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CALIFORNIA CORPORATE & SECURITIES LAW

When The Parent Is A Blue Hen And The Subsidiary Is A 49er, What Law Governs?

With most publicly traded companies choosing to incorporate in Delaware, corporate officers are likely to assume that they have the benefit of Delaware law.  Assumptions sometimes can be wrong.

FDIC v. Faigin, 2013 U.S. Dist. LEXIS 94899 (C.D. Cal. July 8, 2013) involved a suit by the Federal Deposit Insurance Corporation (which is identified as “Company” in the order) to recover over $100 million from the former officers and directors of the First Bank of Beverly Hills (FBBH).  Although FBBH was incorporated and has its principal place of business in California.  The officers, however, argued that FBBH’s was so intertwined with its corporate parent, a Delaware corporation, that Delaware law should apply.  Judge Dean D. Pregerson didn’t agree.  Citing the internal affairs doctrine, he applied the law of FBBH’s state of incorporation.

There is an important lesson here.  Organizational structure matters.  In companies with a holding company structure and operations being conducted at the subsidiary level, the officers of the subsidiaries may be subject to different standards of liability even though they perceive themselves to be working for the Delaware parent.

I’ll have more to say about FDIC v. Faigin in future postings. Note today’s post is in the form of a priamel in the manner of Sappho 16 (as are many prior posts).

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