Shareholder distribution ban advances

By CMTA Staff

Capitol Update, May 4, 2007 Share this on FacebookTweet thisEmail this to a friend

This week the Assembly Banking and Finance committee approved AB 251 (Mark DeSaulnier, D-Martinez) that would prohibit any corporation or any of its subsidiaries from making a distribution to the corporation's shareholders if they have an outstanding pension obligation to employees.

The bill appears to impact only California companies and has a number of definitional flaws. Additionally, the bill would make a member of the Board of Directors who receives a distribution prohibited by this provision liable to the corporation for the dividend payment, plus interest, regardless of whether he or she had knowledge of its impropriety.  Shareholder liability to do the same would kick in only if the shareholder had direct knowledge of an impropriety. Setting up a system that holds Directors and Officers jointly and severally liable, with or without knowledge of the facts, should cause concern for any existing or prospective Board member.

Pursuing a state law on this topic is misguided because current federal law governs pension funding obligations. Section 1141 (a) of ERISA provides that, with limited exceptions, federal ERISA law "shall supersede any and all state laws insofar as they may not or hereafter relate to any employee benefit plan." A person who believes they have been denied a pension benefit is able to sue pursuant to ERISA. Additionally, a current prohibition in the California Corporations Code 501 prohibits corporations from making distributions that would prevent them from fulfilling other obligations. AB 251 is completely unnecessary.

AB 251 is being pushed by a large number of labor unions and will next be considered by the full Assembly. CMTA will continue to lobby against this proposal.

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