Overcoming A Securities Overissue

I like to remind my colleagues that California has two securities laws. Neither of these laws applies exclusively to corporations or other entities organized under California law.  The Corporate Securities Law of 1968, Cal. Corp. Code § 25000 et seq., is generally concerned with the offer and sale of securities in California.  The Uniform Commercial Code - Investment Securities, Cal. Comm. Code § 8101 et seq., establishes the rules for the transfer and registration of securities.  In addition, the California General Corporation Law imposes requirements on the authorization, issuance and form of shares.  Therefore, it is important to remember that any one of these laws might provide the answer to a particular question.

From time to time, I'm asked about overissues of shares.  This occurs when an issuer has issued securities in excess of the amount that it has the corporate power to issue.  Cal. Comm. Code § 8210(a).  The reference to corporate power requires consideration of the applicable corporate law.  Under the GCL, the number of shares that a corporation is authorized to issue must be specified in the articles of incorporation.  Cal. Corp. Code § 202(f).  Note, however, the Section 8210 is not limited to shares, Cal. Comm. Code § 8102(15), and may include debt securities and the GCL does not require that the articles of incorporation specify the amount of debt securities that a corporation is authorized to issue.

Assuming that an overissue has occurred, Section 8210 provides three "solutions" to the problem.  First, an overissue is deemed not to have occurred at all if appropriate action has cured the overissue.  In general, appropriate action in the case of an overissue of shares would entail an amendment of the articles of incorporation.  However, the comment to the statute abnegates any right to compel an amendment of the articles to cure the overissue.  Second, if an identical security is reasonably available for purchase, the person entitled to the issue or validation may required the issuer to purchase the security and deliver it or register its transfer.  Cal. Comm. Code § 8210(c).  The security, however, can't be entirely identical - it must itself not constitute an overissue.  Lastly, if a security is not reasonably available for purchase, the person entitled to issue or validation may recover from the issuer the price that the person or the last purchaser for value paid for the security with interest from the date of demand.  Cal. Comm. Code  § 8210(d)