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CALIFORNIA CORPORATE & SECURITIES LAW

Is It Necessary To Check With The Shareholders Before Hocking The Corporate Crown Jewels?

Corporations Code Section 1001(a) authorizes a corporation to “sell, lease, convey, exchange, transfer, or otherwise dispose of all or substantially all of its assets” if the principal terms are approved by the board, and, unless the transaction is in the usual and regular course of its business, approved by the outstanding shares.  While this suggests that a mortgage of all of a corporation’s assets outside the regular course of business would require approval of the outstanding shares, Section 1000 provides that the board of directors may approve any “mortgage, deed of trust, pledge or other hypothecation of all or any part of a corporation’s property, real or personal, for the purpose of securing the payment or performance of any contract or obligation”.

However, shareholder approval or approval of the outstanding shares may be required by the articles of incorporation.  Therefore, unless one checks the articles of incorporation, one can’t be sure that board approval alone is sufficient authorization when a mortgage involves all or substantially all of the corporate assets outside the ordinary course.

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