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CALIFORNIA CORPORATE & SECURITIES LAW

Why Some Delaware Corporations May Be Concerned With California’s Supermajority Vote Requirements

Section 710(b) of the California Corporations Code defines a “supermajority vote” as a requirement set forth in a corporation’s articles of incorporation (or certificate of determination) that specified actions be approved by a larger proportion of the outstanding shares than a majority, or by a larger proportion of the outstanding shares of a class or series than a majority.  Most readers won’t find this definition either novel or alarming.  Some readers, however, may be nonplussed to learn that a supermajority vote requirement subject to Section 710 may not exceed 66 2/3 percent of the outstanding shares or 66 2/3 percent of the outstanding shares of any class or series of those shares.  These readers may even be unnerved to learn that Section 710 may be applicable to foreign corporations meeting the conditions set forth in Corporations Code Section 2115.

A statute so confused, so strange, so outrageous, and so variable

Explaining the application of Section 710 is no easy task for this writer.  First, the statute does not apply to corporations with just a few shareholders, i.e, those with outstanding shares held by fewer than 100 persons (as determined in Section 305 of the Corporations Code).  Expressed more positively, Section 710 applies to corporations with shares held of record by 100 or more persons.  Second, the statute applies only to a corporation that files an amendment to its articles or certificate of incorporation containing a supermajority vote provision on or after January 1, 1989.

But wait, there’s more.  A special rule applies to corporations that file an amendment on or after January 1, 1994.  Section 710 does not apply to a corporation if at the time of filing, the corporation has (i) outstanding shares of more than one class or series of stock, (ii) no class of equity securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, and (3) outstanding shares held of record by fewer than 300 persons (as determined by Section 605).  What could the legislature have possibly been thinking in creating this bizarre exception?  This exception was the result of a legislative compromise intended to facilitate venture capital financings.  The result of conditions is to impose the statute’s limitations on supermajority vote provisions on privately held corporations with large numbers of stockholders of record.  Formerly, only a small number of corporations may have met the parameters of Section 710.  Now, the number of companies subject to Section 710 may be much larger as a result of  the increased thresholds for registration and termination under the Exchange Act established by the Jumpstart Our Business Startups Act  and Title LXXXV of the Fixing America’s Surface Transportation Act.

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