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CALIFORNIA CORPORATE & SECURITIES LAW

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Shares of Foreign Subsidiaries

I expect that little or no thought is given to the possible application of California’s Corporate Securities Law of 1968 when a corporation incorporates a subsidiary under the laws of a foreign country.  However, the issuance of shares to a corporate parent located in California may well involve the offer and sale of securities in California.  As such, the issuance must be qualified unless exempt from qualification.  Cal. Corp. Code § 25110.

It turns out that there is an exemption just for this situation.  Rule 260.105.22 exempts any offer or sale of common shares issued by any corporation organized under the laws of a foreign country, provided all of the following conditions are met:

  • After such offer and sale, 100% of the outstanding capital stock of the issuer is owned by a corporation, directly or indirectly, in its own name or in the name of nominees or other persons holding for the sole benefit of such corporation;
  • The acquiring corporation represents that the securities are purchased for its own account for investment and not with a view to, or for sale in connection with, any distribution of the shares; and
  • All such shares shall be evidenced by certificates which shall have stamped or printed prominently on their face a legend in the form prescribed by Rule 260.141.11.

The last condition is the most problematic.  The legend prescribed by Rule 260.141.11 is:

“IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS [sic] OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.”

Although Rule 260.105.22 permits the issuance of shares of the foreign subsidiary to its parent without consent, I expect that the restriction on subsequent transfers without prior consent of the Commissioner will make this exemption unpalatable to most issuers.  These issuers may choose to rely on other exemptions such as Corporations Code Section 25102(f) or federal preemption via Rule 506.

“there is nothing can spoil a persons [sic] appreciation of good stuff like typographical errors.”*

I began writing this blog over seven years ago and have over 1,800 posts.  Over the years, I have been grateful to those readers who have pointed out typos.  I’m sure, however, there there are still many that I and they have missed.  Recently, I received an email that included the following banner:

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Spell check obviously doesn’t help weed out this type of error.

*Ernest Hemingway, Letter to Ernest Walsh and Ethel Moorhead (Jan. 7, 1925).

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