CORPORATE TRANSACTIONS & COMPLIANCE BLOG

California Expands Its Conversion Statute

By: Pia Angelikis, Esq., COGENCY GLOBAL on Thu, Dec 01, 2022

What this is – A new law on the books in California allows domestic corporations to convert into other foreign entity types.

What this means – Under this new law, a California Corporation can convert into another entity type in another state, provided that the foreign state also allows for the conversion. It can also convert into a foreign corporation – a process referred to in some states as “redomestication”

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On September 2, 2022, California Governor Gavin Newsom signed Senate Bill 49 (SB 49) into law. SB 49 amends the California Corporations Code (CCC) to allow domestic corporations to convert into foreign entity types. Currently, California only allows domestic corporations to convert into other domestic entity types.

For example, under current law, a California corporation can convert into a California LLC, but it cannot convert into a Delaware LLC. SB 49 will change that when it takes effect on January 1, 2023. Once effective, SB 49 will allow a California Corporation to convert into another entity type in another state, provided that the foreign state also allows for the conversion.

Under this new law, a California Corporation can also convert into a foreign corporation – a process referred to in some states as “redomestication”. Below are some key details of this important bill.

Procedures

CCC Section 1151 currently pertains to the conversion of a corporation only into a domestic other business entity. The section, as amended, provides that a corporation may be converted into a domestic other business entity, foreign other business entity, or a foreign corporation upon satisfaction of certain conditions.

Requirements for the plan of conversion

CCC Section 1152, as amended, lists the conversion plan requirements for a corporation that desires to convert to a domestic other business entity, foreign other business entity, or foreign corporation. The amendment adds that the plan must include the name, form, and jurisdiction of organization of the converted entity after conversion. The amendment also clarifies that the plan include the provisions of the governing documents for a converted entity, including the partnership agreement if the converted entity is a partnership, the articles of organization or certificate of formation and operating agreement if the converted entity is a limited liability company, or the articles or certificate of incorporation if the converted entity is a corporation.

CCC Section 1152 adds that the conversion of a corporation into a foreign general or limited partnership or into a foreign limited liability company be subject to specified shareholder approval requirements. In addition, the converted entity is required to keep the plan of conversion at the office at which records are to be kept under the laws of the applicable jurisdiction if the converted entity is a foreign other business entity or foreign corporation.

Filing

CCC Section 1153, as amended, provides that after approval of the plan of conversion by the board and outstanding shares of a corporation, the converting corporation must cause the filing of all documents that the law requires for the conversion and creation of the converted entity, including in the case of a corporation converting into a foreign corporation or other foreign business entity, the laws of the state or place of organization of the foreign corporation or other business entity. The documents must include a certificate or statement of conversion. (CCC Sections 1153, 1155, 1157). In the case of a corporation converting into a foreign corporation or foreign other business entity, CCC Section 1153, as amended, states that conversion will become effective according to the laws of the state or place of organization of the foreign corporation or other business entity (CCC Section 1153).

Fees

SB 49 waives the current $150 fee for filing a plan of conversion in California.

The above covers many, but not all, of the key aspects of SB 49. The full text of SB 49 is available here.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Cogency Global News, U.S. Corporate Services