10.22.2004

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Updates

California has enacted AB 1000, effective September 27, 2004, which amends California's Corporate Disclosure Act to clarify the requirements of the original Act and conforms many of its provisions to SEC reporting requirements for public companies. California adopted the original Act in the aftermath of Sarbanes-Oxley to require public companies doing business in California to file certain corporate data with the California Secretary of State's office.

Because even as amended the new Act diverges from SEC disclosure requirements, California will continue as the only state in the nation to impose a duplicative and burdensome filing requirement on businesses.

Does the Act Apply to You?

The Act only applies to "corporations" and does not affect other types of entities, such as limited liability companies. The Act applies to all California corporations and corporations qualified to do business in California that (i) are issuers of securities and (ii) have at least one class of securities listed or admitted for trading on a national securities exchange, the Nasdaq National or SmallCap Markets, the OTC Bulletin Board or the electronic service operated by Pink Sheets LLC.

Trap for the Unwary

The Act Does Not Just Apply To California Corporations! The Act applies both to companies incorporated in California and to any public company that does business in California. For example, a Delaware corporation headquartered in Chicago that is qualified to do business in California will be required to file under the Act.

When Must You File a Disclosure Statement? – New Deadline

AB 1000 simplifies the Act's prior requirement by requiring corporations to file a Corporate Disclosure Statement annually within 150 days after the corporation's fiscal year-end.

What Information Required by the Act Exceeds SEC Requirements?

The Act continues to require disclosure of certain compensation, litigation, fraud conviction and bankruptcy information over and above that required by the SEC.

  • Must Disclose Compensation for Additional Executive Officers

      . The SEC requires public companies to disclose compensation earned by board members, the CEO and the next four most highly compensated executive officers who earned at least $100,000 for the fiscal year. California requires disclosure of compensation information for all board members, the five most highly compensated executive officers who are

not

      board members and the CEO, to the extent he or she is not one of the five most highly compensated executive officers. This reporting requirement exceeds disclosure required by the SEC and is the most significant burden imposed on publicly traded companies by the Act. While the original Act required disclosure of "annual" compensation, the amendment now clarifies that compensation information must reflect the most recent fiscal year.

Corporations no longer have the flexibility of selecting an applicable twelve-month period.

  • Must Disclose Certain Litigation in More Detail. Although certain litigation disclosure requirements were conformed to those of the SEC, the Act now requires disclosure of all material legal proceedings in which the corporation was found legally liable by a final ruling during the last five years. Although this reduced time period conforms to similar SEC requirements, the Act requires broader disclosure.
  • Must Disclose Fraud and Bankruptcy Information for Longer Period. The SEC requires publicly traded corporations to state for the last five years whether any board member or executive officer has been convicted of fraud, and whether any board member, executive officer or the corporation has entered into bankruptcy. Unlike the SEC rules, California requires disclosure of such information for a ten-year period. However, the new legislation clarifies that overturned or expunged fraud convictions need not be disclosed.
  • Practical Tip

    Update Disclosure Controls and Procedures to Collect the Additional Information Required by the Act. Public corporations doing business in California should modify their current procedures for collecting information for annual SEC filings to obtain the additional information required by the Act. Doing this prospectively avoids unnecessary duplication of effort and mitigates the burdens of collecting and filing such information.

    When Does the Act Take Effect?

    The new disclosure requirements took effect on September 27, 2004.

    Text of the New Legislation

    This Update is only a summary of the Act.  You can find a general discussion of other recent laws, regulations and rule proposals of interest to public companies on our website.