M&A Conditions Precedent Checklist - California

M&A CONDITIONS PRECEDENT CHECKLIST

State of California

Transaction Name: [________________________________]
Transaction Type: ☐ Stock Purchase ☐ Asset Purchase ☐ Statutory Merger ☐ Other: [________________________________]
Seller/Target: [________________________________]
Buyer/Acquirer: [________________________________]
Anticipated Closing Date: [__/__/____]
Definitive Agreement Date: [__/__/____]
Outside Date (Drop-Dead Date): [__/__/____]
Deal Counsel (Seller): [________________________________]
Deal Counsel (Buyer): [________________________________]

STATUS KEY:

• NS = Not Started
• IP = In Progress
• PC = Pending Counterparty
• PR = Pending Regulatory
• C = Complete
• W = Waived
• NA = Not Applicable

PART I: PRE-CLOSING CONDITIONS

A. Regulatory Approvals

B. Third-Party Consents

C. Stockholder/Member Approvals

PART II: SELLER'S CONDITIONS TO CLOSING (Conditions for Seller's Benefit)

A. Representations and Warranties Bring-Down

B. Buyer's Covenants Performed

C. Other Seller Conditions

PART III: BUYER'S CONDITIONS TO CLOSING (Conditions for Buyer's Benefit)

A. Representations and Warranties Bring-Down

B. Seller's Covenants Performed

C. No Material Adverse Change (MAC/MAE)

D. Legal Opinions

E. Financial and Diligence Conditions

PART IV: MUTUAL CONDITIONS TO CLOSING

PART V: CALIFORNIA-SPECIFIC REQUIREMENTS

A. State Merger Filings (Statutory Merger Transactions)

B. California Franchise Tax Board (FTB) Tax Status

C. California Good Standing and Entity Status

D. California Tax Matters

E. California Bulk Sales Act Compliance (Asset Purchases)

F. California-Specific Licensing and Permits

PART VI: CLOSING DELIVERABLES CHECKLIST

A. Seller's Closing Deliverables

B. Buyer's Closing Deliverables

C. Funds Flow and Payment

PART VII: POST-CLOSING CONDITIONS AND OBLIGATIONS

PART VIII: PRACTICE NOTES -- CALIFORNIA-SPECIFIC

Key California Considerations

1. Franchise Tax Board (FTB) Status: An FTB clearance certificate is not a blanket prerequisite to filing a California merger. The Secretary of State's legislative summary says a merger may be filed without one for several types of surviving entities. Check the precise surviving entity type and current filing instructions, and complete tax-return and liability diligence separately.

2. Minimum Franchise Tax and LLC Annual Tax: Corporations generally owe the $800 minimum franchise tax under Cal. Rev. & Tax. Code § 23153; an LLC doing business or organized in California generally owes a separate $800 annual tax under § 17941. Check current first-year and other exceptions for the entity and tax year.

3. Filing Office and Fee: Merger documents are filed with the California Secretary of State in Sacramento. The filing fee is approximately $150 for interspecies mergers. Check the current fee schedule at sos.ca.gov.

4. Shareholder Approval: Cal. Corp. Code 1201 generally requires approval by a majority of outstanding shares. California also has unique provisions for reorganizations (Cal. Corp. Code 1200-1203) that may apply when the surviving entity has different terms.

5. Dissenters' Rights: Cal. Corp. Code 1300-1312 provides dissenters' rights. Under § 1300(b)(1), shares listed on a certified national securities exchange immediately before the transaction generally fall outside the definition of dissenting shares if the required meeting notice summarizes the statute, subject to the transfer-restriction and consideration exceptions stated there. California does not use a 2,000-shareholder alternative in this provision.

6. Short-Form Merger: Cal. Corp. Code 1110 allows a parent owning 90% or more of each class to merge a subsidiary via Certificate of Ownership, with only the parent board's approval.

7. Bulk Sales Act: California is one of the few states that retains UCC Article 6 (Bulk Sales), codified at Cal. Com. Code 6101-6111. It applies to bulk sales of inventory and equipment by businesses whose principal activity is sale from stock or restaurants. Exemptions apply for sales under $10,000 or over $5,000,000.

8. Non-Competition Agreements: California Business and Professions Code 16600 generally voids non-competition agreements (with narrow exceptions for sale of business goodwill under Cal. Bus. & Prof. Code 16601). Structure protections around trade secrets and proprietary information instead.

9. Documentary Transfer Tax: California imposes county documentary transfer tax at $0.55 per $500 (or $1.10 per $1,000) of consideration on real property transfers (Cal. Rev. & Tax. Code 11911). Many cities impose additional transfer taxes (e.g., City of Los Angeles, San Francisco). Allocate and negotiate responsibility.

10. California WARN Act: At a covered establishment, Cal. Lab. Code § 1401 requires 60 days’ advance notice before a mass layoff, relocation, or termination unless a statutory exception applies. Section 1400.5 defines a mass layoff as 50 or more employees within 30 days; relocation and termination have separate definitions without that 50-person event threshold.

11. Health Care Transactions: Covered nonprofit health-facility transactions require Attorney General notice and consent under Cal. Corp. Code § 5914. Separately, covered health care entities must give the Office of Health Care Affordability notice under Health & Safety Code § 127507 and may face a cost and market impact review under § 127507.2.

12. California Real Property Withholding: For a covered disposition of California real property, the buyer may be required to withhold regardless of the seller's residency. Check the statutory exceptions and any available alternative withholding calculation under Cal. Rev. & Tax. Code § 18662; the standard calculation is 3 1/3% of the real property's sales price.

Common Pitfalls

• Assuming an FTB clearance certificate is required for every merger rather than checking the surviving-entity structure and current filing instructions
• Overlooking California's active Bulk Sales Act (most other states have repealed it)
• Including non-competition covenants that are void under California law
• Not accounting for city-level transfer taxes in addition to county documentary transfer tax
• Missing California WARN Act requirements (more expansive than federal WARN)
• Not filing CDTFA successor liability clearance request in asset purchases
• Omitting a Preliminary Change of Ownership Report without checking the recorder's additional fee and statutory exceptions

SOURCES AND REFERENCES

• California Corporations Code, Merger: Cal. Corp. Code 1100-1113
• California Bulk Sales Act: Cal. Com. Code 6101-6111
• California Secretary of State -- Merger Forms: sos.ca.gov
• Franchise Tax Board -- Tax Clearance: ftb.ca.gov
• California Secretary of State, 2005 legislative summary (merger clearance change): sos.ca.gov
• California Dissenters' Rights: Cal. Corp. Code 1300-1312
• California Non-Compete Law: Cal. Bus. & Prof. Code 16600
• Hart-Scott-Rodino Act, 15 U.S.C. 18a; 2026 thresholds: ftc.gov