Section 403 of the California Corporations Code provides authority for a California corporation to issue convertible shares when so provided in the articles of incorporation. In general, conversion may be upon the "happening of one or more specified events and upon the terms and conditions that are stated in the articles". The statute, however, allows conversion only upon three specified conditions.
As originally enacted, the statute did not authorize the issuance of shares convertible at the option of the corporation. The drafters of the statute were of the view that to do so would be "inherently deceptive" and create an irreconcilable conflict of interest. H. Marsh, Jr., R. Finkle & L. Sonsini, Marsh's California Corporation Law § 7.07. An exception was made in Section 403(a)(2) when the corporation has a license or franchise from a governmental agency to conduct its business or is a member of of a national securities exchange, and the license, franchise or membership is conditioned upon some or all of the holders possessing prescribed qualifications. In that case conversion at the option of the corporation is permitted to the extent necessary to prevent the loss of the license, franchise or membership.
In 1996, the Business Law Section of the California State Bar sponsored legislation (AB 3061) to add an additional exception if the corporation is a "listed corporation" as defined in Section 301.5 both at the time of the original issuance of the convertible shares and at the time of conversion. In such cases, the shares may be converted at the option of the corporation into shares of any class or series or into any other security of the corporation provided that the securities received upon conversion are listed or qualified for trading on a stock exchange or national market system defined in Section 301.5(d).