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What is a Certificate of Determination?

Logo for Avvo, where Dana Shultz answered a question about: a Certificate of DeterminationOne of my Avvo answers led me to write this post. Please see CA corp Certificate of Determination: must it include tag-along and drag-along provisions?

Corporations, by default, issue common shares to shareholders. However, corporations also can issue preferred shares. Preferred shares have characteristics (“preferences“) that typically make those shares more desirable than common shares. Please see What is Preferred Stock?

Usually, the corporation’s Articles of Incorporation (California) or Certificate of Incorporation (Delaware) describe the preferences. That description typically requires at least several pages.

Preferences Specified by Board of Directors…

Sometimes, though, the Articles merely specify a number of preferred shares. In that case, the corporation’s Board of Directors specifies the preferences when it decides to issue those shares.

For example, I recently filed Restated Articles of Incorporation for a client. The Articles specified 600,000,000 shares of Preferred Stock.

Of the Preferred Stock, 200,000,000 shares were of Series A Preferred Stock. The Series A preferences were specified in the Articles.

Here is what the Articles said about the remaining 400,000,000 shares of Preferred Stock.

The board of directors of this corporation has the power to determine the rights, preferences, privileges and restrictions of shares of Preferred Stock other than those designated as Series A Preferred Stock.

…and Filed in Certificate of Determination

So, let’s assume that, down the road, it is time to issue more preferred shares. These shares of  “Series B Preferred Stock” will have different preferences.

  • The Board of Directors will define the Series B preferences in a set of resolutions. The Board will approve those resolutions at a board meeting or by unanimous written consent.
  • Then the corporation will file, with the Secretary of State, a Certificate of Determination that incorporates those resolutions.
  • With that filing, the corporation will be authorized to issue Series B Preferred Shares.

The California Secretary of State has included , in its Corporate Filing Tips, suggestions for how to file a Certificate of Determination properly.

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

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