Legislature To Consider Easing Corporate Conversions

Chapter 11.5 of the California General Corporation Law currently authorizes the conversion of a corporation into an "domestic other business entity" (defined in section 167.7) such as a limited liability company or a partnership.  While a "foreign other business entity" (defined in section 171.07) may be converted into a "corporation" (generally, a corporation organized under the GCL), the GCL does not presently authorize the direct conversion of a "corporation" into a foreign corporation (defined section 171) or a "foreign other business entity".  Nonetheless, such conversions were not impossible as corporations could achieve the result by first converting into a California limited liability company and then converting into a "foreign other business entity" pursuant to Corporations Code Section 17710.02.

There is no good reason for this state of affairs.  On Monday, Senator Brian Jones introduced SB 913 that would set matters right by allowing direct conversions of a corporation into either a "foreign corporation" or a "foreign other business entity".  The bill is the product of the Corporations Committee of the Business Law Section of the California Lawyers Association, which I currently Co-Chair with Steve Hazen. 

No one should fear that enactment of SB 913 will reduce the number of California corporations.  I believe that it will have the opposite effect.  It is much more expensive to incorporate in Delaware and many of Delaware's perceived benefits are only available to, or as a practical matter enjoyed by, stock exchange listed companies.  SB 913 would allow start-ups to incorporate in California with the assurance that they could easily convert later if circumstances make that desirable.  The bill, of course, has nothing to do with the location of a corporation's operations.