United States: California Amends Corporate Disclosure Act

Last Updated: November 11 2004
Article by James R Walther, David Y. Gan and Kenneth Kohler

Originally published November 4, 2004

On September 27, 2004, the Governor of the State of California signed into law Assembly Bill 1000, making changes affecting the substance and timing of the annual disclosure requirements under the controversial California Corporate Disclosure Act (the "California Disclosure Act") that was enacted in late 2002. The amendments took effect immediately and must be observed by all corporations that are incorporated or have qualified to do business in California. Publicly traded corporations should pay particular attention to the amendments as the changes mainly affect the disclosure requirements for publicly traded corporations. The amendments clarify some, but not all, of the most ambiguous of the requirements relating to the public company information disclosures that were originally enacted in 2002. In addition, as noted below, some publicly traded corporations will not be required to file their public company information in 2004.

Background of the California Disclosure Act

The California Disclosure Act, which was originally effective on January 1, 2003, substantially amended the previously existing requirement that each corporation incorporated or qualified to do business in California file periodic information statements disclosing basic information concerning its board of directors, officers and operations. The most significant change for publicly traded corporations was that a number of additional disclosures were required, including, among other things, disclosure of director and executive officer compensation, loans made to directors at preferential rates and disclosure of the name of and any nonaudit services provided by the corporation’s auditors.

The California Disclosure Act was hastily adopted near the end of the 2002 legislative session in California as a response to the collapse of Enron and other business scandals that prompted the enactment by Congress of the Sarbanes- Oxley Act of 2002. Since its adoption, the California Disclosure Act has been criticized by lawyers and their publicly traded clients for a number of serious flaws, including ambiguous language regarding exactly what information was required to be disclosed and its imposition of disclosure requirements that duplicated and, in some instances, exceeded the reporting requirements of the Securities and Exchange Commission. A more detailed discussion of the enactment of and concerns with the California Disclosure Act can be found in our November 21, 2002 Legislative Update on our website at http://www.mayerbrownrowe.com/publications/article.asp?id=210&nid=6.

Transition Period

The revised public company disclosure requirements described below are embodied in a separate form required to be filed within 150 days after a corporation’s fiscal year end. We have received informal guidance through discussions with the California Secretary of State’s office that publicly traded corporations whose filing periods end in October, November or December of 2004 will not be required to comply with the filing requirements of newly enacted Sections 1502.1 and 2117.1 of the California General Corporation Law (the "Corporations Code") in 2004. Instead, they will first be required to file the information required thereunder within 150 days after the end of their 2005 fiscal years.

Summary of Amendments The recently enacted amendments make both substantive changes and a number of clarifying technical changes to the California Disclosure Act. The full text of the amendments and the updated forms to be used for filings can be found at http://www.ss.ca.gov/business/corp/corp_soinfo.htm.

New Timing and Definitions

Sections 1502 and 2117 of the Corporations Code continue the pre-amendment requirements applicable to all privately held and publicly traded corporations that are incorporated or qualified to do business in California. Sections 1502 and 2117 require corporations to file a statement of information annually that discloses basic information regarding the corporation, including the names and addresses of the corporation’s directors and officers and the type of business the corporation is engaged in. This information statement must be filed within the six-month period ending with the month in which the original articles of incorporation (for a California corporation) or qualification to do business (for a non- California corporation) was filed with the California Secretary of State. For example, this means that a California corporation that filed its original articles of incorporation in July must file its annual statement of information during the months of February through July of each succeeding year.

The revised disclosure requirements for publicly traded corporations are now set forth in new Sections 1502.1 and 2117.1 of the Corporations Code. The definition of "publicly traded corporation" has been amended to clarify that these requirements apply only to a corporation (and not to non-corporate entities such as business trusts, limited liability companies, partnerships or associations) that is an "issuer" as defined under Section 3(a)(8) of the Securities Exchange Act of 1934 and has at least one class of securities listed or admitted for trading on a national securities exchange such as the New York Stock Exchange, on the Nasdaq National Market or Small-Cap Market, on the OTC Bulletin Board, or in the "Pink Sheets."

The public company disclosures required under Sections 1502.1 (for California corporations) and 2117.1 (for non- California corporations) must be filed within 150 days after the end of the corporation’s fiscal year. Prior to the amendments, the California Disclosure Act required that public company information be filed along with the basic information within the six-month period described above. Note this means that many publicly traded corporations will have two different filing deadlines in California, one for the basic information required under Sections 1502 and 2117, and one for the additional public company disclosures required in the separate filings provided for in Sections 1502.1 and 2117.1.

Revised Disclosure Requirements

The disclosure requirements for publicly traded corporations have been revised to require disclosure of the following information:

  • Independent Auditor. The name of the independent auditor that prepared the most recent auditor’s report on the corporation’s annual financial statements and, if different, the name of the corporation’s current auditor.
  • Non-audit Services. Any "other" (meaning non-audit) services performed for the corporation by the corporation’s independent auditor and certain of the auditor’s affiliates during the corporation’s two most recent fiscal years and during the period between the end of its most recent fiscal year and the date of the statement of information. Pre-amendment, the required disclosure was of non-audit services during the 24 months prior to filing.
  • Director and Officer Compensation. The compensation for the most recent fiscal year paid to each member of the board of directors and each of the five most highly compensated executive officers who are not members of the board of directors. The compensation paid to the CEO must also be disclosed, if the CEO is not among the five most highly compensated executive officers. These requirements are broader than the SEC disclosure rule, which generally only requires disclosure for the CEO and the four other most highly compensated executive officers, in addition to disclosure of director compensation arrangements. The definition of "executive officer" has been amended to parallel the definition of "officer" in Rule 16a-1 under the Securities Exchange Act of 1934. In addition, the definition of "compensa tion" for purposes of Sections 1502.1 and 2117.1 of the Corporations Code now refers specifically to the compensation disclosure requirements set forth in Item 402 of SEC Regulation S-K.

Previously, there was some question as to whether the compensation of additional executive officers beyond the five most highly compensated executive officers was required to be disclosed when one or more of the five most highly compensated executive officers are also directors. This was because the term "executive officer" was defined as "the five most highly compensated officers excluding any officer who is also a member of the board of directors." It was also unclear whether compensation information was to be provided for the most recent fiscal year or some other time frame, such as the trailing twelve months preceding the filing.

  • Loans to Directors. A description of any loan made to any member of the board of directors by the corporation during the two most recent fiscal years at an interest rate lower than the rate available from an unaffiliated commercial lender to a similarly-situated borrower. The definition of "loan" now specifically excludes advances for expenses and payments by the corporation of life insurance premiums to the extent permitted by the laws of the corporation’s state or place of incorporation. Also, prior to the amendments, the language required disclosure of loans at a "preferential loan rate," but did not define what that meant.
  • Bankruptcy Proceedings. Whether an order for relief has been entered in a bankruptcy case with respect to the corporation, its executive officers or any member of its board of directors, within the 10 years prior to the date of the statement of information. Pre-amendment, the disclosure obligation only covered voluntary bankruptcy filings. Now, every case, voluntary or involuntary, must be disclosed, except for successfully contested involuntary cases in which no order for relief is entered. The time period and scope of this California disclosure requirement are different from corresponding SEC disclosure requirements.
  • Fraud Convictions. Whether any member of the board of directors or any executive officer has been convicted of fraud during the past 10 years, if the conviction has not been overturned or expunged. Prior to the amendments, there was no exception for "overturned or expunged" fraud convictions. The time period and scope of this California disclosure requirement are also different from corresponding SEC disclosure requirements.
  • Material Legal Proceedings. A description of (i) material pending legal proceedings, other than ordinary routine litigation incidental to the corporation’s business, that would be required to be disclosed under Item 103 of SEC Regulation S-K (the standard used for determining disclosure of legal proceedings in a company’s SEC reports on Forms 10-K and 10-Q) and (ii) material legal proceedings in which the corporation was found liable on final judgment or final order that was not overturned on appeal during the five years prior to the date of the statement of information. Pre-amendment, the required disclosure was for violations of "federal security laws or any banking or security provision of California law" during the prior 10 years in which a judgment exceeding $10,000 was entered.

New Questions

The amendments have removed some of the ambiguities and other problems that previously existed in the California Disclosure Act. However, not all problems have been resolved and, as with any legislation, new questions of interpretation may surface.

For example, the director and executive officer "compensation" is now determined with reference to the relevant SEC definition under Item 402 of Regulation S-K. The statement of information provided by California to make such compensation disclosure, however, has a different and more limited number of categories of compensation than that under Item 402, which requires disclosure of a number of separate categories of compensation, including salary, bonus, other annual compensation, restricted stock awards, securities underlying options and payouts under long-term incentive plans. Presumably the value of the categories of compensation required to be disclosed under Item 402 and not separately captured in the California form will need to be combined to fit under one or more of the limited categories provided in the California form.

Legal counsel should be consulted to assure compliance with the newly-updated disclosure requirements. Among other things, affected companies will want to review and, if needed, update their director and officer questionnaires to ensure that they obtain the necessary information under the amended disclosure requirements. Note that as before, monetary and other penalties may apply for noncompliance and that a knowing filing of a false material statement by a director, officer or agent of a corporation is punishable under the California Code as a felony.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions