Wilson v. Louisiana-Pacific Resources, Inc.
138 Cal. App. 3d 216, 187 Cal. Rptr. 852, 1982 Cal. App. LEXIS 2227 (1982)
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Rule of Law:
A state may constitutionally apply its corporate governance laws to a foreign corporation if that corporation's business property, payroll, and sales, as well as the residency of its shareholders, are predominantly within that state.
Facts:
- Louisiana-Pacific Resources, Inc. was incorporated under the laws of Utah.
- Utah law permits straight voting for corporate directors unless the articles of incorporation provide for cumulative voting; Louisiana-Pacific's articles did not.
- An average of over 50% of Louisiana-Pacific's property, payroll, and sales were in California.
- More than 50% of Louisiana-Pacific's shareholders of record resided in California.
- Louisiana-Pacific's principal place of business, employee locations, bank accounts, and meetings of shareholders and directors were all in California.
- The corporation had virtually no business connections with Utah, aside from being domiciled and having a transfer agent there.
- Ross A. Wilson was a shareholder of Louisiana-Pacific Resources, Inc.
Procedural Posture:
- Ross A. Wilson filed an action against Louisiana-Pacific Resources, Inc. in a California trial court.
- Wilson sought a declaratory judgment that the corporation was subject to California's cumulative voting law under section 2115 of the Corporations Code.
- The trial court found that Louisiana-Pacific met the statutory tests and concluded that the application of California's law was constitutional, granting the declaratory judgment.
- Louisiana-Pacific Resources, Inc. (appellant) appealed the judgment to the California Court of Appeal, First District.
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Issue:
Does California Corporations Code section 2115, which imposes California's mandatory cumulative voting law on a foreign corporation that conducts a majority of its business and has a majority of its shareholders in California, violate the Full Faith and Credit, Commerce, Due Process, Contract, or Equal Protection Clauses of the U.S. Constitution?
Opinions:
Majority - Grodin, P. J.
No, the application of California Corporations Code section 2115 is constitutional. A state may apply its substantive law if it has a significant aggregation of contacts creating state interests, such that the choice of law is neither arbitrary nor fundamentally unfair. Here, California's interests in protecting shareholders through its long-standing policy of mandatory cumulative voting outweigh Utah's less-defined interest in maintaining a permissive policy. The statute does not violate the Full Faith and Credit Clause because California's contacts are substantial and its interests are paramount. It does not violate the Commerce Clause because it regulates even-handedly, and any incidental burden on interstate commerce is minimal compared to the legitimate local benefits; the statute's high threshold prevents conflicting regulations from other states. The law does not violate Due Process as it is rationally related to protecting California's public policy from being circumvented by 'pseudo-foreign' corporations. The impairment of the corporate charter under the Contract Clause is minimal and therefore permissible. Finally, the exemption for corporations on certified national stock exchanges does not violate Equal Protection, as the legislature could rationally conclude that such entities are subject to other adequate forms of regulation.
Analysis:
This decision establishes the 'pseudo-foreign corporation' doctrine, significantly limiting the traditional 'internal affairs' doctrine, which dictates that the law of the state of incorporation governs a company's internal governance. The ruling confirms that a state with paramount interests, demonstrated by the corporation's 'center of gravity,' can apply its own laws to protect its residents and regulate corporate behavior. This precedent empowers states to prevent corporations from incorporating in jurisdictions with lax regulations ('charter-mongering') while conducting the bulk of their business elsewhere. It signals a shift from a formalistic choice-of-law approach based on domicile to a more functional analysis based on a corporation's actual contacts and business realities.
