It has long been safe to assume that a corporation will be governed by the laws of the state in which it is incorporated. However, businesses and corporate practitioners should be aware that this is not universally true. Section 2115 of California’s Corporations Code (hereinafter “Code”) subjects foreign corporations to California corporate law if they meet certain criteria. ((Cal. Corp. Code § 2115 (2010).))
Some sources deem the statute controversial. ((See Adam R. Moses et al., Of Long Arms and Internal Affairs, Corporate Counsel (Dec. 23, 2014), https://www.milbank.com/images/content/1/8/v5/18692/Of-Long-Arms-and-Internal-Affairs-A-Moses-H-Maghakian-M-Vibl.pdf.)) Further, there is some question as to whether California courts will enforce the statute. ((See Lidow v. Superior Court, 206 Cal. App. 4th 351, 363 (2012) (agreeing with an earlier Delaware decision that the state of incorporation should govern corporate internal affairs).)) This uncertainty notwithstanding, the statute remains in force and it is important to know when it may apply.
First, a foreign corporation operating in California qualifies under the statute if it conducts more than half of its business in California. ((§ 2115(a)(1).)) In determining whether a corporation conducts more than half of its business in California, three factors are averaged together, including property, payroll, and sales. ((Gina Correia, Doing Business in California: “Quasi-California” Corporations Made Subject to California’s Corporate Laws, PR Newswire (Nov. 15, 2016, 12:00 AM), https://www.prnewswire.com/news-releases/doing-business-in-california-quasi-california-corporations-made-subject-to-californias-corporate-laws-300362682.html.)) Second, the foreign corporation will qualify under the statute if more than half of its outstanding voting securities are held by persons having addresses within California. ((§ 2115(a)(2).)) The addresses must appear on the corporation’s books “on the record date for the latest meeting of shareholders held during its latest full income year or, if no meeting was held during that year, on the last day of the latest full income year.” ((Id.)) Both of these provisions must be met for § 2115 to apply.
The corporation will then be subject to various chapters and sections of the Code, to the exclusion of the laws of its state of incorporation, including:
- Chapter 1 (general provisions and definitions);
- Section 301 (annual election of directors);
- Section 303 (removal of directors without cause);
- Section 304 (removal of directors by court proceedings);
- Section 305, subdivision (c) (filling of director vacancies where less than a majority in office elected by shareholders);
- Section 309 (directors’ standard of care);
- Section 316 (excluding paragraph (3) of subdivision (a) and paragraph (3) of subdivision (f)) (liability of directors for unlawful distributions);
- Section 317 (indemnification of directors, officers, and others);
- Sections 500 to 505, inclusive (limitations on corporate distributions in cash or property);
- Section 506 (liability of shareholder who receives unlawful distribution);
- Section 600, subdivisions (b) and (c) (requirement for annual shareholders’ meeting and remedy if same not timely held);
- Section 708, subdivisions (a), (b), and (c) (shareholder’s right to cumulate votes at any election of directors);
- Section 710 (supermajority vote requirement);
- Section 1001, subdivision (d) (limitations on sale of assets);
- Section 1101 (provisions following subdivision (e)) (limitations on mergers);
- Section 1151 (first sentence only) (limitations on conversions);
- Section 1152 (requirements of conversions);
- Chapter 12 (commencing with Section 1200) (reorganizations);
- Chapter 13 (commencing with Section 1300) (dissenters’ rights);
- Sections 1500 and 1501 (records and reports);
- Section 1508 (action by Attorney General);
- Chapter 16 (commencing with Section 1600) (rights of inspection). ((§ 2115(b).))
Indeed, the wide range of provisions included in § 2115(b) makes it imperative for any foreign corporation operating in California to understand how it may be affected if it meets the requirements set forth in § 2115(a).
As noted above, it remains unclear the extent to which a California court will enforce the provisions of § 2115. ((See Lidow v. Superior Court, 206 Cal. App. 4th 351, 363 (2012).)) There have also been attempts, albeit unsuccessful, to repeal the statute. ((At Last, a California Court Acknowledges Delaware Supreme Court Decision Holding that the State’s “Quasi-California Corporation” Statute Violates Internal Affairs Doctrine, WSGR Alert (Aug. 30, 2012), https://www.wsgr.com/wsgr/Display.aspx?SectionName=publications/PDFSearch/wsgralert-quasi-california-corporation.htm.)) It appears that California has an interest in maintaining equal regulation of all corporations operating in the state, and nevertheless seems reluctant to render the statute unconstitutional in the absence of local authority on the matter. ((Id.)) Thus, any corporation with substantial operations in California should consider the potential impacts of § 2115 on its business, even if the possibility of full enforcement seems remote.
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