Over the years, I’ve received several calls asking what can be done when a business entity has been wrongfully terminated.  Answering this question became a bit easier in 2006 with the enactment of AB 2588 (Runner) which authorized a court to reinstate a business entity for any of the following three reasons:

• The factual representations by a shareholder, member, partner, or other person that are required for the termination document are materially false;

• The submission of the termination document to the Secretary of State for filing is fraudulent; or

• Other grounds exist warranting reinstatement of the business entity.

Cal. Gov’t Code § 12261.

Yesterday Governor Edmund G. Brown Jr. signed SB 1041 (Jackson) which eliminates the third “catch-all” grounds for reinstatement.  The bill also provides that an order for reinstatement may be obtained by submitting a petition to the Superior Court.  Unfortunately, the bill doesn’t specify who has standing to file the petition.  The list of possible petitioners might include the former business entity or its owners, officers, managers, directors or even creditors.  The bill is also silent on who, if anyone, must be served with notice of the petition.  For example, must the person who made the allegedly false representation be served?  Must the person who submitted the fraudulent filing be served? While not answering these questions, the bill does forbid naming the Secretary of State as a party.

While the bill is short on procedural guidance, it is specific when it comes to the contents of the order, which must provide:

• The specific grounds for reinstatement.

• That if there is a conflict with the entity name under subdivision (b) of Section 201, subdivision (b) of Section 5122, subdivision (c) of Section 7122, subdivision (b) of Section 9122, subdivision (b) of Section 12302, subdivision (d) of Section 15901.08, subdivision (b) of Section 17701.08 of the Corporations Code, or related statutes, the reinstatement shall be conditioned upon the business entity concurrently submitting for filing an amendment to change its name to eliminate the conflict along with the certified copy of the order required by Section 12263.

• That the business entity shall be reinstated effective from the date of the filing of the court order with the Secretary of State.

Thus, reinstatement will not necessarily put a business entity into the same position that it enjoyed before its wrongful termination: It may be required to change its name and it won’t be reinstated nunc pro tunc.