(July 19, 2007) California Chamber of Commerce-opposed legislation to add a vague new prohibition on the ability of corporations to make distributions to its shareholders was rejected by the Senate Banking, Finance and Insurance committee last month.
AB 251 (DeSaulnier; D-Concord) aimed to prohibit these distributions and make board members personally and strictly liable for any distributions that violate the vague new prohibition.
Vague Strict Liability Trigger
Federal and California law already prohibit corporations from making distributions if they have not met pension funding obligations required by law. AB 251 also would have barred distributions if a corporation “failed to make a payment” to a defined benefit plan. This undefined new prohibition would have confused existing law, potentially resulting in litigation and unintended consequences that could have harmed retirees and shareholders.
For example, a corporation may have fully met its pension funding obligation, but be disputing a small payment amount.
Under current law, the corporation could lawfully proceed with a distribution, but under AB 251, a corporation, its shareholders, and board members could be subject to liability.
The confusing new basis for liability created by AB 251 could have discouraged corporations from offering defined benefit plans and dissuaded shareholders from investing in corporations that have them.
AB 251 also created strict liability for board members for distributions violating the vague new standard, even if they acted in good faith and had no knowledge that a distribution was improper. This would have discouraged individuals from serving on boards, already a serious challenge faced by corporations.
Key Vote
AB 251 was rejected June 20 by a vote of 3-6.
Ayes: Lowenthal (D-Long Beach); Romero (D-Los Angeles); Wiggins (D-Santa Rosa).
Noes: Machado (D-Linden); Runner (R-Lancaster); Correa (D-Santa Ana); Cox (R-Fair Oaks); Hollingsworth (R-Murrieta); Margett (R-Arcadia).
Absent, abstaining or not voting: Florez (D-Shafter); Scott (D-Pasadena).
Additional Information
Taxation
Staff Contact: Kyla Christoffersen