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Why Common Shares May Not Be Common Stock

Surprisingly, the California General Corporation Law uses the term "common stock" as opposed to "common shares" in only a single statute.  Section 159 of the California Corporations Code defines "common shares" as "shares which have no preference over any other shares with respect to distribution of assets on liquidation or with respect to payment of dividends".   Notably the statute does not rely on upon distinctions in voting power as a marker for identifying shares as "common shares".

"Thou know'st 'tis common"

Section 907(c) uses the term "common stock" rather than "common shares".   The statute provides that if an amendment to the articles of incorporation changes the statement from a single class of shares to two classes and only one of the two classes includes "common" in the designation "that class is the common stock class".   If, however, the designation of neither class includes "common" but one of the two classes has limited or no voting rights, the class whose voting rights are not limited is the "common stock class".  Thus, it is possible that a class of shares with does not qualify as "common shares" under Section 159 (because no other class has preference over it with respect to distributions) will nonetheless qualify as "common stock" pursuant to Section 907(c) (because it has limited or no voting rights).

This anomaly can be avoided entirely by including a statement of the effect of an amendment on outstanding shares pursuant to Section 907(b), in which case Section 907(c) will have no application.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 165
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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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