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 Clearance

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) Clearance: A domestic California corporation that is the disappearing entity in a merger must obtain a tax clearance certificate from the FTB (Form 3555) before the Secretary of State will file the merger documents. The FTB has 30 days to process. Plan ahead -- this is a common source of closing delays.

2. Minimum Franchise Tax: California imposes a minimum $800 annual franchise tax on corporations and LLCs (Cal. Rev. & Tax. Code 23153). Confirm this is current.

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. However, the "market exception" (Cal. Corp. Code 1300(b)) exempts shares listed on a national securities exchange or held by 2,000+ shareholders from appraisal rights in certain circumstances.

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: California's WARN Act (Cal. Lab. Code 1400-1408) requires 60 days' advance notice before a mass layoff, relocation, or plant closing affecting 50+ employees. This is broader than the federal WARN Act in some respects.

11. Attorney General Review: Certain transactions involving nonprofit healthcare facilities or large healthcare transactions require Attorney General review and approval under Cal. Corp. Code 5914-5920 or Cal. Health & Safety Code 127500 et seq.

12. Withholding on Out-of-State Sellers: If the seller is not a California resident or entity, the buyer may be required to withhold 3 1/3% of the purchase price allocated to California real property (Cal. Rev. & Tax. Code 18662).

Common Pitfalls

• Failing to obtain FTB tax clearance before filing (causes rejection by Secretary of State)
• 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
• Forgetting Preliminary Change of Ownership Report for real property

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
• FTB Form 3555 (Tax Clearance Certificate Request): ftb.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; 2025 thresholds: ftc.gov