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Delaware Supreme Court Declares
"Quasi-California Corporation" Statute
Violates Internal Affairs Doctrine May 13, 2005 On May 5, 2005, in VantagePoint Venture Partners 1996 v. Examen, Inc., the Delaware Supreme Court held that Section 2115 of the California Corporations Code (a statute requiring non-California corporations with contacts in the state to adhere to certain California laws governing the corporation's internal affairs) violated "Delaware's well-established choice of law rules and the federal constitution." The Delaware Supreme Court reaffirmed that the Commerce Clause and Fourteenth Amendment of the U.S. Constitution, U.S. Supreme Court precedent, and Delaware Supreme Court precedent mandate that the internal affairs of Delaware corporations "be adjudicated exclusively" in accordance with the law of Delaware. In VantagePoint, plaintiff Examen, a Delaware corporation doing business in California, filed a complaint in Delaware seeking a judicial declaration that defendant VantagePoint Venture Partners, a Series A Preferred Shareholder of Examen, was not entitled under Delaware law to a separate class vote on a proposed merger between Examen and a Delaware subsidiary of Reed Elsevier. Five days later, VantagePoint filed an action in California Superior Court requesting a determination that Examen be identified as a "quasi-California corporation" under Section 2115 of the California Corporations Code. Section 2115 applies to corporations that have certain specified contacts with California but are incorporated in other states. It provides that the articles of incorporation of such "quasi-California corporations" are deemed amended to comply with California corporations laws. If Section 2115 applied to Examen, California law would have permitted its stockholders to vote by class, effectively allowing VantagePoint to block the merger. The California court stayed the action pending a ruling in the first-filed Delaware action. On March 29, 2005, the Delaware Chancery Court held that the "internal affairs doctrine" as laid out by the Delaware Supreme Court's 1987 decision in McDermott v. Lewis required the application of Delaware law to the voting rights issue in the case. In so holding, the Chancery Court rejected VantagePoint's argument that Section 2115, which would have required stockholders to vote as a separate class, did not conflict with Delaware law's mandate that the merger be authorized by a majority of all stockholders voting as a single class. Because the Chancery Court determined that the issue was one of choice of law, it did not address the constitutionality of Section 2115. The Delaware Supreme Court unequivocally affirmed the Chancery Court's ruling. Although the Chancery Court's decision focused on choice-of-law principles rather than the constitutionality of Section 2115, the Delaware Supreme Court addressed both issues, holding that "Delaware's well-established choice-of-law rules and the federal constitution mandated that Examen's internal affairs and, in particular, VantagePoint's voting rights, be adjudicated exclusively in accordance with the laws of its state of incorporation, in this case, the law of Delaware." The court also rejected the defendant's argument that the internal affairs doctrine would promote forum-shopping. The justices noted that VantagePoint's reliance on a 1982 California appellate court decision, Wilson v. Louisiana-Pacific Resources, Inc., was misplaced given the United States Supreme Court's subsequent decisions that "recognized the constitutional imperative of the internal affairs doctrine." In addition, the court noted that Wilson was decided before the decision in McDermott, and had even been questioned by other courts in California as a result of the "broad acceptance" of the importance and validity of the internal affairs doctrine since Wilson. Implications of the VantagePoint Decision In refusing to apply Section 2115 to a Delaware corporation, the Delaware Supreme Court unequivocally reaffirmed the application of the internal affairs doctrine for Delaware corporations. The court stressed that the internal affairs doctrine provides "certainty and predictability" and "protects the justifiable expectations of the parties with interests in the corporation." Allowing Section 2115 to be applied to a Delaware corporation, the court noted, is "apt to produce inequalities, intolerable confusion, and uncertainty and intrude into the domain of other states that have a superior claim to regulate the same subject matter." Although California courts are not bound to follow the VantagePoint decision, it is persuasive law, and we believe there is a high probability that the reasoning in the case will be adopted by California courts. If this decision is followed by the California courts, it should put to rest any claims by shareholders of a Delaware corporation that they are entitled to any rights under Section 2115 of the California Corporations Code or any other aspect of California law governing the internal affairs of non-California corporations. The Delaware Supreme Court's decision effectively to declare a California statute unconstitutional also may spark interest from the United States Supreme Court to again weigh in on the constitutional underpinnings and "imperatives" of the internal affairs doctrine. For more information about the VantagePoint decision and its implications, please contact David Berger or any other member of Wilson Sonsini Goodrich & Rosati's securities litigation practice. |