Earlier this week, The Wall Street Journal published two articles by Rolfe Winkler concerning shareholder access to financial information in companies not subject to the reporting requirements of the Securities Exchange Act of 1934. In one of these pieces, Mr. Winkler describes California's annual report requirement found in Corporations Code Section 1501.
In general, Section 1501 requires a corporation to cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year. The requirement applies to all domestic corporations (Section 167), except those with fewer than 100 holders of record that have expressly waived the requirement in their bylaws.
Delaware corporations may believe that they are not subject to California's statute. Indeed, Vice Chancellor John W. Noble recently ruled that Delaware law "generally does not require disclosures to shareholders unless shareholder action is sought". The Ravenswood Investment Company, L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Transcript) (Del. Ch. Feb. 25, 2016). However, California, as is its wont, expressly provides that Section 1501 applies foreign corporations:
- meeting the tests set forth in Corporations Code Section 2115;
- having their principal executive offices in California; or
- customarily holding meetings of their board of directors in California.
California's annual report requirement is likely to take on heightened significance because an increasing number of companies are attracting large numbers of stockholders without becoming subject to the reporting requirements of the Securities Exchange Act of 1934. I refer to these as "tweeners" (i.e., between corporations with a handful of shareholders and publicly traded corporations). I believe that a number of factors are driving this trend, including:
- The SEC's adoption of Rule 506(c) to eliminate the prohibition on using general solicitation under Rule 506 when all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors;
- The amendment of Section 12(g) of the Securities Exchange Act to increase the number of shareholders triggering the requirement to register under the act; and
- The significant increase in compliance costs as a result of the Sarbanes-Oxley Act, the Dodd-Frank Act and SEC rulemaking.