California Court Distinguishes Delaware’s VantagePoint Opinion

Typically, corporate bylaws provide that officers serve at the pleasure of the Board of Directors and any officer may be removed, either with or without cause, by the Board of Directors.  This right of removal is consonant with the notion that an officer’s relationship with the corporation is the subject of corporate law.  However, another body of law can, and does, intrude.

If the officer is also an employee of the corporation, then his or her relationship to the corporation qua employee is the subject of employment, not corporate, law.  In recognition of this fact, bylaws investing the board with the right to remove officers usually acknowledge that the right of removal is “subject to the rights, if any, of an officer under any contract of employment”.

In Lidow v. Superior Court, Cal. Ct. Appeal Case No. B239042 (May 23, 2012), the California Court of Appeal addressed the question of whether a lawsuit for wrongful termination brought by an officer of a Delaware corporation is governed by Delaware or California law.  The court began by noting that “the removal of a CEO for any number of reasons . . . falls within the scope of a corporation’s internal governance, thus triggering the application of the internal affairs doctrine”.  The internal affairs doctrine is a conflict of laws principle that recognizes that courts should normally look to the state of incorporation for the law governing a corporation’s internal affairs (i.e., matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders).  The court, however, concluded that removal of an officer in retaliation for complaints about possible illegal or harmful activity “goes beyond corporate governance and touches upon broader public interest concerns that California has a vital interest in protecting”.  The court distinguished the Delaware Supreme Court’s decision in VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (2005) on this basis.

Lidow is a cautionary case for those who believe that the Delaware Supreme Court’s decision in VantagePoint was the last word on the internal affairs doctrine.  Not every affair is internal and the California courts will not apply the doctrine to every internal affair.

For more on the internal affairs doctrine as applied by the California courts, see the following articles:

  • Court of Appeal Applies California Inspection Rights to Delaware Corporation, 17 CEB California Business Law Reporter 168 (1996)
  • The War Between the States – Delaware’s Supreme Court  Ignores California’s Corporate Outreach Statute, 19 Insights 19 (2005)
  • California Appellate Court Holds that the Internal Affairs Doctrine Does not Trump California’s Insider Trading Law, 20 Insights 15 (2006)

Upcoming Securities Law Program

On June 5, I’ll be joining Lee Petillon and his partner, Mark Hiraide, in presenting a program for the Los Angeles County Bar Association on recent developments in federal and state securities laws governing offerings in California.  More information about this program is available here.  Lee is responsible for at least six bills enacted by the California legislature to facilitate capital formation.  Mark is a former SEC enforcement lawyer who represents both publicly traded and privately held companies.

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