California Amends State Law to Better Accommodate SEC E-Proxy Rules

July 24, 2008

On July 22, 2008, Governor Schwarzenegger signed into law Bill 1409. Bill 1409 amends Section 1501 of the California Corporations Code to better accommodate the SEC’s e-proxy rules by allowing annual report delivery in California to be satisfied if a corporation with an outstanding class of securities registered under the Securities Exchange Act complies with certain federal regulations relating to Internet availability of an annual report, referred to as the e-proxy rules. The California Corporations Code Section 1501 requirement that a corporation’s board deliver its annual report to shareholders no later than 120 days after the close of its fiscal year is now satisfied by compliance with Section 240.14a-16 of Title 17 of the Code of Federal Regulations, which codifies delivery of annual reports and proxy materials via electronic transmission.

Prior to the enactment of Bill 1409, Section 1501 of the California Corporations Code created uncertainty as to some corporations’ ability to fully use e-proxy for delivery of annual reports. Section 1501 required companies with corporate headquarters in California or that customarily held their board meetings in the state to deliver an annual report to each shareholder. Section 1501’s delivery requirement was subject to Section 20 which requires affirmative prior consent from a shareholder before an electronic transmission to the shareholder would constitute "delivery." These rules contrasted with the newly released federal e-proxy rules which allow delivery by electronic transmission on the basis of constructive permission, requiring delivery in hard copy where requested by a stockholder. This difference left public companies with the burden of determining how to comply with the potentially conflicting federal and California laws. 

This bill has been approved as an urgency statute, and thus, it takes effect immediately. Corporations in the State of California can take advantage of technological improvements and achieve the costs savings afforded by federal regulations by allowing corporations to provide their materials to shareholders via the Internet.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s Securities Regulation and Corporate Governance Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or any of the following:

Lisa A. Fontenot – Palo Alto  (650-849-5327, lfontenot@gibsondunn.com
David M. Hernand – Los Angeles (310-552-8559, dhernand@gibsondunn.com
Michael J. Scanlon – Washington, D.C. (202-887-3668 , mscanlon@gibsondunn.com)
Marcie M. Areias – Palo Alto (650-849-5363, mareias@gibsondunn.com)

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