad stock that would ensure railroads built rail lines that connected their jurisdictions."  Bill Analysis, AB 857 (Chiu), Senate Committee on Governance & Finance (July 3, 2019).  

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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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