What Kind Of California Corporation Must Include A Salary Limitation In Its Articles Or Bylaws?

I suspect that at least a few California corporate lawyers are unaware of a provision in the California Corporations Code requiring the articles or bylaws of certain corporations to contain a limitation on the salaries paid to the persons operating or employed by the corporation, including officers and directors.  If you are guessing that this provision is included in the Nonprofit Corporation Law, your guess is wrong.

The statute in question is Section 14312, which is found in Title 1, Division 3, Part 7, Chapter 2 of the Corporations Code.  This Chapter applies to mutual water companies formed on or after January 1, 1998 in connection with the offering for sale or lease, or with the sale or lease, of lots within a subdivision to delver water for domestic use to owners of lots in the subdivision.  Mutual water companies formed before January 1, 1998 may elect to meet the requirements of Chapter 2.

Those not familiar with mutual water companies might be inclined to believe that they are organized and governed by the Nonprofit Mutual Benefit Corporation Law.  While some California mutual water companies are formed under that law, many are formed as stock corporations under the General Corporation Law.

So, how does Chapter 2 get into the picture?  The story, at least from my perspective, begins in 1996 when I was serving as California's Commissioner of Corporations.   The Department of Corporations at that time shared responsibility with the Department of Real Estate for mutual water companies: the DOC through the qualification of the offer and sale of mutual water company shares and the DRE through the approval of "public reports" issued for subdivisions.  The DOC therefore sponsored legislation, SB 633 (Ayala), to consolidate oversight in the DRE and codify existing standards.  Consequently, Section 25100(f) (not to be confused with Section 25102(f)), now exempts any security of a mutual water company offered or sold in connection with subdivided lands pursuant to Chapter 2.  Section 25100(f), however, does not exempt any investment contract offered or sold with, or as part of, an interest in all or portions of a parcel or parcels of subdivided lands, a subdivision, or in a real estate development.

Section 14312 lists 12 different provisions that mutual water companies subject to Chapter 2 must include in their articles of incorporation or bylaws, including the limitation on salaries.