Why Common Shares May Not Be Common Stock

Allen Matkins
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Allen Matkins

 Surprisingly, the California General Corporation Law uses the term "common stock" as opposed to "common stock" in only a single statute.  Section 159 of the California Corporations Code defines "common shares" as "shares which have no preference over any other shares with respect to distribution of assets on liquidation or with respect to payment of dividends".   Notably the statute does not rely on upon distinctions in voting power as a marker for identifying shares as "common shares".

"Thou know'st 'tis common"

Section 907(c) uses the term "common stock" rather than "common shares".   The statute provides that if an amendment to the articles of incorporation changes the statement from a single class of shares to two classes and only one of the two classes includes "common" in the designation "that class is the common stock class".   If, however, the designation of neither class includes "common" but one of the two classes has limited or no voting rights, the class whose voting rights are not limited is the "common stock class".  Thus, it is possible that a class of shares with does not qualify as "common shares" under Section 159 (because no other class has preference over it with respect to distributions) will nonetheless qualify as "common stock" pursuant to Section 907(c) (because it has limited or no voting rights).

This anomaly can be avoided entirely by including a statement of the effect of an amendment on outstanding shares pursuant to Section 907(b), in which case Section 907(c) will have no application.

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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