Incorporation May Require A Bulk Sale Notice

Allen Matkins
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Allen Matkins

California's Bulk Sales Law dates to 1990 when the legislature adopted a new Division 6 to the Commercial Code.  Cal. Stats. 1990, ch. 1191.  The current law is a farrago of prior law and the then uniform act recommended by the National Conference of Commissioners on Uniform State Laws (albeit as an alternative to repealing the bulk sales law entirely).  

Most practitioners think of the Bulk Sales Law only when a business is selling more than one-half of its assets in a transaction outside of the ordinary course of business.   The incorporation of an existing business, however, may be subject to the Bulk Sales Law because it involves the passing of title to the business' assets for a price (the shares of the corporation).  See Cal. Comm. Code §§ 2106 & 6102(a)(3)(ii).   For purposes of the Bulk Sales Law, the state of incorporation of the corporation matters not.  

If a transaction is subject to the Bulk Sales Law, notice of the sale must be published in a newspaper and mailed to the county tax collector.   The law also has an escrow procedure when the creditors' claims are less than $2 million.  Cal. Comm. Code § 6106.2.  Transfers in violation of the Bulk Sales Law are no longer "void" or "voidable" but a creditor of the business being incorporated may collect damages from the corporation.  Cal. Comm. Code § 6107.  

It should be noted that California's Bulk Sales Law applies only to certain sellers and to certain types of property.   For example, the law applies only when the business being incorporated (i.e., the seller) is located in California.  Cal. Comm. Code § 6103(a)(2).   A seller  is deemed to be located at its place of business.  If a seller has more than one place of business, the seller is deemed located at its chief executive office.   Cal. Comm. Code § 6103(b).   Moreover, there are 16 statutory exceptions to the law.  Cal. Comm. Code § 6103(c)(1)-(16).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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