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Can California Dictate The Composition Of Foreign Corporations?

Senator Hannah-Beth Jackson's effort to mandate the number of female directors recently passed out of the Senate Committee on Judiciary.  That should not be too surprising as Senator Jackson chairs the committee.  The bill's next stop is the Senate Appropriations Committee.

As noted in earlier posts, the bill would apply to both publicly traded corporations, including those incorporated in other states, that have their principal executive offices in California.  Some may wonder whether such a requirement would run afoul of the "internal affairs doctrine" which requires that the law of the state of incorporation governs the internal affairs of a corporation.

According to the Committee's analysis (remember Senator Jackson chairs the Committee), the author's response is:

Although the US Supreme Court has taken a broad view of the internal affairs doctrine, stating that only one State should have the authority to regulate a corporation's internal affairs because otherwise a corporation could be faced with conflicting demands, California Corporations Code Section 2115 applies a full laundry list of California statutes to out-of-state corporations, notwithstanding the law applicable within their state of incorporation. In other words, the internal affairs doctrine does not overrule applicability of Section 2115 to out-of-state corporations. Unless exempt, an out-of-state corporation is subject to Section 2115 when specified shareholder and business tests are met.

Section 2115, of course, a complete non-sequitur.  The application of Section 2115 is not based on the location of a corporation's principal executive office, but on a combination of business and shareholder factors.  This is no small distinction because that combination ensures that no other state has a greater interest in the corporation.   Wilson v. Louisiana-Pacific Res., 138 Cal. App. 3d 216, 227 (1982).  Section 2115, moreover, does not apply to most publicly traded companies.  See Cal. Corp. Code § 2115(c).

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
Partner at Allen Matkins
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