Wilson v. Louisiana-Pacific Resources, Inc.

California Court of Appeal · 1982 · Corporations

CorporationsForeign corporationsCumulative votingConstitutional lawsection 2115section 708cumulative votingpseudo-foreign corporation

Facts

Defendant was a Utah corporation whose articles and bylaws did not provide for cumulative voting, and Utah law permitted straight voting unless cumulative voting was provided in the articles. The trial court found that, in the years preceding the action, the average of defendant's property, payroll, and sales in California exceeded 50 percent and that more than 50 percent of its shareholders entitled to vote resided in California. The court also found that, aside from domicile and a transfer agent in Utah, defendant had virtually no business connection with Utah; its principal place of business, shareholder and director meetings, employees, and bank accounts were all in California. During the appeal, certification of the Pacific Stock Exchange made section 2115 inapplicable to defendant, but the appellate court addressed the constitutional issues because they were of public interest and likely to recur.

Issue

May California constitutionally apply Corporations Code section 2115, including its mandatory cumulative voting provision, to a foreign corporation incorporated elsewhere but having greater contacts with California than with any other state? Relatedly, may cumulative voting be required for all shareholders of such a covered foreign corporation, not just California residents?

Rule

California may apply section 2115's cumulative voting requirement to a foreign corporation when the corporation satisfies section 2115's high-contact criteria, because those criteria create a significant aggregation of contacts and substantial state interests, making application of California law neither arbitrary nor fundamentally unfair. The statute survives full faith and credit, dormant commerce clause, due process, contract clause, and equal protection challenges where the burden on interstate commerce is incidental and minimal, the impairment of contractual expectations is only minimal, and the exchange-listing exemption has a rational basis.

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Mesa Ridge Timber, Inc. is incorporated in Nevada, but its principal office, executive staff, bank accounts, and annual director meetings are in Sacramento, California. During its latest full income year, 68 percent of its property, payroll, and sales were in California, and 61 percent of its voting shares were held of record by persons with California addresses; Nevada law permits straight voting unless cumulative voting is provided in the charter.

A shareholder sues in California to require cumulative voting in the next director election. Mesa Ridge argues that California must defer to Nevada law under the Full Faith and Credit Clause because Nevada is the state of incorporation. How should the court rule?

Explanation. The majority held California may apply its cumulative-voting rule to a covered pseudo-foreign corporation when the corporation meets section 2115's high-contact criteria. Those criteria create a significant aggregation of contacts and substantial California interests, making application of California law constitutionally permissible under the full faith and credit analysis. The court rejected the argument that the internal affairs doctrine or incorporation state alone controls. (Derived from Wilson v. Louisiana-Pacific Resources, Inc. (n.d.).)