Conversion can be a sensitive subject for some. In California, corporate conversions are a relatively new phenomenon, having made their first appearance with legislation enacted in 2002 (SB 399 (Ackerman)). The General Corporation Law (GCL) rather unhelpfully defines a “conversion” as “a conversion pursuant to Chapter 11.5 . . . [of the Corporations Code]“. Cal. Corp. § 161.9. Fundamentally, Chapter 11.5 provides the legislative alchemy for a corporation to convert into another type of legal entity or another type of legal entity to convert into a corporation. Without this bit of thaumaturgy, the converting entity would need to effect an interspecies merger to change its legal form.
Recently, I’ve been thinking about conversions. For example, a merger may or may not trigger an anti-assignment clause in a contract depending upon how it is phrased. I suspect that most contract provisions don’t expressly mention conversions, but may include language such as the following:
Neither this agreement nor any of the rights, interests or obligations under it shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .
Would a conversion constitute an assignment by operation of law under such a provision? Corporations Code Section 1158(a) would appear to say “no” because it states that an entity that converts to another entity pursuant to Chapter 11.5 is “for all purposes” the same entity that existed before the conversion (except for the purposes of specified provisions of the Revenue and Taxation Code). However, given that there has been uncertainty about the effect of such clauses on reverse triangular mergers (see, e.g., Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2011 Del. Ch. LEXIS 61 (April 8, 2011)), it may be time to modify assignment clauses to clarify whether conversions are covered.
Another more subtle question is the effect of legal restraints imposed on the converted entity but not the converting entity. For example, Section 317 of the General Corporation Law limits the authority of a corporation to indemnify agents. These provisions do not apply to other types of entities (which may be subject to different limitations). If the converting entity is a limited liability company that has entered into an indemnity agreement based on the indemnification provisions applicable to LLCs, what will be the effect of the conversion on that agreement? Corporations Code Section 1158(b)(2) provides that all obligations of the converting entity continue as obligations of the converted entity.
Opinion questions may also arise. For example, if a transaction is entered into when the converting entity is an LLC, the lack of any board resolutions may be questioned if a due authorization opinion is required after the LLC has converted to a corporation.
When considering conversion, it is also a good idea not to lose sight of the Corporate Securities Law (CSL). Section 25120(a)(4) of the Corporations Code makes it clear that an “entity conversion transaction” is subject to qualification. However, an “entity conversion transaction” is not the same thing as a “conversion”. Compare Corporations Code Section 25005.1 (defining “entity converstion transaction” for purposes of the CSL) with Section 161.9 (defining “conversion” for puropses of the GCL).
Finally, licensing issues may arise. Whether an entity will continue to be licensed will likely depend on the applicable licensing scheme.
Is California About To Say ”Good Bye” To Columbus Day?
Section 7.1(l) of the California Civil Code designates the second Monday in October as “Columbus Day”. Earlier this week, Assemblymember Roger Hernández introduced AB 55 to rename the holiday as “Native American Day”. The bill includes the following statement of legislative intent:
In order to recognize the genocide inflicted upon Native Americans and their removal from their ancestral lands, and to acknowledge the numerous contributions made by Native Americans to California and the nation, the second Monday in October, previously known as Columbus Day, shall be known as Native American Day.
In 2007, another Californian, then Representative Joe Baca, authored H.R. 62 which designated Friday, November 28, 2008 as “Native American Heritage Day”. P.L. No. 10t-370. For the last two decades, the City of Berkeley, California has observed “Indiginous Peoples Day”.
