How Do You Know if a Particular Section of California’s Corporation Code Applies to a Foreign Corporation Doing Business in California?
By Gerald P. Burleson, Member of the California Bar, and Evan Flores, 3rd year law student, University of San Diego Law School.
© 2017 by Gerald P. Burleson, all rights reserved
If you think that a company doing business in the state of California is bound by Californian law, think again! If you think suing a corporation in California means that California law applies, think again! Foreign corporations, or corporations that are formed anywhere outside of the state of California, follow California laws when they conduct business in California… but only sometimes.
As a general rule of thumb, the laws of the state of incorporation control issues of corporate governance. Cal. Corp. Code §2116. This “internal affairs doctrine” is a conflict of laws principle that recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could face conflicting demands. Vaughn v. LJ Internat., Inc.(2009) 174 Cal.App.4th 213, 223. However, California’s corporation laws usually offer greater protection to shareholders than do the corporations laws of other states, like Delaware and Nevada.
So how can you know whether or not California law applies in specific instances? Unfortunately, the answer is about as consistent as most peoples’ New Years Resolutions. Each specific instance of the California Corporation Code’s application to a foreign corporation has a separate analysis: sometimes the foreign corporation’s domiciliary law applies, and occasionally California law.
To illustrate the complications that sometimes are associated with determing which state laws apply to a particular case, one needs to look no further than Greb.
In Greb v. Diamond International Corporation, the plaintiffs filed a lawsuit against Diamond International Corporation, a corporation that was incorporated in Delaware, for asbestos-related injuries. Greb v. Diamond International Corp. (2013) 56 Cal. 4th 243, 246. The catch, however, was that Diamond International had dissolved more than three years before the lawsuit was brought. Ibid. Under Delaware law, corporations that have dissolved can only be sued within three years after their dissolution; any longer than that, and the corporation cannot be targeted by a lawsuit. See Delaware Code Title 8. Corporations § 278. Under the California Corporations Code § 2010, however, corporations have no such time limit. See Cal. Corp. Code §2010.
Seeing the discrepancies between the two states’ laws, and recognizing that Delaware law time-barred their lawsuit, the plaintiffs sued in California, and argued to the courts that § 2010 of the California Corporations Code applied. Greb, supra, 56 Cal. 4th at p. 246. The trial court disagreed with them, but there enough confusion among previous court decisions to allow for the case to be appealed. Ibid. After the California Court of Appeals decided Delaware law applied, the case made its way to the California Supreme Court. Id. at 247.
To get a sense of how technical an analysis of California law’s application on a foreign corporation can sometimes be, one needs to look no further than the first section on analysis in Greb, titled “The Conflicting Appellate Court Decisions.” Id. at 248. The California Supreme Court set about untangling the conflicting appellate court decisions that had been previously been made in California. Ibid. On the one hand, in cases like North American Asbestos Corporation v. Superior Court (“North American I”) and Riley v. Fitzgerald, the California Appellate Courts had determined that §2010 did not apply to foreign corporations. See North American Asbestos Corp. v. Superior Court (1982) 128 Cal. App. 3d; Riley v. Fitzgerald (1986) 178 Cal. App. 3d 871. The courts in these cases pointed to other sections of the California Corporations Code that addressed foreign corporations. Ibid. On the other hand, the Appellate Court in cases like North American Asbestos Corporation v. Superior Court (yes, the same name, but a different case, “North American II”) had ruled that § 2010 did apply to foreign corporations who did business in California and were sued in California. See North American Asbestos Corp. v. Superior Court (1986) 180 Cal. App. 3d 902.
Ultimately, the California Supreme Court sided with Diamond International Corporation, holding that §2010 did not apply to a foreign corporation. Greb, supra, 56 Cal. 4th at p. 243. In reaching that determination, the court first relied on three provisions of the Corporations Code that had been discussed by the appellate court in North American I. Id. at 256. First, it examined § 102(a) of the California Corporations Code, which described the California Corporations Code as applying to “corporations organized under this division.” Id. at 257; Cal. Corp. Code § 102(a). The court found that this was design to mean California Corporations, and that § 102(a) limits the application of the provisions of the code solely to certain domestic corporations, unless a provision expressly provides otherwise. Greb, supra, 56 Cal. 4th at p. 262. The court also considered § 162, which, considered with section 102(a), the court found, evinces “a clear intent to limit the Corporations Code’s general application to domestic corporations”. Id. at 256. Finally, the Court agreed with the lower court’s analysis of § 2115, which, the court noted, “identifies all of the chapters and sections of the Corporations Code that apply to foreign corporations meeting certain threshold requirements, [but] does not mention section 2010.” Ibid.
The California Supreme Court then carefully dismantled the appellate court’s arguments from North American II. Greb, supra, 56 Cal. 4th at 263. First, the California Supreme Court held that the North American II’s interpretation of the law, which in part had revolved around the interpretation of the phrase “every private corporation,” was incorrect. Id. at 265. Statutes that apply to “every private corporation,” the Supreme Court of California determined, were intended to cover every California private corporation, but not every private corporation who did business in California, regardless of their state of incorporation. Ibid. Then, the court tackled one of the concerns raised in North American II: whether finding that foreign corporations were exempt from § 2010 would be at odds with the California Constitution. Id. at 268. The appellate court in North American II believed Article XII, former section 15, was meant to impose all statutory burdens that applied to domestic corporations to also apply to foreign corporations, even if the particular statute did not specify that it would apply to foreign as well as domestic corporations. Ibid. The court ruled that North American II’s interpretation of the California Constitution had also been misguided, and that the foreign corporations and domestic corporations are sometimes meant to be treated differently under California law. Id. at 269.
Combining all of the aforementioned analysis, the Supreme Court held that following: “In view of the language of the current statutory provisions and the deliberate changes made to them throughout the years, as well as the legislative and constitutional background against which the predecessor of section 2010 was enacted, we conclude that the survival statute should properly be interpreted to apply to domestic corporations only.” Greb, supra, 56 Cal. 4th at p. 271.
So what does all of this mean? A few lessons can be distilled from the in-depth discussion held in Greb. First, for a very specific takeaway from the case, § 2010 of the California Corporations Code does not apply to foreign corporations. In other words, if a lawsuit needs to be brought against a corporation that is dissolved, the clock may already be ticking, depending on which state the corporation is from. Second, California law sometimes captures foreign corporations, and it sometimes does not. Cases like Greb demonstrate instances in which the foreign corporation’s state-of-incorporation laws apply, but other cases like Kruss v. Booth show the opposite (for an in-depth look at Kruss and § 2115 of the California Corporation Code, visit http://https://www.jerryburleson.com/california-law-may-determine-critical-corporate-governance-issues-even-though-its-a-delaware-nevada-or-texas-corporation/). Kruss v. Booth (2010) 185 Cal.App.4th 699, 716. Third, and finally, that if an individual wishes to sue a foreign corporation, that time and care should be spent to determine which laws will apply. The plaintiffs in Greb, who had sued under the authority of § 2010, ultimately lost their ability to sue Diamond International, as Delaware law prevented it. The application of Delaware law completely negated their ability to sue, and their reliance on the wrong state’s law cost them their chance to win a lawsuit.