California corporations that effect stock splits and seek to collect outstanding certificates in order to exchange them for new certificates reflecting the split have an enforcement mechanism that may not be available to a corporation incorporated
in Delaware.
California Corporations Code Section 422(a) states:
When the articles are amended in any way affecting the statements contained in the certificates for outstanding shares, or it becomes desirable for any reason, in the discretion of the board, to cancel any outstanding certificate for shares and
issue a new certificate therefor conforming to the rights of the holder, the board may order any holders of outstanding certificates for shares to surrender and exchange them for new certificates within a reasonable time to be fixed by the board.
The Board of Directors enforce the order to surrender of certificates via Section 422(b):
The order may provide that a holder of any certificates so ordered to be surrendered is not entitled to vote or to receive dividends or exercise any of the other rights of shareholders until the holder has complied with the order, but such order operates to suspend such rights only after notice and until compliance. The duty of surrender of any outstanding certificates may also be enforced by civil action.
Therefore, under California law shareholders with notice that their rights to vote their shares and receive dividends will be suspended until they turn in their certificates for reissuance lose their right to vote and payment of dividends until
they comply with the board order. Delaware does not appear to have a similar enforcement mechanism.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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