Certificate of Determination of Preferred Shares
(California Corporation)

Summary

This template may be used by a California corporation to file a "Certificate of Determination of Preferred Shares" with the California Secretary of State pursuant to the requirements of Cal. Corp. Code § 401. This template includes practical guidance, drafting notes, and alternate and optional clauses. For additional information about California corporations, see Formation and Qualification (CA Corporation) and Corporation Stock and Stockholders (CA Corporation). For additional information about preferred shares, see Venture Capital Preferred Stock Offerings: Negotiation of Terms, Pre-seed and Seed Stage Convertible Note and Note Purchase Agreement Transactions, and Venture Capital Mergers, Consolidations, and Other Corporate Combinations. If a corporation is authorized to issue more than one class of shares, or if any class of shares is to have two or more series, the designation of each class and series, and the total number of shares authorized for each class and series must be stated in the articles of incorporation. (See Cal. Corp. Code § 202(g)(1), (2)). In addition, the articles must either state the rights, preferences, privileges, and restrictions granted to or imposed on the respective classes or series of shares or grant the authority to the board of directors to determine all or some of those matters. (See Cal. Corp. Code § 202(g)(3)). When these matters are determined and fixed for a class or series by resolution of the board of directors, a "certificate of determination" must be filed with the California Secretary of State prior to the time shares are issued in that class or series. (See Cal. Corp. Code § 401). Although that certificate, in effect, then becomes a part of the corporation's articles (See Cal. Corp. Code § 154), best practices are that the corporation should restate its articles of incorporation to include the rights and preferences of all interim classes or series of shares. The following summation of the Cal. Corp. Code § 401 is provided as a ready reference and drafting aid for counsel. However, counsel is reminded to carefully review Cal. Corp. Code § 401 for greater specificity and nuances in the verbatim statutory language: (a) Before the corporation issues any shares of any class or series, if not fixed in the articles of incorporation, the rights, preferences, privileges and restrictions (or any of them) and the number of shares of any series and its designation, must be fixed in a board resolution together with an officer's certificate setting forth (1) a copy of the board resolution covering such class or series, (2) the number of shares of the class or series, and (3) that none of the shares has been issued. (b) After a certificate of determination has been filed, but before any of the subject shares of the class or series has been issued, the board may, by another resolution, alter or revoke any or all aspects of that series or class if none of the respective shares has been issued. (c) After any certificate of determination has been filed, the board may, if authorized in the articles, increase, or decrease the number of shares of the series. But if any certificate of determination has been incorporated into restated articles, such increase or decrease must be accomplished by an amendment of the articles approved by the board in accordance with the relevant provisions of the California Corporations Code (the "Corporations Code"). (d) Other than with respect to subsection (c) above, after shares of a class or a series have been issued, any other amendments of the information contained in the respective certificate of determination must be accomplished by an amendment of the articles (as well as the filing of a certificate of amendment) in accordance with the relevant provisions of the Corporations Code. (e) A provision in a certificate of determination further amended pursuant to subsections (b), (c), or (d) above shall be identified in the relevant amendment in accordance with the Corporations Code. (f) If a certificate under subsection (c) above decreases the number of shares of a series to zero, the series is no longer part of the authorized share capital of the corporation. (g) If the rights, preferences, privileges, and restrictions of a class or series contain a supermajority provision under the Corporations Code, the officer's certificate submitted in accordance with subsection (a) above shall reflect this and that this has been approved by shareholders in accordance with the Corporations Code.