Common Reasons the California Secretary of State Rejects Corporate Filings (Part One – Mergers)
Every year, numerous corporate filings are rejected by the California Secretary of State. This is the first in a four-part series, and examines a few of the most common reasons that filings for mergers are rejected.
The successful timing of a merger filing can be crucial in a merger transaction; the effectiveness of the merger filing often triggers other transactions contemplated by the merger agreement. The most common reasons for rejection of a merger filing vary depending on the nature of the entities being merged, as follows:
1. Merger of corporations
A. Including only one, rather than both, of the required officer signatures on the merger agreement: For each corporation involved in the merger, the merger agreement must be executed and acknowledged by (i) the chairperson of the board, president, or a vice president, and (ii) the secretary or an assistant secretary of the corporation. (California Corporations Code (“CCC”) § 1102).
B. Including the corporation’s name on, above, or near the officer signature blocks on the officers’ certificate: When a corporation effects a merger by filing a copy of the agreement of merger, the filing must include officers’ certificates for the surviving corporation and each merging entity. (CCC § 1103). Each such officers’ certificate must be signed by (i) the chairperson of the board, president, or a vice president, and (ii) the secretary, chief financial officer, treasurer or any assistant secretary or assistant treasurer of the corporation. (CCC § 173). Both officers must sign in their individual capacities and not on behalf of the corporation. If the corporation’s name appears on, above, or near an officer’s signature block in such a way that the officer appears to be signing on behalf of the corporation, rather than in his or her individual capacity, the officers’ certificate and the merger filing may be rejected.
C. Submitting a file-stamped, rather than certified, copy of the merger document when the surviving corporation is a foreign corporation: If a foreign corporation will be the surviving corporation in a merger with a California corporation, there are three alternative methods for completing the merger filing in California: (CCC § 1108(d)).
1. Submit a certified copy of the merger document filed in the foreign jurisdiction (e.g., a certificate of merger certified by the Delaware Secretary of State);
2. Submit merger documents meeting the requirements of California law, including a copy of the agreement of merger and officers’ certificates for the surviving foreign corporation and each domestic merging corporation, or, if appropriate, a certificate of ownership; or
3. Submit an executed counterpart of the merger document filed in the foreign jurisdiction (in the form required by the laws of the foreign jurisdiction); the submitter must also provide proof that the merger document has been filed in the foreign jurisdiction.
Importantly, for the first option listed above, the copy of the merger document must be certified, by the public official having custody over the original filed document. The filing will be rejected if the filer merely submits a file-stamped, and not certified, copy of the merger document.
D. Failing to clearly identify the consideration being paid in the agreement of merger: The agreement of merger filed with the California Secretary of State must clearly set forth the manner of converting the shares of each constituent corporation into shares, interests, or other securities of the surviving party. If any shares of any constituent corporation will not be converted solely into shares, interests, or other securities of the surviving party, the agreement of merger must specify (i) the cash, rights, securities, or other property which the holders of those shares are to receive in exchange for their shares (whether in addition to or in lieu of shares, interests, or other securities of the surviving party), or (ii) that the shares will be cancelled without consideration. (CCC § 1101(d)).
E. Having an insufficient number of authorized shares to consummate the merger: The surviving corporation must have enough authorized, but not yet issued or outstanding, shares to accommodate any new shares to be issued in consideration for the merger.
1. Merger of a corporation with any other business entity
A. Submitting a certificate of merger without the required attachments: The certificate of merger must be accompanied by both (i) a copy of the agreement of merger and (ii) officers’ certificates for the surviving corporation and for each merging entity. (CCC §§ 1113(g)(1) and 1113(j)(4)). The California Secretary of State has posted a sample agreement of merger and a sample officers’ certificate on its website, which samples have been designed to meet minimum statutory requirements in a situation when there is only one class of shares and 100% shareholder approval is received. The exception is if only a disappearing corporation is merged into a California other business entity, the certificate of merger is the sole document required to be filed. (CCC § 1113(g)(2)).
B. Filling out inapplicable items in the certificate of merger: If the filer has filled out items on the certificate that are not applicable to the merger, the filing may be rejected. For example, if the merger does not involve the issuance of equity securities of a parent party, the filer should not check either of the boxes in Item 10 of the certificate of merger.
C. If the merger involves a foreign entity, failing to identify the foreign law authorizing the merger: When the merger involves a foreign entity, the certificate of merger must set forth in Item 14 the statutory authority or other basis under which the foreign entity is authorized by law to effect the merger (e.g., for a Delaware merger of corporations, Delaware General Corporation Law § 252). (CCC § 1113(g)).
D. Failing to include the proper signatories: The certificate of merger must be executed and acknowledged by both (i) the surviving entity and (ii) each other merging business entity. The California Secretary of State has prepared a table, available on its website, which summarizes the specific signatory requirements for each constituent entity. (CCC §§ 1113(g)(1) – (2), 3203(g)(1) – (2), 6019.1(f), 8019.1(g), 12540.1(g), 15911.14(a), 16915(b) or 17710.14(a)).
