Bill Text: CA AB571 | 2011-2012 | Regular Session | Chaptered
Bill Title: Corporations: distributions.
Spectrum: Partisan Bill (Republican 3-0)
Status: (Passed) 2011-09-01 - Chaptered by Secretary of State - Chapter 203, Statutes of 2011. [AB571 Detail]
Download: California-2011-AB571-Chaptered.html
BILL NUMBER: AB 571 CHAPTERED
BILL TEXT
CHAPTER 203
FILED WITH SECRETARY OF STATE SEPTEMBER 1, 2011
APPROVED BY GOVERNOR SEPTEMBER 1, 2011
PASSED THE SENATE JULY 14, 2011
PASSED THE ASSEMBLY AUGUST 18, 2011
AMENDED IN SENATE JULY 5, 2011
AMENDED IN ASSEMBLY APRIL 25, 2011
INTRODUCED BY Assembly Member Hagman
(Coauthors: Assembly Members Garrick and Mansoor)
FEBRUARY 16, 2011
An act to amend Sections 163.1, 500, 506, and 509 of, to repeal
Sections 502, 503.1, 503.2, and 507 of, and to repeal and add Section
503 of, the Corporations Code, relating to corporations.
LEGISLATIVE COUNSEL'S DIGEST
AB 571, Hagman. Corporations: distributions.
Existing law provides for the formation and governance of
corporations. Existing law allows a corporation to make a
distribution of cash or property to shareholders, including a
dividend or a repurchase or redemption of shares, only if either the
corporation has retained earnings prior to the distribution equal to
or exceeding the amount of the distribution or the corporation can
satisfy specified balance sheet test and liquidity requirements after
giving effect to the distribution, and the distribution will not
render the corporation insolvent.
This bill would allow a corporation to distribute cash or property
to shareholders, including a dividend or repurchase or redemption of
shares, if the amount of the corporation's retained earnings prior
to the distribution equals or exceeds the sum of the distribution and
the cumulative dividends in arrears on certain preferred stock and,
after giving effect to the distribution, the value of the corporation'
s assets equals or exceeds the sum of its liabilities and the
liquidation preference of any preferred stock, except as specified.
The bill would provide that a board of directors may base a
determination that the value of its assets exceeds the amount of
liabilities on financial statements prepared on the basis of
accounting practices and principles that are reasonable in the
circumstances, a fair valuation, or any other method that is
reasonable under the circumstances.
Existing law provides that a shareholder who knowingly receives an
improper distribution is liable to the corporation's creditors and
holders of preferred shares, as specified, and that those parties may
bring suit in the name of the corporation to enforce those
liabilities.
This bill would provide that holders of shares having preferential
rights with respect to cumulative dividends in arrears shall not
have the right to bring suit with respect to an improper distribution
unless the amounts owed those holders, as specified, is greater than
zero. The bill would also provide that a cause of action with
respect to an obligation to return an improper distribution shall be
extinguished unless brought within 4 years of the distribution date.
Existing law requires a corporation to provide notice, as
specified, to shareholders, with respect to a dividend other than one
chargeable to retained earnings, stating that the dividend is being
made from a source other than retained earnings, and stating the
accounting treatment of the dividend.
This bill would eliminate that requirement. The bill would make
technical, conforming amendments.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 163.1 of the Corporations Code is amended to
read:
163.1. For purposes of subdivision (b) of Section 500 and
subdivision (b) of Section 506, "cumulative dividends in arrears"
means only cumulative dividends that have not been paid as required
on a scheduled payment date set forth in, or determined pursuant to,
the articles of incorporation, regardless of whether those dividends
had been declared prior to that scheduled payment date.
SEC. 2. Section 500 of the Corporations Code is amended to read:
500. (a) Neither a corporation nor any of its subsidiaries shall
make any distribution to the corporation's shareholders (Section 166)
unless the board of directors has determined in good faith either of
the following:
(1) The amount of retained earnings of the corporation
immediately prior to the distribution equals or exceeds the sum of
(A) the amount of the proposed distribution plus (B) the preferential
dividends arrears amount.
(2) Immediately after the distribution, the value of the
corporation's assets would equal or exceed the sum of its total
liabilities plus the preferential rights amount.
(b) For the purpose of applying paragraph (1) of subdivision (a)
to a distribution by a corporation, "preferential dividends arrears
amount" means the amount, if any, of cumulative dividends in arrears
on all shares having a preference with respect to payment of
dividends over the class or series to which the applicable
distribution is being made, provided that if the articles of
incorporation provide that a distribution can be made without regard
to preferential dividends arrears amount, then the preferential
dividends arrears amount shall be zero. For the purpose of applying
paragraph (2) of subdivision (a) to a distribution by a corporation,
"preferential rights amount" means the amount that would be needed if
the corporation were to be dissolved at the time of the distribution
to satisfy the preferential rights, including accrued but unpaid
dividends, of other shareholders upon dissolution that are superior
to the rights of the shareholders receiving the distribution,
provided that if the articles of incorporation provide that a
distribution can be made without regard to any preferential rights,
then the preferential rights amount shall be zero. In the case of a
distribution of cash or property in payment by the corporation in
connection with the purchase of its shares, (1) there shall be added
to retained earnings all amounts that had been previously deducted
therefrom with respect to obligations incurred in connection with the
corporation's repurchase of its shares and reflected on the
corporation's balance sheet, but not in excess of the principal of
the obligations that remain unpaid immediately prior to the
distribution and (2) there shall be deducted from liabilities all
amounts that had been previously added thereto with respect to the
obligations incurred in connection with the corporation's repurchase
of its shares and reflected on the corporation's balance sheet, but
not in excess of the principal of the obligations that will remain
unpaid after the distribution, provided that no addition to retained
earnings or deduction from liabilities under this subdivision shall
occur on account of any obligation that is a distribution to the
corporation's shareholders (Section 166) at the time the obligation
is incurred.
(c) The board of directors may base a determination that a
distribution is not prohibited under subdivision (a) or under Section
501 on any of the following:
(1) Financial statements prepared on the basis of accounting
practices and principles that are reasonable under the circumstances.
(2) A fair valuation.
(3) Any other method that is reasonable under the circumstances.
(d) The effect of a distribution under paragraphs (1) or (2) of
subdivision (a) is measured as of the date the distribution is
authorized if the payment occurs within 120 days after the date of
authorization.
(e) (1) If terms of indebtedness provide that payment of principal
and interest is to be made only if, and to the extent that, payment
of a distribution to shareholders could then be made under this
section, indebtedness of a corporation, including indebtedness issued
as a distribution, is not a liability for purposes of determinations
made under paragraph (2) of subdivision (a).
(2) If indebtedness is issued as a distribution, each payment of
principal or interest on the indebtedness shall be treated as a
distribution, the effect of which is measured on the date the payment
of the indebtedness is actually made.
(f) This section does not apply to a corporation licensed as a
broker-dealer under Chapter 2 (commencing with Section 25210) of Part
3 of Division 1 of Title 4, if immediately after giving effect to
any distribution the corporation is in compliance with the net
capital rules of the Commissioner of Corporations and the Securities
and Exchange Commission.
SEC. 3. Section 502 of the Corporations Code is repealed.
SEC. 4. Section 503 of the Corporations Code is repealed.
SEC. 5. Section 503 is added to the Corporations Code, to read:
503. (a) The provisions of Sections 500 and 501 shall not apply
to a purchase or redemption of shares of a deceased shareholder from
the proceeds of insurance on the life of that shareholder in excess
of the total amount of all premiums paid by the corporation for that
insurance, in order to carry out the provisions of an agreement
between the corporation and that shareholder to purchase or redeem
those shares upon the death of the shareholder.
(b) The provisions of Sections 500 and 501 shall not apply to the
purchase or redemption of shares of a disabled shareholder from the
proceeds of disability insurance applicable to the disabled
shareholder in excess of the total amount of all premiums paid by the
corporation for the insurance, in order to carry out the provisions
of an agreement between the corporation and the shareholder to
purchase or redeem shares upon the disability of the shareholder as
defined within that policy. For the purposes of this subdivision,
"disability insurance" means an agreement of indemnification against
the insured's loss of the ability to work due to accident or illness.
SEC. 6. Section 503.1 of the Corporations Code is repealed.
SEC. 7. Section 503.2 of the Corporations Code is repealed.
SEC. 8. Section 506 of the Corporations Code is amended to read:
506. (a) Any shareholder who receives any distribution prohibited
by this chapter with knowledge of facts indicating the impropriety
thereof is liable to the corporation for the benefit of all of the
creditors or shareholders entitled to institute an action under
subdivision (b) for the amount so received by the shareholder with
interest thereon at the legal rate on judgments until paid, but not
exceeding the liabilities of the corporation owed to nonconsenting
creditors at the time of the violation and the injury suffered by
nonconsenting shareholders, as the case may be. For purposes of
determining the value of any noncash property received in a
distribution described in the preceding sentence, the shareholder
receiving that illegal distribution shall be liable to the
corporation for an amount equal to the fair market value of the
property at the time of the illegal distribution plus interest
thereon from the date of the distribution at the legal rate on
judgments until paid, together with all reasonably incurred costs of
appraisal or other valuation, if any, of that property, but not
exceeding the liabilities of the corporation owed to nonconsenting
creditors at the time of the violation and the injury suffered by
nonconsenting shareholders, as the case may be.
(b) Suit may be brought in the name of the corporation to enforce
the liability (1) to creditors arising under subdivision (a) for a
violation of Section 500 or 501 against any or all shareholders
liable by any one or more creditors of the corporation whose debts or
claims arose prior to the time of the distribution to shareholders
and who have not consented thereto, whether or not they have reduced
their claims to judgment, or (2) to shareholders arising under
subdivision (a) for a violation of Section 500 against any or all
shareholders liable by one or more holders of shares having
preferential rights with respect to cumulative dividends in arrears,
in the case of a violation of paragraph (1) of subdivision (a) of
Section 500, or upon dissolution, in the case of a violation of
paragraph (2) of subdivision (a) of Section 500, in each case who
have not consented to the applicable distribution, without regard to
the provisions in Section 800, and in each case to the extent the
applicable shares with preferential rights were outstanding at the
time of the distribution; provided that holders of shares of
preferential rights shall not have the right to bring suit in the
name of the corporation under this subdivision unless the
preferential dividends arrears amount, in the case of a violation of
paragraph (1) of subdivision (a) of Section 500, or the preferential
rights amount, in the case of a violation of paragraph (2) of
subdivision (a) of Section 500, was greater than zero. A cause of
action with respect to an obligation to return a distribution
pursuant to this section shall be extinguished unless the action is
brought within four years after the date the distribution is made.
(c) Any shareholder sued under this section may implead all other
shareholders liable under this section and may compel contribution,
either in that action or in an independent action against
shareholders not joined in that action.
(d) Nothing contained in this section affects any liability which
any shareholder may have under Chapter 1 (commencing with Section
3439) of Title 2 of Part 2 of Division 4 of the Civil Code.
SEC. 9. Section 507 of the Corporations Code is repealed.
SEC. 10. Section 509 of the Corporations Code is amended to read:
509. (a) A corporation may redeem any or all shares which are
redeemable at its option by (1) giving notice of redemption as
provided in subdivisions (b) and (c) or as otherwise provided in its
articles of incorporation, and (2) payment or deposit of the
redemption price of the shares as provided in its articles or deposit
of the redemption price pursuant to subdivision (d).
(b) Subject to any provisions in the articles with respect to the
notice required for redemption of shares, the corporation may give
notice of the redemption of any or all shares subject to redemption
by causing a notice of redemption to be published in a newspaper of
general circulation in the county in which the principal executive
office of the corporation is located at least once a week for two
successive weeks, in each instance on any day of the week, commencing
not earlier than 60 nor later than 20 days before the date fixed for
redemption. The notice of redemption shall set forth all of the
following:
(1) The class or series of shares or part of any class or series
of shares to be redeemed.
(2) The date fixed for redemption.
(3) The redemption price.
(4) If the shares are certificated securities, the place at which
the shareholders may obtain payment of the redemption price upon
surrender of their share certificates.
(c) If the corporation gives notice of redemption pursuant to
subdivision (b), it shall also mail a copy of the notice of
redemption to each holder of record of shares to be redeemed as of
the date of mailing or record date fixed in accordance with Section
701, addressed to the holder at the address of such holder appearing
on the books of the corporation or given by the holder to the
corporation for the purpose of notice, or if no such address appears
or is given at the place where the principal executive office of the
corporation is located, not earlier than 60 nor later than 20 days
before the date fixed for redemption. Failure to comply with this
subdivision does not invalidate the redemption of the shares.
(d) If, on or prior to any date fixed for redemption of redeemable
shares, the corporation deposits with any bank or trust company in
this state as a trust fund, (1) a sum sufficient to redeem, on the
date fixed for redemption thereof, the shares called for redemption,
(2) in the case of the redemption of any uncertificated securities,
an officer's certificate setting forth the holders thereof registered
on the books of the corporation and the number of shares held by
each, and (3) irrevocable instructions and authority to the bank or
trust company to publish the notice of redemption thereof (or to
complete publication if theretofore commenced) and to pay, on and
after the date fixed for redemption or prior thereto, the redemption
price of the shares to their respective holders upon the surrender of
their share certificates, in the case of certificated securities, or
the delivery of the officer's certificate in the case of
uncertificated securities, then from and after the date of the
deposit (although prior to the date fixed for redemption) the shares
called shall be redeemed and the dividends on those shares shall
cease to accrue after the date fixed for redemption. The deposit
shall constitute full payment of the shares to their holders and from
and after the date of the deposit the shares shall no longer be
outstanding and the holders thereof shall cease to be shareholders
with respect to the shares and shall have no rights with respect
thereto except the right to receive from the bank or trust company
payment of the redemption price of the shares without interest, upon
surrender of their certificates therefor, in the case of certificated
securities, and any right to convert the shares which may exist and
then continue for any period fixed by its terms.
In determining the holders of uncertificated securities, the bank
or trust company shall be entitled to rely on any officer's
certificate deposited with it in accordance with this subdivision.
