California continues to hemorrhage corporate charters to Delaware and Nevada. The most recent potential emigrant is SJW Corp. which filed this proxy statement last week seeking shareholder approval of a reincorporation from California to Delaware. Can California and other states stanch the flow by offering licenses only to domestic corporations?
Surely, there must be some constitutional bar to such a requirement – or maybe not? That question was answered last week by U.S. District Court Judge Lucy H. Koh in Nationwide Biweekly Admin., Inc. v. Owen, 2015 U.S. Dist. LEXIS 34558 (N.D. Cal. March 18, 2015). The plaintiff in the case was subject to an investigation by the Commissioner of Business Oversight regarding possible violation of California’s Check Sellers, Bill Payers and Proraters Law, Cal. Fin. Code § 12000 et seq. The plaintiff argued that the law facially discriminates against interstate commerce because it requires that licenses be issued only to California corporations. Cal. Fin. Code § 12200.1. As an Ohio corporation, the plaintiff would be required either to reincorporate in California or form a California subsidiary in order to be eligible for a license.
Judge Koh found that requiring the formation of an in-state subsidiary to obtain a license is “commensurate with the general rule that states may require a person or company to obtain a license” without violating the dormant Commerce Clause. She also ruled that Section 12200.1 facially treats in-state and out-of-state persons or corporations equally because any corporation, regardless of where it is based, must first organize a California corporation to obtain a license under the statute.
The plaintiff was also unsuccessful in its claims that the practical effect of Section 12200.1 is to discriminate against interstate commerce. Judge Koh found that the plaintiff had not adduced evidence that the statute “alters the proportional share” of the prorater market in favor of California economic interests or creates a system whereby local firms constitute a larger share of the market than proraters having their principal places of business outside the state.
It is important to recognize that Judge Koh was ruling on a motion for a preliminary injunction. Thus, she was assessing likelihood of success on the merits. It is possible that a final adjudication could result in a different outcome.