Shares and Certificates

Chapter 4 of Division 1 of Title 1 deals with shares and share certificates of general corporations in California.

Section 400 authorizes a corporation to issue one or more classes or series of shares or both, with full, limited or no voting rights and with such other rights, preferences, privileges and restrictions as are stated or authorized in its articles. No denial or limitation of voting rights shall be effective unless at the time one or more classes or series of outstanding shares or debt securities, singly or in the aggregate, are entitled to full voting rights; and no denial or limitation of dividend or liquidation rights shall be effective unless at the time one or more classes or series of outstanding shares, singly or in the aggregate, are entitled to unlimited dividend and liquidation rights.

Section 401 provides that, before any corporation issues any shares of any class or series of which the rights, preferences, privileges, and restrictions, or any of them, or the number of shares constituting any series or the designation of the series, an officers’ certificate must be executed and filed, setting forth three specified items.

Section 402 allows a corporation to provide in its articles for one or more classes or series of shares which are redeemable, in whole or in part, at the option of the corporation or to the extent and upon the happening of one or more specified events, and not otherwise except as herein provided.

Section 402.5 specifies that the rights, preferences, privileges, and restrictions granted to or imposed upon a class or series of preferred shares, the designation of which includes either the word “preferred” or the word “preference,” may do specified actions.

Section 403 states that, when provided in the articles, a corporation may issue shares convertible within the time or upon the happening of one or more specified events and upon the terms and conditions that are stated in the articles if any of three specified conditions apply.

Section 404 provides that, either in connection with the issue, subscription or sale of any of its shares, bonds, debentures, notes or other securities or independently, a corporation may grant options to purchase or subscribe for shares of any class or series upon such terms and conditions as may be deemed expedient. Option rights may be transferable or nontransferable and separable or inseparable from other securities of the corporation.

Section 405 says that, if at the time of granting option or conversion rights or at any later time the corporation is not authorized by its articles to issue all the shares required for the satisfaction of the rights, if and when exercised, the additional number of shares required to be issued upon the exercise of such option or conversion rights must be authorized by an amendment to the articles.

Section 406 allows the board to issue shares, options or securities having conversion or option rights without first offering them to shareholders of any class.

Section 407 allows a corporation to issue fractions of a share originally or upon transfer. If it does not issue fractions of a share, it must in connection with any original issuance of shares take three specified actions.

Section 408 authorizes a corporation to adopt and carry out a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for consideration as may be fixed of its unissued shares, or of issued shares acquired or to be acquired, to one or more of the employees or directors of the corporation or of a subsidiary or parent thereof or to a trustee on their behalf and for the payment for such shares in installments or at one time.

Section 409 allows shares to be issued in two specified ways.

Section 410 provides that every subscriber to shares and every person to whom shares are originally issued is liable to the corporation for the full consideration agreed to be paid for the shares.

Section 411 states that a transferee of shares for which the full agreed consideration has not been paid to the issuing corporation, who acquired them in good faith, without knowledge that they were not paid in full or to the extent stated on the certificate representing them or, in the case of uncertificated securities, on the applicable initial transaction statement, is liable only for the amount shown by the certificate or statement to be unpaid on the shares represented.

Section 412 specifies that every transferee of partly paid shares who acquired them under a certificate or initial transaction statement showing the fact of part payment, and every transferee of such shares who acquired them with actual knowledge that the full agreed consideration had not been paid to the extent stated on the certificate or initial transaction statement, is personally liable to the corporation for installments of the amount unpaid becoming due until the shares are transferred to one who becomes liable for them.

Section 413 provides that a person holding shares as pledgee, executor, administrator, guardian, conservator, trustee, receiver or in any representative or fiduciary capacity is not personally liable for any unpaid balance of the subscription price of the shares because the shares are so held but the estate and funds in the hands of such fiduciary or representative are liable and the shares are subject to sale.

Section 414 prohibits any action from being brought by or on behalf of any creditor to reach and apply the liability, if any, of a shareholder to the corporation to pay the amount due on the shareholder’s shares.

Section 415 explains that nothing in this division is to be construed as a derogation of any rights or remedies which any creditor or shareholder may have against any promoter, shareholder, director, officer or the corporation because of participation in any fraud or illegality practiced upon the creditor or shareholder by any person or by the corporation in connection with the issue or sale of shares or other securities or in derogation of any rights.

Section 416 provides that every holder of shares in a corporation is entitled to have a certificate signed in the name of the corporation certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile.

Section 417 provides that, if the shares of the corporation are classified or if any class of shares has two or more series, there is required to appear on the certificate or, in the case of uncertificated securities, the initial transaction statement and written statements, one of three specified statements.

Section 419 allows a domestic or foreign corporation to issue a new share certificate or a new certificate for any other security in the place of any certificate issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any certificate or the issuance of a new certificate.

Section 420 provides that neither a domestic nor foreign corporation nor its transfer agent or registrar is liable for specified actions.

Section 421 states that each holder of shares of a close corporation, whether original or subsequent, by accepting the certificates for the shares which contain the legend required by law agrees that the holder cannot make any transfer of shares which would violate the provisions of law and waives any right which the holder might otherwise have under any other law to sell such shares to a greater number of purchasers or to demand any registration.

Section 422 says that, when the articles are amended in any way affecting the statements contained in the certificates for outstanding shares, or it becomes desirable for any reason, in the discretion of the board, to cancel any outstanding certificate for shares and issue a new certificate conforming to the rights of the holder, the board may order any holders of outstanding certificates for shares to surrender and exchange them for new certificates within a reasonable time to be fixed by the board.

Section 423 provides that shares are not assessable except as provided in this section or as otherwise provided by a statute other than this division.