Chapter 10Reorganizations

Section § 3400

Explanation

This section outlines the approval process required for certain types of corporate reorganizations involving social purpose corporations. Specifically, any reorganization or tender offer involving a merger or share exchange must be approved by the board of several entities. These include each social purpose corporation involved in the merger, the acquiring corporation in an exchange, and both the acquiring and acquired corporations in a sale-of-assets scenario. Additionally, any parent corporation controlling any involved entities must approve if its equity securities are part of the transaction.

A reorganization or a share exchange tender offer shall be approved by the board of all of the following:
(a)CA Corporations Code § 3400(a) Each constituent social purpose corporation in a merger reorganization.
(b)CA Corporations Code § 3400(b) The acquiring social purpose corporation in an exchange reorganization.
(c)CA Corporations Code § 3400(c) The acquiring social purpose corporation and the social purpose corporation whose property and assets are acquired in a sale-of-assets reorganization.
(d)CA Corporations Code § 3400(d) The acquiring social purpose corporation in a share exchange tender offer.
(e)CA Corporations Code § 3400(e) The social purpose corporation in control of any constituent or acquiring domestic or foreign social purpose corporation or other business entity under subdivision (a), (b), or (c) and whose equity securities are issued, transferred, or exchanged in the reorganization, hereafter a “parent party.”
social purpose corporation board approval reorganization merger reorganization exchange reorganization sale-of-assets reorganization share exchange tender offer parent party equity securities acquiring corporation constituent corporation domestic social purpose corporation foreign social purpose corporation
(Amended by Stats. 2014, Ch. 694, Sec. 62. (SB 1301) Effective January 1, 2015.)

Section § 3401

Explanation

This section outlines the rules for approving a reorganization of a social purpose corporation. Generally, shareholders need to approve the reorganization plans unless certain conditions are met. If shareholders will own most of the voting power after reorganization, approval isn't needed. Approval is also required if the reorganization affects shareholder rights or involves foreign corporations or if shareholders will be personally liable. A two-thirds vote is generally required, but it could be more depending on the articles of the corporation. Finally, the board can abandon the reorganization after approval, depending on any third-party contractual obligations.

(a)CA Corporations Code § 3401(a) The principal terms of a reorganization shall be approved by the outstanding shares of each class of each social purpose corporation the approval of whose board is required under Section 3400, except as provided in subdivision (b) and except that, unless otherwise provided in the articles, no approval of any class of outstanding preferred shares of the surviving or acquiring social purpose corporation or parent party shall be required if the rights, preferences, privileges, and restrictions granted to or imposed upon that class of shares remain unchanged, subject to the provisions of subdivision (c). For the purpose of this subdivision, two classes of common shares differing only as to voting rights shall be considered as a single class of shares.
(b)CA Corporations Code § 3401(b) No approval of the outstanding shares is required by subdivision (a) if the social purpose corporation, or its shareholders immediately before the reorganization, or both, shall own, immediately after the reorganization, equity securities, other than any warrant or right to subscribe to or purchase those equity securities, of the surviving or acquiring social purpose corporation or a parent party possessing more than five-sixths of the voting power of the surviving or acquiring social purpose corporation or parent party. In making the determination of ownership by the shareholders of a social purpose corporation, immediately after the reorganization, of equity securities pursuant to the preceding sentence, equity securities that they owned immediately before the reorganization as shareholders of another party to the transaction shall be disregarded. For the purpose of this section, the voting power of a social purpose corporation shall be calculated by assuming the conversion of all equity securities convertible, immediately or at some future time, into shares entitled to vote but not assuming the exercise of any warrant or right to subscribe to or purchase those shares.
(c)CA Corporations Code § 3401(c) Notwithstanding subdivisions (a) and (b), the principal terms of a reorganization shall be approved by the outstanding shares of the surviving social purpose corporation in a merger reorganization, as otherwise required by Chapter 10 (commencing with Section 3400), if any amendment is made to its articles that would otherwise require that approval.
(d)CA Corporations Code § 3401(d) Notwithstanding subdivisions (a) and (b), the principal terms of a reorganization shall be approved by the affirmative vote of at least two-thirds of each class, or a greater vote if required in the articles, of the outstanding shares of any class of a social purpose corporation that is a party to a merger or sale-of-assets reorganization if holders of shares of that class receive shares of the surviving or acquiring social purpose corporation or parent party having different rights, preferences, privileges, or restrictions than those surrendered. Shares in a foreign corporation received in exchange for shares in a domestic social purpose corporation shall be deemed to have different rights, preferences, privileges, and restrictions within the meaning of the preceding sentence.
(e)CA Corporations Code § 3401(e) Notwithstanding subdivisions (a) and (b), the principal terms of a reorganization shall be approved by the affirmative vote of at least two-thirds of each class, or a greater vote if required in the articles, of the outstanding shares of any social purpose corporation that is a close social purpose corporation if the reorganization would result in the holders receiving shares or other interests of a corporation or other business entity that is not a close social purpose corporation. The articles may provide for a lesser vote, but not less than a majority of the outstanding shares of each class.
(f)CA Corporations Code § 3401(f) Notwithstanding subdivisions (a) and (b), the principal terms of a reorganization shall be approved by a vote of at least two-thirds of the outstanding shares of each class, or a greater vote if required in the articles, of a social purpose corporation that is a party to a merger reorganization, regardless of whether that class is entitled to vote thereon by the provisions of the articles, if holders of shares of that class receive interests of a surviving other business entity in the merger that is not a social purpose corporation, or receive interests of a surviving social purpose corporation the articles of incorporation of which specify a materially different purpose as part of the reorganization.
(g)CA Corporations Code § 3401(g) Notwithstanding subdivisions (a) and (b), the principal terms of a reorganization shall be approved by all shareholders of any class or series if, as a result of the reorganization, the holders of that class or series become personally liable for any obligations of a party to the reorganization, unless all holders of that class or series have the dissenters’ rights provided in Chapter 13 (commencing with Section 1300) of Division 1.
(h)CA Corporations Code § 3401(h) Any approval required by this section may be given before or after the approval by the board. Notwithstanding approval required by this section, the board may abandon the proposed reorganization without further action by the shareholders, subject to the contractual rights, if any, of third parties.
social purpose corporation reorganization approval outstanding shares voting rights equity securities merger reorganization sale-of-assets shareholder liabilities dissenters' rights close social purpose corporation foreign corporation exchange shareholder vote conversion of securities board abandonment contractual rights
(Amended by Stats. 2014, Ch. 694, Sec. 63. (SB 1301) Effective January 1, 2015.)