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CALIFORNIA CORPORATE & SECURITIES LAW

Can Pseudo-Foreign Corporations Exonerate Their Directors?

Corporations Code Section 2115 is not an easy read.  Fortunately, California Supreme Court Chief Justice Tani Cantil-Sakauye has provided a more digestible overview of the statute:

Section 2115 was enacted as part of a comprehensive revision of the Corporations Code in the mid-1970s.  The section addressed so-called pseudoforeign corporations—entities incorporated outside California, but that meet two tests: (1) the corporation transacts more than half of its business (as measured by various objective criteria) in California, and (2) a majority of the voting securities are held by California  residents. (See § 2115, subd. (a)(1) & (2).)  Such foreign corporations must abide by numerous specified statutes within division 1, the General Corporation Law—provisions that govern corporate “internal affairs” and would not otherwise apply to foreign entities.  This statute, which survived multiple challenges to its constitutionality in Wilson v. Louisiana-Pacific Resources, Inc. (1982) 138 Cal. App. 3d 216 further mandates adherence to these provisions “to the exclusion of the law of the jurisdiction in which it is incorporated.” (§ 2115, subd. (b).)

Greb v. Diamond Internat. Corp., 56 Cal. 4th 243, 251-252 ( 2013) (footnotes omitted).

One of the California Corporations Code sections that Section 2115 applies to pseudo-foreign corporations is Section 309 that defines a director’s standard of care.  One the statutes that Section 2115 does not apply to pseudo-foreign corporations is Section 204(a)(10) that allows a California corporation to include a provision in its articles of incorporation eliminating or limiting (with numerous exceptions) the liability of directors for monetary damages in a derivative suit for breach of fiduciary duty.  While it is understandable that California would not presume to tell foreign corporations what they may or may not put in their articles of incorporation, it does lead to an odd result.  Directors of California and pseudo-foreign corporations are subject to the same standard of care, but only directors of California corporations may have the benefit of exoneration pursuant to Section 204(a)(10).

 

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