Selected Developments in Business Law — Organizing Corporations in California

April 2024

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the January 2024 update to Organizing Corporations in California.  References are to the book’s section numbers.  The most significant legal developments affecting corporate formation practice in California since the last update include developments in such important topic areas as board diversity requirements, director inspection rights, the Corporate Transparency Act, crowdfunding, jurisdiction, and more. 

January 2024 Update

In Hacker v Fabe (2023) 92 CA5th 1267, the court allowed a company owner to be added as an alter ego judgment debtor because of the owner’s bad faith conduct in transferring assets while exercising complete control over the company. See §1A.2.

In Reliant Life Shares, LLC v Cooper (2023) 90 CA5th 14, the court allowed reverse veil piercing. See §1A.25.

The California Secretary of State no longer accepts name reservations other than through its online service, Bizfile Online. An available name can be reserved at the Secretary of State’s website for a fee of $10. Click on “Reserve a Business Entity Name” on the home page of the Bizfile Online service, scroll down the page and open the form for “Entity Name Reservation – Corporation, LLC, LP” and complete and submit the form online. See §2.9.

Assembly Bill 979 was signed into law in 2020 by Governor Newsom. This bill amended Corp C §301.3 and added Corp C §§301.4 and 2115.6, to require each publicly held corporation that is incorporated in California or has its principal office in California to include at least one person from an “underrepresented community” on its board by the end of 2021, and two or three, depending on the size of the board, by the end of 2022. In a recent case, the U.S. District Court for the Eastern District of California struck down AB 979. On May 16, 2023, the court granted summary judgment for the plaintiff, finding that AB 979 violates the equal protection clause and is unconstitutional on its face because it imposes a racial quota by requiring a certain fixed number of board positions to be reserved exclusively for certain minority groups. The court concluded that the unconstitutional aspects of AB 979 could not be severed, and invalidated the bill in its entirety. Alliance for Fair Bd. Recruitment v Weber (ED Cal, May 15, 2023, No. 2:21-cv-01951-JAM-AC) 2023 US Dist Lexis 85662. The California Secretary of State has appealed the court’s decision, and the appeal is pending. See §2.113A.

The first set of final regulations under the Corporate Transparency Act (CTA) (Pub L 116–283, 134 Stat 4604) was issued by the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury on September 30, 2022, and is codified in 31 CFR pt 1010. See 87 Fed Reg 59498. These regulations establish the reporting deadlines and clarify who must file reports and what information must be reported. In addition, on December 16, 2022, FinCEN proposed regulations to implement the strict protocols on security and confidentiality required by the CTA to protect the information reported to it. See §2B.4; 87 Fed Reg 77404. Finally, on January 17, 2023, FinCEN issued a proposed form for reporting the information required (see 88 Fed Reg 2760) and a proposed form of application for a so-called FinCEN identifier (see §2B.3A; 88 Fed Reg 2764). See §2B.1.

In September 2023, FinCEN published a Small Entity Compliance Guide, available at https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf, which is intended to help small businesses determine whether they are required to file a report and what information will need to be reported. See §§2B.1, 2B.6.

A FinCEN identifier is a unique identifying number that FinCEN will issue to an individual or entity that submits an application with their identifying information to FinCEN directly. See 31 CFR §1010.380(a)(4). On January 17, 2023, FinCEN issued a proposed form of application for a FinCEN identifier, including all the data fields to be requested on the application. Obtaining a FinCEN identifier is voluntary, but individuals must keep the information submitted to FinCEN updated if any of that information changes. Obtaining a FinCEN identifier may be very useful for individuals who are beneficial owners of several entities or who prefer not to submit their personal information to a reporting company. See §2B.3A.

In March 2023, FinCEN issued some initial guidance regarding beneficial ownership information reporting, available at https://www.fincen.gov/news/news-releases/fincen-issues-initial-beneficial-ownership-information-reporting-guidance. See §2B.6.

On November 15, 2022, National Small Business United (d/b/a the National Small Business Association) filed an action against the U.S. Department of the Treasury and other parties for declaratory and injunctive relief, alleging that the CTA is unconstitutional on several grounds. See Complaint filed in National Small Bus. United v Yellen (ND Ala, No. 5:22-cv-01448), https://www.courtlistener.com/docket/66579602/national-small-business-united-v-yellen/. See §2B.7.

In Lee v Fisher (9th Cir 2023) 70 F4th 1129, the court affirmed dismissal of the case on forum non conveniens grounds. The company’s bylaws designated the Delaware Court of Chancery as the appropriate forum for derivative actions. The court held that the forum selection clause was not void or unenforceable. See §§5.70, 5.83A.

In Preciado v Freightliner Custom Chassis Corp. (2023) 87 CA5th 964, an action arising from a bus accident, the court held that California did not have general jurisdiction over the manufacturer of the bus’s chassis, a Delaware corporation, because the company’s principal place of business was in South Carolina and the company had no offices or facilities in California. It was not enough that its products were sold and serviced in California through independent dealers. See §§5.79, 5.83.

In EpicentRx, Inc. v Superior Court (2023) 95 CA5th 890, the court held that the trial court had correctly denied a motion to dismiss a minority shareholder’s lawsuit on forum non conveniens grounds, after concluding that the mandatory forum selection clauses in a Delaware corporation’s certificate of incorporation and bylaws were unenforceable. The clauses specified the Delaware Court of Chancery, in which litigants had no right to a civil jury trial. The court of appeal held that enforcement of the forum selection clauses would deprive the minority shareholder of its jury trial right under Cal Const art I, §16, in violation of California’s public policy against implied predispute jury trial waivers outside the exclusive statutory waiver methods specified in CCP §631. See §5.83A.