Governmental Affairs

CLA Advocacy Update

By Saul Bercovitch

The California Lawyers Association’s individual sections have been hard at work pursuing their own legislative proposals. As of this writing, seven section-sponsored bills have passed out of the house of origin and are now in the second house. This is a summary of those bills.

Business Law Section

Corporations Committee

SB 218 Under current law, there is no certain means by which a California corporation can ratify an otherwise lawful corporate act that was not in compliance with the General Corporation Law or the corporation’s articles or bylaws, and have that ratification relate back to the original intended date of the action. This can cause uncertainty and complications for a corporation that believes it took an action years ago, but, because it failed to follow corporate formalities, is concerned that the action might not have been valid. The bill sponsored by the Business Law Section’s Corporations Committee provides two means by which a corporation may retroactively ratify or obtain judicial validation of a corporate action that was, or might have been, invalid at the time it was made. This will resolve the uncertainty under current law that negatively affects the ability of California corporations to raise money, complete mergers, acquisitions, and sales, and undertake other significant transactions. SB 288 Existing law permits a California corporation to convert into another type of California business entity, such as a partnership or a limited liability company, but does not provide a way for a California corporation to convert into a business entity organized under the laws of another state in a single step. Multi-step conversions are more cumbersome, time consuming, and expensive than the single-step conversion process available to corporations in nearly all other states. The Corporations Committee proposed this bill to establish procedures for the direct conversion of domestic corporations into foreign other business entities or foreign corporations. This will encourage business startups to incorporate in California rather than another state by providing needed flexibility through the streamlined process.

Corporations Committee and Nonprofit Organizations Committee

AB 663 Under current law, a California corporation must receive the affirmative consent of its shareholders or members to communicate validly with them by electronic means. The Corporations Committee and Nonprofit Organizations Committee proposed a bill that accomplishes two goals. First, it changes the statutory structure to provide for an opt-out from electronic communication, rather than an opt-in, lessening the burden on corporations to solicit and collect consents, while still preserving the ability of shareholders and members to opt out if they prefer not to receive communications from the corporation by electronic means. Second, current law sets the rules for the use of electronic communications between corporations and their shareholders and members, absent an emergency, and creates limited exceptions during an emergency. This bill allows California corporations the opportunity in non-emergency circumstances to achieve efficiencies of resources and time when conducting shareholder or member meetings using current technology by permitting remote participation (including telephonic participation), while preserving the ability of shareholders and members to attend a meeting in person if and when they want to do so by requiring a meeting to be “hybrid” (i.e., also have a physical location) unless all shareholders or members consent to a “virtual” meeting. When an emergency does arise, the bill authorizes a corporation to use available technology for conducting shareholder or member meetings solely in a “virtual” venue (without the requirement for unanimous shareholder or member consent) when that is the only realistic means available to the corporation.

Nonprofit Organizations Committee

AB 283 Whereas a traditional corporation generates earnings for its owners or shareholders, a cooperative corporation conducts its business primarily for the mutual benefit of its members or patrons. The earnings, savings, or benefits of a cooperative corporation formed under the California Cooperative Corporation Law must be used for the general welfare of its members or be proportionately and equitably distributed to some or all of its members or its patrons, based upon their patronage of the corporation, in the form of cash, property, evidences of indebtedness, capital credits, memberships, or services. Under existing law, Corporations Code Section 25100(r) does not provide an exemption from qualification for any equity securities of a cooperative corporation formed under the law cited above beyond a $1,000 exemption. The bylaws of many (if not most) cooperatives provide for the distributions of the excess of revenues over expenses to their members. Forcing these cooperatives to obtain qualification to retain patronage, even where such distributions are required, imposes unique burdens on the cooperatives. Besides the annual administrative and professional costs, the requirement to obtain governmental qualification can create additional hardships, including possible restrictions, deposits, prospectus requirements, and costly financial audits. The Nonprofit Organizations Committee’s proposed fix with AB 283 will free cooperatives from these burdens at least with respect to patronage-related distributions that are historically a distinctly defining and salient feature of cooperative corporations.

Family Law Section

AB 429 Under current law, all papers, records and hearings pertaining to parentage actions are confidential. This requires a level of secrecy in child custody and child support cases involving unmarried or single parents that is not required in cases involving married or formerly married parents. California’s law was originally enacted in 1975 as part of California’s adoption of the Uniform Parentage Act (UPA) which, in turn, was drafted in 1973. At that time, births outside of marriage accounted for only 11.3 percent of all births in the United States. Today, nearly 40 percent of children are born to unmarried parents. The confidentiality provisions in current law relate back to a time when it was considered immoral to have a child born out of wedlock. This perceived stigma formed the basis for including confidentiality provisions in the UPA. The bill sponsored by the Family Law Section removes the existing confidentiality provisions in current law, except for one category of cases. Parents who use assisted reproduction technology also file parentage actions to determine who is and is not a parent. These parents have contracts between them that provide for confidentiality. Therefore, existing confidentiality will be preserved, but only for cases brought under provisions of the Family Code governing assisted reproduction cases. The change to existing law proposed by the Family Law Section will allow lawyers to better represent their clients, with ease of access to files and records, and aid litigants with other related cases, including domestic violence, child support, and child custody proceedings.

Trusts and Estates Section

SB 329 The Trusts and Estates Section crafted a bill that amends the Code of Civil Procedure to provide that an action brought to enforce a no contest clause contained in a trust or will is not subject to a special motion to strike under California’s anti-SLAPP statute, adding to existing statutory exemptions for other types of actions that have been deemed to fall outside the purpose and intent of the anti-SLAPP law. A no contest clause is a provision that imposes a penalty on a beneficiary who files a pleading alleging the invalidity of a trust or will or one or more of its terms. When a beneficiary files a trust or will contest, a trustee, personal representative, or different beneficiary may file a petition to enforce a no contest clause against the beneficiary who filed the contest. When this happens, the petition to enforce the no contest clause is currently subject to a special motion to strike under California’s anti-SLAPP statute by the party who brought the trust or will contest. Prohibiting the use of anti-SLAPP motions in trust and will contest proceedings will fulfill the decedent’s intent and avoid the delay caused by excessive pre-contest litigation, which harms the efficient and speedy administration of trusts and estates. AB 1079 The trustee and the settlor of a California revocable trust have different roles and responsibilities. A settlor is the person who creates and funds the trust. The trustee is appointed by the settlor to administer the trust. Californians who create a revocable living trust as part of their estate plan generally designate themselves as the initial trustee(s). So long as those individuals are alive and competent, California law protects the privacy of their trust, and remainder beneficiaries have no ability to receive a copy of the trust, no right to be aware of what actions a trustee is taking, and no right to demand accountings. However, where a successor trustee takes over during the settlor’s lifetime because the settlor has become incompetent, the provisions curtailing the rights of remainder beneficiaries to information are lifted. Existing law, as interpreted by the courts, provides that all beneficiaries, regardless of their interest, are then entitled to detailed information pertaining to the trust and actions of the trustee. Current law is likely inconsistent with the intent of most settlors and unnecessarily burdensome on trustees. Under existing law, unless the trust instrument provides otherwise, all beneficiaries, broadly defined under the Probate Code to include even remote and contingent beneficiaries, become able to enforce the duties of the trustee. The Trusts and Estates Section proposed this bill, which provides trustees with clear rules as to when and what must be shared with defined and limited remainder beneficiaries, so that such beneficiaries can enforce the duties of a trustee, thereby providing much needed and reasonable guidance to trustees and beneficiaries alike. Saul Bercovitch is CLA’s Director of Governmental Affairs.

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