Is Shareholder Approval Required To Mortgage Corporate Property?

Allen Matkins

Allen Matkins

California requires the approval of the outstanding shares of a California corporation and its board of directors when it sells, leases, conveys, exchanges, transfers or otherwise disposes of all or substantially all of its assets other than in the usual and regular course of its business.  Cal. Corp. Code § 1001(a).   The expansive language of the statute suggests that shareholder approval is also required when a corporation mortgages or otherwise pledges all or substantially all of its assets.   A mortgage could be consider a "transfer" of an asset.    United States copyright law, for example, defines a "transfer of copyright ownership" as including an hypothecation.  17 U.S.C. § 101.

Section 1000, however, negates this suggestion by providing that unless the articles of incorporation provide otherwise, no approval of the shareholder or of the outstanding shares is required for any mortgage, deed of trust, pledge or other hypothecation of all or any part of a corporation's property, real or personal for the purpose of securing payment or performance of any contract or obligation. 

While the foregoing demarcation may seem relatively clear, some transactions, such as sale-lease backs, may occupy an "isthmus of a middle state" between Sections 1000 and 1001.   Further not every sale of all or substantially all of a corporation's assets are subject to Section 1000.  See When a Sale of Assets is not a "Sale-of-Assets Reorganization".

Included in the list of secured transactions is the catch-all "or other hypothecation".  The word hypothecate is derived from two Greek words, ὑπό, meaning under, and τιθέναι, meaning to place under.  Thus, to hypothecate is to place property under a pledge or mortgage.  

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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