New Laws Bring California Into Alignment With U.S.

Starting in 2012, a variety of new laws passed that directly affect California businesses. There were new filing requirements for exempt securities offerings involving real estate, changes to the rights of dissenting shareholders in reorganization transactions, and enactment of a permanent exemption from registration for certain “private investment advisers” under California law.

California’s rules on lawful corporate distributions and dividends were clarified and restated and rule-making under the JOBS Act and implementation of Dodd-Frank continued. California also welcomed the “hybrid corporation,” an entity that lawfully may pursue both profits and advance social causes, without risk of breaching fiduciary duties: the “benefit corporation” and the “flexible purpose corporation,” each with their own separate statutory regime.

California Revised Uniform Limited Liability Company Act

Businesses should also be aware of three new California laws that become effective on Jan. 1, 2014: an entirely new act governing California limited liability companies, new provisions affecting the powers of corporations during emergencies and revisions to the means by which California corporations may approve and consummate certain mergers.

The California Revised Uniform Limited Liability Company Act (“Act”) is the product of an effort to make California’s rules of limited liability company formation and operation more consistent and uniform with the laws of other states. California was the seventh state to adopt some form of the Uniform Act, with a number of significant deviations consistent with California policy.

The act purports to apply to all LLCs, even those formed prior to Jan. 1, 2014, and thus some caution is warranted. Because there are new default rules (statutory provisions triggered when the LLC operating agreement remains silent) and different terminology, there could be a conflict between the requirements of the act and LLC operating agreements signed before the law took effect.

An entirely new bill to address some of the inconsistencies and imperfections has already been introduced in the Legislature.

AB 491 (Emergency Powers)

In addition, a new measure to authorize the conduct of corporate activities during emergencies will become effective Jan. 1, 2014. California corporations will be authorized to take specific actions to continue to conduct its ordinary business during an emergency. They will also be allowed to adopt bylaws along the same lines.

The amendments protect corporate actions taken in good faith and clarify the lines of command and responsibility in the event of the sudden loss of a substantial portion of the management or board due to a catastrophic event. These new provisions also found their roots in a model act: The Model Business Corporation Act.

Thirty-eight U.S. jurisdictions have adopted similar emergency powers and bylaw provisions.

AB 457 (Approval of Certain Reorganization Transactions by Written Consent)

Finally, also enacted into law was Assembly Bill 457 which amends of Section 603(b) of the California Corporations Code concerning shareholder action taken by written consent. Under current law, a 10-day waiting period must lapse before consummation of corporate reorganizations approved by less than unanimous written consent unless the written consent of all shareholders was solicited. The proposal at first received some criticism based on shareholder rights.

Naysayers suggested the 10-day waiting period causes no harm, ignoring the direct costs of consent solicitation, confidentiality risks, and risks to the transaction created by the delay.

Ultimately, the proponents were successful in changing a law that forced corporations to incur increased costs and incremental risks without justification. This was a small victory, to be sure, but one that should help empower further efforts to promote efficiency and provide flexibility to corporations without impairing shareholder protection afforded by other existing laws.

The three new laws discussed above provide a glimmer of encouragement to California businesses. California business laws are too often the outliers, creating an atmosphere where entities doing business in California must “expect the unexpected.” The new LLC Act and the emergency powers law bring our laws into greater alignment with the laws of other U.S. jurisdictions.

The merger approval law creates greater flexibility for corporations with no loss of protection for shareholders. Some argue that California business laws put the highest premium on the protection of shareholder rights even to the detriment of allowing companies flexibility and freedom to operate and grow.

Whether or not this is true, the time is right for legislation that will encourage businesses while making them subject to reasonable regulation that prevents real harm.

One measure along these lines that is on tap for 2014 is new legislation creating a safe harbor for “finders” in securities transactions. Many believe that the activities of legitimate “finders” are beneficial to the orderly flow of transactions, and are particularly important in the raising of capital by small to mid-sized businesses.