Corporations Committee Proposes Changes to the Corporations Code: Allow the Ratification of Noncompliant Corporate Actions and Permit Conversion of a Corporation into a Foreign Entity

The Corporations Committee is proposing two important changes to the California Corporations Code. These were introduced in the Senate on January 21, 2020 as SB 870 and on February 3, 2020 as SB 913. 

SB 870 proposes to add Section 119 to the Corporations Code, which would allow the ratification or validation of an otherwise lawful corporate action not in compliance with law or the corporation’s bylaws or articles by the superior court, which would be conclusive absent actual fraud in the process.  Section 119 would also provide, among other things, the following:

• It would not be the exclusive means for ratification or validation in that a corporation would also be permitted to ratify or validate a corporate action or correction of a record by other means, such as board approval, shareholder approval and filing a certificate of correction pursuant to Section 109 of the Corporations Code. 
• Ratification pursuant to Section 119 would require approval by the board and, as applicable, the outstanding shares in accordance the Corporations Code and the articles and bylaws in effect at the time of ratification, unless a higher approval standard was or would have been applicable to the original taking of the corporate action, in which case the ratification must be approved in accordance with such higher approval standard. 
• The corporation would be required to provide notice of the ratification to its shareholders either before or promptly after ratification. 
• Ratification or validation would not be permitted if it would cause an instrument previously filed with the Secretary of State to become incorrect or incomplete. 
• A corporation would be permitted to file a Certificate of Ratification if a ratification or validation of a corporate action affirms an instrument previously filed with the Secretary of State as long as the previous instrument at the time of its filing was not in compliance with law or the corporation’s article or bylaws and it accurately reflected the action that is being ratified or validated.  A Certificate of Ratification may not have a future effective date but would be effective retroactively to the date of the record being ratified, provided that the ratified corporate action is effective when filed with respect to persons that previously relied on the original record and would be adversely affected by the retroactive effect.

SB 870 proposes to amend Section 1150 of the Corporations Code to allow for the conversion of a corporation into a foreign corporation or a foreign other business entity,  and would require the converting corporation to file a certificate of conversion with the Secretary of State.  Section 115 permits the conversion of corporations into a domestic other business entity, including, but not limited to, a limited liability company or a partnership, but does not currently permit the conversion into a foreign corporation or other entity.

This e-Bulletin was prepared by Katherine J. Blair of Manatt, Phelps & Phillips, LLP. Ms. Blair is Vice Chair, Publications and a member of the Corporations Committee of the Business Law Section of the California Lawyers Association.