California broadly authorizes a corporation to sell, lease, convey, exchange, transfer or otherwise dispose of all or substantially all of its assets when the principal terms have been approved by the board. If the sale is not in the usual and regular course of business, the principal terms must also be approved by the outstanding shares. Cal. Corp. Code § 1001(a). For a discussion of the meaning of “approved by the outstanding shares”, see this post from last week.
If the acquiring party is in control of or under common control with the disposing corporation, then the principal terms of the sale must be approved by at least 90% of the voting power of the disposing corporation. Cal. Corp. Code § 1001(d). The term “voting power” is defined to mean the power to vote for the election of directors at the time any determination of voting power is to be made and does not include the right to vote upon the happening of some condition or event that has not yet occurred. Cal. Corp. Code § 194.5. The statute includes a special rule when different classes of shares are entitled to vote as separate classes for different members of the board. The purpose of this requirement is analogous to other provisions in the California General Corporation Law that are intended to prevent cashing out of minority shareholders (Sections 1101 and 407). The 90% threshold is the same that required to effect a short-form merger (Section 1110).
There are at least two exceptions to this rule. First, a higher vote is not required if the disposition is to a domestic or foreign corporation or other business entity in consideration of the nonredeemable common shares or nonredeemable equity securities of the acquiring party or its parent. Presumably, this is an exception because the minority shareholders are not being squeezed out. Second, an exception is made if the terms and conditions of the transaction (and the fairness thereof) are approved by the Commissioner of Corporations, Commissioner of Financial Institutions, Insurance Commissioner, or Public Utilities Commission. Cal. Corp. Law § 1001(e).
Should you be wondering why this post has so many terms in red, I’ve done this to illustrate how just many terms are defined in the General Corporation Law. Although the GCL often includes a reference to the definitional sections in parentheses, this practice is by no means universal. Further, many terms such as “corporation” “vote” and “class” are common and readers may not expect that the GCL has defined these in particular ways. Note that in the case of Section 1001, the term “control” has a special meaning – the ownership directly or indirectly of “shares” of “equity securities” possessing more than 50% of the the “voting power” of a “domestic corporation”, a “foreign corporation”, or an “other business entity”. Cal. Corp. Code § 160(b).