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Choice of Law: The Internal Affairs Doctrine

The “internal affairs doctrine” is a choice of law rule that applies the law of the state of incorporation to the corporation’s “internal affairs.”

While many in the U.S. treat the internal affairs doctrine as self-evident, other countries frequently insist on applying their corporate law to all corporations that have their headquarters in that country, or some other substantial connection to that country. Such insistence on a substantial connection is no stranger to U.S. choice of law. In fact, for most contracts, U.S. courts generally refuse to apply “[t]he law of the state chosen by the parties to govern their contractual rights and duties” if “the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice,” see Restatement of the Law (2nd) Conflict of Laws § 187(2)(a). U.S. courts will, however, enforce any chosen state's corporate law under the internal affairs doctrine.

The internal affairs doctrine allowed corporations to migrate away from states that imposed restrictions. Again, “migration” is a mere figure of speech — no people or assets need to move out of state to avoid that state's corporate law. Mere reincorporation in another state is sufficient.

Nowadays this issue is mostly discussed in connection with shareholder rights. In recent decades, commentators have been intensely debating whether Delaware’s enabling approach to shareholder rights is the result of a “race to the top” or a “race to the bottom” from the perspective of the shareholder/manager relationship. But Delaware actually became a major corporate domicile only because other states tried to protect non-shareholder constituencies through corporate law. In particular, in an attempt to combat “trusts,” a/k/a cartels, New York in the later 19th and early 20th century prohibited holding companies — it prohibited its corporations from owning stock in other corporations. In response, corporations migrated to New Jersey. When New Jersey’s governor Woodrow Wilson ran for the presidency in 1912, he advocated amendments that limited holding companies in New Jersey as well. Thus, the corporations moved on to Delaware and they have stayed there ever since. The issue of “trusts” was left to federal antitrust law.

In general, regulatory competition may work for the contracting parties writ large. As previously indicated, this group includes all those who voluntarily interact with the corporation. But regulatory competition clearly does not address the concerns of third parties, such as tort creditors or the general public. To the extent that these groups are affected by corporate law, regulatory competition is apt to generate negative externalities. Such externalities would then require federal intervention, such as the federal antitrust and securities laws. 

Are negative externalities a real problem in corporate law, or a negligible quibble? The answer depends on two related issues: First, the scope of the internal affairs doctrine. The fewer rules the doctrine covers, the less potential for externalities. As its name implies, the internal affairs doctrine covers internal organizational rules, but the details can be tricky, as Lidow illustrates.

Second, do third parties really need the protection of rules covered by the internal affairs doctrine? After all, tort victims are already protected by tort law, the environment is protected by environmental statutes and so on.  Nevertheless, additional protection through organizational law may be required. The reason is that this other law is imperfect, owing to the limits of both the political process and of law’s capacity to regulate human affairs. Hence societies must rely on non-legal norms to regulate most human interaction. However, the corporate context may interfere with the operation of non-legal norms, be it by diffusing responsibility, by suppressing internalized norms, or by some other mechanism. Do we need to insist on some mandatory internal corporate structure to avoid “sociopathic” corporate behavior? Or to take a more positive view, does organizational law provide opportunities for “mandatory betterment” that would be infeasible or unethical for individuals? For example, should we impose co-determination or affirmative action for boards? The U.S. has neither, but many European countries do.

If one concludes that externalities from corporate law are a real problem, then one should wonder why states accept the internal affairs doctrine. It is often said, especially in Delaware, that the U.S. Constitution enshrines the internal affairs doctrine; CTS is usually cited as support. See, e.g., VantagePoint below. Read CTS and judge for yourself.

  • 1 CTS v. Dynamics (U.S. 1987)

    This decision upheld Indiana’s version of DGCL 203 against constitutional challenge. In the 1980s, most states passed some form of an anti-takeover statute. They were hotly politically contested, as you might infer from the heated debate between the Justices and the various amici.

    In Edgar v. MITE (1982), a plurality of the Supreme Court struck down an Illinois law that purported to apply to any tender offer for shares of  “corporation or other issuer of securities of which shareholders located in Illinois own 10% of the class of equity securities subject to the offer, or for which any two of the following three conditions are met: the corporation (1) has its principal executive office in Illinois, (2) is organized under the laws of Illinois, or (3) has at least 10% of its stated capital and paid-in surplus represented within the State,” 457 U.S. 624, 627 (1982).

    The Indiana statute at issue here in CTS is different as it applies only to corporations chartered in Indiana. Does this fact or anything else in the decision imply that the internal affairs doctrine is enshrined in the U.S. Constitution?

    1
    481 U.S. 69 (1987)
    2
    CTS CORP.
    v.
    DYNAMICS CORPORATION OF AMERICA
    3
    No. 86-71.
    Supreme Court of United States.
    4
    Argued March 2, 1987
    5
    Decided April 21, 1987[*]
    6

    APPEAL FROM THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

    7

    [71] James A. Strain argued the cause for appellant in No. 86-71. With him on the brief were Richard E. Deer and Stanley C. Fickle. John F. Pritchard argued the cause and filed a brief for appellant in No. 86-97.

    8

    [72] Lowell E. Sachnoff argued the cause for appellee in both cases. With him on the brief were Dean A. Dickie and Sarah R. Wolff.[†]

    9
    JUSTICE POWELL delivered the opinion of the Court.
    10

    These cases present the questions whether the Control Share Acquisitions Chapter of the Indiana Business Corporation Law, Ind. Code § 23-1-42-1 et seq. (Supp. 1986), is preempted by the Williams Act, 82 Stat. 454, as amended, 15 U. S. C. §§ 78m(d)-(e) and 78n(d)-(f) (1982 ed. and Supp. III), or violates the Commerce Clause of the Federal Constitution, Art. I, § 8, cl. 3.

    11
    I
    12
    A
    13

    On March 4, 1986, the Governor of Indiana signed a revised Indiana Business Corporation Law, Ind. Code § 23-1-17-1 et seq. (Supp. 1986). That law included the Control Share Acquisitions Chapter (Indiana Act or Act). Beginning on August 1, 1987, the Act will apply to any corporation incorporated in Indiana, § 23-1-17-3(a), unless the corporation amends its articles of incorporation or bylaws to opt out of the Act, § 23-1-42-5. Before that date, any Indiana corporation can opt into the Act by resolution of its board of directors. § 23-1-17-3(b). The Act applies only to "issuing [73] public corporations." The term "corporation" includes only businesses incorporated in Indiana. See § 23-1-20-5. An "issuing public corporation" is defined as:

    14

    "a corporation that has:

    15
    "(1) one hundred (100) or more shareholders;
    16
    "(2) its principal place of business, its principal office, or substantial assets within Indiana; and
    17
    "(3) either:
    18
    "(A) more than ten percent (10%) of its shareholders resident in Indiana;
    19
    "(B) more than ten percent (10%) of its shares owned by Indiana residents; or
    20
    "(C) ten thousand (10,000) shareholders resident in Indiana." § 23-1-42-4(a).[1]
    21

    The Act focuses on the acquisition of "control shares" in an issuing public corporation. Under the Act, an entity acquires "control shares" whenever it acquires shares that, but for the operation of the Act, would bring its voting power in the corporation to or above any of three thresholds: 20%, 33 1/3%, or 50%. § 23-1-42-1. An entity that acquires control shares does not necessarily acquire voting rights. Rather, it gains those rights only "to the extent granted by resolution approved by the shareholders of the issuing public corporation." § 23-1-42-9(a). Section 23-1-42-9(b) requires a majority vote of all disinterested[2] shareholders holding each [74] class of stock for passage of such a resolution. The practical effect of this requirement is to condition acquisition of control of a corporation on approval of a majority of the pre-existing disinterested shareholders.[3]

    22

    The shareholders decide whether to confer rights on the control shares at the next regularly scheduled meeting of the shareholders, or at a specially scheduled meeting. The [75] acquiror can require management of the corporation to hold such a special meeting within 50 days if it files an "acquiring person statement,"[4] requests the meeting, and agrees to pay the expenses of the meeting. See § 23-1-42-7. If the shareholders do not vote to restore voting rights to the shares, the corporation may redeem the control shares from the acquiror at fair market value, but it is not required to do so. § 23-1-42-10(b). Similarly, if the acquiror does not file an acquiring person statement with the corporation, the corporation may, if its bylaws or articles of incorporation so provide, redeem the shares at any time after 60 days after the acquiror's last acquisition. § 23-1-42-10(a).

    23
    B
    24

    On March 10, 1986, appellee Dynamics Corporation of America (Dynamics) owned 9.6% of the common stock of appellant CTS Corporation, an Indiana corporation. On that day, six days after the Act went into effect, Dynamics announced a tender offer for another million shares in CTS; purchase of those shares would have brought Dynamics' ownership interest in CTS to 27.5%. Also on March 10, Dynamics filed suit in the United States District Court for the Northern District of Illinois, alleging that CTS had violated the federal securities laws in a number of respects no longer relevant to these proceedings. On March 27, the board of directors of CTS, an Indiana corporation, elected to be governed by the provisions of the Act, see § 23-1-17-3.

    25

    Four days later, on March 31, Dynamics moved for leave to amend its complaint to allege that the Act is pre-empted by the Williams Act, 15 U. S. C. §§ 78m(d)-(e) and 78n(d)-(f) (1982 ed. and Supp. III), and violates the Commerce Clause, Art. I, § 8, cl. 3. Dynamics sought a temporary restraining order, a preliminary injunction, and declaratory relief against [76] CTS' use of the Act. On April 9, the District Court ruled that the Williams Act pre-empts the Indiana Act and granted Dynamics' motion for declaratory relief. 637 F. Supp. 389 (ND Ill. 1986). Relying on JUSTICE WHITE's plurality opinion in Edgar v. MITE Corp., 457 U. S. 624 (1982), the court concluded that the Act "wholly frustrates the purpose and objective of Congress in striking a balance between the investor, management, and the takeover bidder in takeover contests." 637 F. Supp., at 399. A week later, on April 17, the District Court issued an opinion accepting Dynamics' claim that the Act violates the Commerce Clause. This holding rested on the court's conclusion that "the substantial interference with interstate commerce created by the [Act] outweighs the articulated local benefits so as to create an impermissible indirect burden on interstate commerce." Id., at 406. The District Court certified its decisions on the Williams Act and Commerce Clause claims as final under Federal Rule of Civil Procedure 54(b). Ibid.

    26

    CTS appealed the District Court's holdings on these claims to the Court of Appeals for the Seventh Circuit. Because of the imminence of CTS' annual meeting, the Court of Appeals consolidated and expedited the two appeals. On April 23 — 23 days after Dynamics first contested application of the Act in the District Court — the Court of Appeals issued an order affirming the judgment of the District Court. The opinion followed on May 28. 794 F. 2d 250 (1986).

    27

    After disposing of a variety of questions not relevant to this appeal, the Court of Appeals examined Dynamics' claim that the Williams Act pre-empts the Indiana Act. The court looked first to the plurality opinion in Edgar v. MITE Corp., supra, in which three Justices found that the Williams Act pre-empts state statutes that upset the balance between target management and a tender offeror. The court noted that some commentators had disputed this view of the Williams Act, concluding instead that the Williams Act was "an anti-takeover statute, expressing a view, however benighted, [77] that hostile takeovers are bad." 794 F. 2d, at 262. It also noted:

    28
    "[I]t is a big leap from saying that the Williams Act does not itself exhibit much hostility to tender offers to saying that it implicitly forbids states to adopt more hostile regulations. . . . But whatever doubts of the Williams' Act preemptive intent we might entertain as an original matter are stilled by the weight of precedent." Ibid.
    29

    Once the court had decided to apply the analysis of the MITE plurality, it found the case straightforward:

    30
    "Very few tender offers could run the gauntlet that Indiana has set up. In any event, if the Williams Act is to be taken as a congressional determination that a month (roughly) is enough time to force a tender offer to be kept open, 50 days is too much; and 50 days is the minimum under the Indiana act if the target corporation so chooses." Id., at 263.
    31

    The court next addressed Dynamic's Commerce Clause challenge to the Act. Applying the balancing test articulated in Pike v. Bruce Church, Inc., 397 U. S. 137 (1970), the court found the Act unconstitutional:

    32
    "Unlike a state's blue sky law the Indiana statute is calculated to impede transactions between residents of other states. For the sake of trivial or even negative benefits to its residents Indiana is depriving nonresidents of the valued opportunity to accept tender offers from other nonresidents.
    33
    ". . . Even if a corporation's tangible assets are immovable, the efficiency with which they are employed and the proportions in which the earnings they generate are divided between management and shareholders depends on the market for corporate control — an interstate, indeed international, market that the State of Indiana is not authorized to opt out of, as in effect it has done in this statute." 794 F. 2d, at 264.
    34

    [78] Finally, the court addressed the "internal affairs" doctrine, a "principle of conflict of laws . . . designed to make sure that the law of only one state shall govern the internal affairs of a corporation or other association." Ibid. It stated:

    35
    "We may assume without having to decide that Indiana has a broad latitude in regulating those affairs, even when the consequence may be to make it harder to take over an Indiana corporation. . . . But in this case the effect on the interstate market in securities and corporate control is direct, intended, and substantial. . . . [T]hat the mode of regulation involves jiggering with voting rights cannot take it outside the scope of judicial review under the commerce clause." Ibid.
    36

    Accordingly, the court affirmed the judgment of the District Court.

    37

    Both Indiana and CTS filed jurisdictional statements. We noted probable jurisdiction under 28 U. S. C. § 1254(2), 479 U. S. 810 (1986), and now reverse.[5]

    38
    II
    39

    The first question in these cases is whether the Williams Act pre-empts the Indiana Act. As we have stated frequently, absent an explicit indication by Congress of an intent to pre-empt state law, a state statute is pre-empted only

    40
    [79] " `where compliance with both federal and state regulations is a physical impossibility . . . ,' Florida Lime & Avocado Growers, Inc. v. Paul, 373 U. S. 132, 142-143 (1963), or where the state `law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.' Hines v. Davidowitz, 312 U. S. 52, 67 (1941) . . . ." Ray v. Atlantic Richfield Co., 435 U. S. 151, 158 (1978).
    41

    Because it is entirely possible for entities to comply with both the Williams Act and the Indiana Act, the state statute can be pre-empted only if it frustrates the purposes of the federal law.

    42
    A
    43

    Our discussion begins with a brief summary of the structure and purposes of the Williams Act. Congress passed the Williams Act in 1968 in response to the increasing number of hostile tender offers. Before its passage, these transactions were not covered by the disclosure requirements of the federal securities laws. See Piper v. Chris-Craft Industries, Inc., 430 U. S. 1, 22 (1977). The Williams Act, backed by regulations of the SEC, imposes requirements in two basic areas. First, it requires the offeror to file a statement disclosing information about the offer, including: the offeror's background and identity; the source and amount of the funds to be used in making the purchase; the purpose of the purchase, including any plans to liquidate the company or make major changes in its corporate structure; and the extent of the offeror's holdings in the target company. See 15 U. S. C. § 78n(d)(1) (incorporating § 78m(d)(1) by reference); 17 CFR §§ 240.13d-1, 240.14d-3 (1986).

    44

    Second, the Williams Act, and the regulations that accompany it, establish procedural rules to govern tender offers. For example, stockholders who tender their shares may withdraw them while the offer remains open, and, if the offeror has not purchased their shares, any time after 60 days from commencement of the offer. 15 U. S. C. § 78n(d)(5); 17 [80] CFR § 240.14d-7(a)(1) (1986), as amended, 51 Fed. Reg. 25873 (1986). The offer must remain open for at least 20 business days. 17 CFR § 240.14e-1(a) (1986). If more shares are tendered than the offeror sought to purchase, purchases must be made on a pro rata basis from each tendering shareholder. 15 U. S. C. § 78n(d)(6); 17 CFR § 240.14(8) (1986). Finally, the offeror must pay the same price for all purchases; if the offering price is increased before the end of the offer, those who already have tendered must receive the benefit of the increased price. § 78n(d)(7).

    45
    B
    46

    The Indiana Act differs in major respects from the Illinois statute that the Court considered in Edgar v. MITE Corp., 457 U. S. 624 (1982). After reviewing the legislative history of the Williams Act, JUSTICE WHITE, joined by Chief Justice Burger and JUSTICE BLACKMUN (the plurality), concluded that the Williams Act struck a careful balance between the interests of offerors and target companies, and that any state statute that "upset" this balance was pre-empted. Id., at 632-634.

    47

    The plurality then identified three offending features of the Illinois statute. JUSTICE WHITE's opinion first noted that the Illinois statute provided for a 20-day precommencement period. During this time, management could disseminate its views on the upcoming offer to shareholders, but offerors could not publish their offers. The plurality found that this provision gave management "a powerful tool to combat tender offers." Id., at 635. This contrasted dramatically with the Williams Act; Congress had deleted express precommencement notice provisions from the Williams Act. According to the plurality, Congress had determined that the potentially adverse consequences of such a provision on shareholders should be avoided. Thus, the plurality concluded that the Illinois provision "frustrate[d] the objectives of the Williams Act." Ibid. The second criticized feature of [81] the Illinois statute was a provision for a hearing on a tender offer that, because it set no deadline, allowed management " `to stymie indefinitely a takeover,' " id., at 637 (quoting MITE Corp. v. Dixon, 633 F. 2d 486, 494 (CA7 1980)). The plurality noted that " `delay can seriously impede a tender offer,' " 457 U. S., at 637 (quoting Great Western United Corp. v. Kidwell, 577 F. 2d 1256, 1277 (CA5 1978) (Wisdom, J.)), and that "Congress anticipated that investors and the takeover offeror would be free to go forward without unreasonable delay," 457 U. S., at 639. Accordingly, the plurality concluded that this provision conflicted with the Williams Act. The third troublesome feature of the Illinois statute was its requirement that the fairness of tender offers would be reviewed by the Illinois Secretary of State. Nothing that "Congress intended for investors to be free to make their own decisions," the plurality concluded that " `[t]he state thus offers investor protection at the expense of investor autonomy — an approach quite in conflict with that adopted by Congress.' " Id., at 639-640 (quoting MITE Corp. v. Dixon, supra, at 494).

    48
    C
    49

    As the plurality opinion in MITE did not represent the views of a majority of the Court,[6] we are not bound by its reasoning. We need not question that reasoning, however, because we believe the Indiana Act passes muster even under the broad interpretation of the Williams Act articulated by JUSTICE WHITE in MITE. As is apparent from our summary of its reasoning, the overriding concern of the [82] MITE plurality was that the Illinois statute considered in that case operated to favor management against offerors, to the detriment of shareholders. By contrast, the statute now before the Court protects the independent shareholder against the contending parties. Thus, the Act furthers a basic purpose of the Williams Act, " `plac[ing] investors on an equal footing with the takeover bidder,' " Piper v. Chris-Craft Industries, Inc., 430 U. S., at 30 (quoting the Senate Report accompanying the Williams Act, S. Rep. No. 550, 90th Cong., 1st Sess., 4 (1967)).[7]

    50

    The Indiana Act operates on the assumption, implicit in the Williams Act, that independent shareholders faced with tender offers often are at a disadvantage. By allowing such [83] shareholders to vote as a group, the Act protects them from the coercive aspects of some tender offers. If, for example, shareholders believe that a successful tender offer will be followed by a purchase of nontendering shares at a depressed price, individual shareholders may tender their shares — even if they doubt the tender offer is in the corporation's best interest — to protect themselves from being forced to sell their shares at a depressed price. As the SEC explains: "The alternative of not accepting the tender offer is virtual assurance that, if the offer is successful, the shares will have to be sold in the lower priced, second step." Two-Tier Tender Offer Pricing and Non-Tender Offer Purchase Programs, SEC Exchange Act Rel. No. 21079 (June 21, 1984), [1984 Transfer Binder] CCH Fed. Sec. L. Rep. ¶ 83,637, p. 86,916 (footnote omitted) (hereinafter SEC Release No. 21079). See Lowenstein, Pruning Deadwood in Hostile Takeovers: A Proposal for Legislation, 83 Colum. L. Rev. 249, 307-309 (1983). In such a situation under the Indiana Act, the shareholders as a group, acting in the corporation's best interest, could reject the offer, although individual shareholders might be inclined to accept it. The desire of the Indiana Legislature to protect shareholders of Indiana corporations from this type of coercive offer does not conflict with the Williams Act. Rather, it furthers the federal policy of investor protection.

    51

    In implementing its goal, the Indiana Act avoids the problems the plurality discussed in MITE. Unlike the MITE statute, the Indiana Act does not give either management or the offeror an advantage in communicating with the shareholders about the impending offer. The Act also does not impose an indefinite delay on tender offers. Nothing in the Act prohibits an offeror from consummating an offer on the 20th business day, the earliest day permitted under applicable federal regulations, see 17 CFR § 240.14e-1(a) (1986). Nor does the Act allow the state government to interpose its views of fairness between willing buyers and sellers of shares [84] of the target company. Rather, the Act allows shareholders to evaluate the fairness of the offer collectively.

    52
    D
    53

    The Court of Appeals based its finding of pre-emption on its view that the practical effect of the Indiana Act is to delay consummation of tender offers until 50 days after the commencement of the offer. 794 F. 2d, at 263. As did the Court of Appeals, Dynamics reasons that no rational offeror will purchase shares until it gains assurance that those shares will carry voting rights. Because it is possible that voting rights will not be conferred until a shareholder meeting 50 days after commencement of the offer, Dynamics concludes that the Act imposes a 50-day delay. This, it argues, conflicts with the shorter 20-business-day period established by the SEC as the minimum period for which a tender offer may be held open. 17 CFR § 240.14e-1 (1986). We find the alleged conflict illusory.

    54

    The Act does not impose an absolute 50-day delay on tender offers, nor does it preclude an offeror from purchasing shares as soon as federal law permits. If the offeror fears an adverse shareholder vote under the Act, it can make a conditional tender offer, offering to accept shares on the condition that the shares receive voting rights within a certain period of time. The Williams Act permits tender offers to be conditioned on the offeror's subsequently obtaining regulatory approval. E. g., Interpretive Release Relating to Tender Offer Rules, SEC Exchange Act Rel. No. 34-16623 (Mar. 5, 1980), 3 CCH Fed. Sec. L. Rep. ¶ 24,284I, p. 17,758, quoted in MacFadden Holdings, Inc. v. JB Acquisition Corp., 802 F. 2d 62, 70 (CA2 1986).[8] There is no reason to doubt that [85] this type of conditional tender offer would be legitimate as well.[9]

    55

    Even assuming that the Indiana Act imposes some additional delay, nothing in MITE suggested that any delay imposed by state regulation, however short, would create a conflict with the Williams Act. The plurality argued only that the offeror should "be free to go forward without unreasonable delay." 457 U. S., at 639 (emphasis added). In that case, the Court was confronted with the potential for indefinite delay and presented with no persuasive reason why some deadline could not be established. By contrast, the Indiana Act provides that full voting rights will be vested — if this eventually is to occur — within 50 days after commencement of the offer. This period is within the 60-day period Congress established for reinstitution of withdrawal rights in 15 U. S. C. § 78n(d)(5). We cannot say that a delay within that congressionally determined period is unreasonable.

    56

    Finally, we note that the Williams Act would pre-empt a variety of state corporate laws of hitherto unquestioned validity if it were construed to pre-empt any state statute that may limit or delay the free exercise of power after a successful tender offer. State corporate laws commonly permit corporations to stagger the terms of their directors. See Model Business Corp. Act § 37 (1969 draft) in 3 Model Business Corp. Act Ann. (2d ed. 1971) (hereinafter MBCA); American [86] Bar Foundation, Revised Model Business Corp. Act § 8.06 (1984 draft) (1985) (hereinafter RMBCA).[10] By staggering the terms of directors, and thus having annual elections for only one class of directors each year, corporations may delay the time when a successful offeror gains control of the board of directors. Similarly, state corporation laws commonly provide for cumulative voting. See 1 MBCA § 33, ¶ 4; RMBCA § 7.28.[11] By enabling minority shareholders to assure themselves of representation in each class of directors, cumulative voting provisions can delay further the ability of offerors to gain untrammeled authority over the affairs of the target corporation. See Hochman & Folger, Deflecting Takeovers: Charter and By-Law Techniques, 34 Bus. Law. 537, 538-539 (1979).

    57

    In our view, the possibility that the Indiana Act will delay some tender offers is insufficient to require a conclusion that the Williams Act pre-empts the Act. The longstanding prevalence of state regulation in this area suggests that, if Congress had intended to pre-empt all state laws that delay the acquisition of voting control following a tender offer, it would have said so explicitly. The regulatory conditions that the Act places on tender offers are consistent with the text and the purposes of the Williams Act. Accordingly, we [87] hold that the Williams Act does not pre-empt the Indiana Act.

    58
    III
    59

    As an alternative basis for its decision, the Court of Appeals held that the Act violates the Commerce Clause of the Federal Constitution. We now address this holding. On its face, the Commerce Clause is nothing more than a grant to Congress of the power "[t]o regulate Commerce . . . among the several States. . . ," Art. I, § 8, cl. 3. But it has been settled for more than a century that the Clause prohibits States from taking certain actions respecting interstate commerce even absent congressional action. See, e. g., Cooley v. Board of Wardens, 12 How. 299 (1852). The Court's interpretation of "these great silences of the Constitution," H. P. Hood & Sons, Inc. v. Du Mond, 336 U. S. 525, 535 (1949), has not always been easy to follow. Rather, as the volume and complexity of commerce and regulation have grown in this country, the Court has articulated a variety of tests in an attempt to describe the difference between those regulations that the Commerce Clause permits and those regulations that it prohibits. See, e. g., Raymond Motor Transportation, Inc. v. Rice, 434 U. S. 429, 441, n. 15 (1978).

    60
    A
    61

    The principal objects of dormant Commerce Clause scrutiny are statutes that discriminate against interstate commerce. See, e. g., Lewis v. BT Investment Managers, Inc., 447 U. S. 27, 36-37 (1980); Philadelphia v. New Jersey, 437 U. S. 617, 624 (1978). See generally Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 Mich. L. Rev. 1091 (1986). The Indiana Act is not such a statute. It has the same effects on tender offers whether or not the offeror is a domiciliary or resident of Indiana. Thus, it "visits its effects equally upon both interstate and local business," Lewis v. BT Investment Managers, Inc., supra, at 36.

    62

    [88] Dynamics nevertheless contends that the statute is discriminatory because it will apply most often to out-of-state entities. This argument rests on the contention that, as a practical matter, most hostile tender offers are launched by offerors outside Indiana. But this argument avails Dynamics little. "The fact that the burden of a state regulation falls on some interstate companies does not, by itself, establish a claim of discrimination against interstate commerce." Exxon Corp. v. Governor of Maryland, 437 U. S. 117, 126 (1978). See Minnesota v. Clover Leaf Creamery Co., 449 U. S. 456, 471-472 (1981) (rejecting a claim of discrimination because the challenged statute "regulate[d] evenhandedly . . . without regard to whether the [commerce came] from outside the State"); Commonwealth Edison Co. v. Montana, 453 U. S. 609, 619 (1981) (rejecting a claim of discrimination because the "tax burden [was] borne according to the amount . . . consumed and not according to any distinction between instate and out-of-state consumers"). Because nothing in the Indiana Act imposes a greater burden on out-of-state offerors than it does on similarly situated Indiana offerors, we reject the contention that the Act discriminates against interstate commerce.

    63
    B
    64

    This Court's recent Commerce Clause cases also have invalidated statutes that may adversely affect interstate commerce by subjecting activities to inconsistent regulations. E. g., Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U. S. 573, 583-584 (1986); Edgar v. MITE Corp., 457 U. S., at 642 (plurality opinion of WHITE, J.); Kassel v. Consolidated Freightways Corp., 450 U. S. 662, 671 (1981) (plurality opinion of POWELL, J.). See Southern Pacific Co. v. Arizona, 325 U. S. 761, 774 (1945) (noting the "confusion and difficulty" that would attend the "unsatisfied need for uniformity" in setting maximum limits on train lengths); Cooley v. Board of Wardens, supra, at 319 (stating that the Commerce Clause prohibits States from regulating [89] subjects that "are in their nature national, or admit only of one uniform system, or plan of regulation"). The Indiana Act poses no such problem. So long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one State. No principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations, including the authority to define the voting rights of shareholders. See Restatement (Second) of Conflict of Laws § 304 (1971) (concluding that the law of the incorporating State generally should "determine the right of a shareholder to participate in the administration of the affairs of the corporation"). Accordingly, we conclude that the Indiana Act does not create an impermissible risk of inconsistent regulation by different States.

    65
    C
    66

    The Court of Appeals did not find the Act unconstitutional for either of these threshold reasons. Rather, its decision rested on its view of the Act's potential to hinder tender offers. We think the Court of Appeals failed to appreciate the significance for Commerce Clause analysis of the fact that state regulation of corporate governance is regulation of entities whose very existence and attributes are a product of state law. As Chief Justice Marshall explained:

    67
    "A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created." Trustees of Dartmouth College v. Woodward, 4 Wheat. 518, 636 (1819).
    68

    See First National Bank of Boston v. Bellotti, 435 U. S. 765, 822-824 (1978) (REHNQUIST, J., dissenting). Every State in this country has enacted laws regulating corporate governance. [90] By prohibiting certain transactions, and regulating others, such laws necessarily affect certain aspects of interstate commerce. This necessarily is true with respect to corporations with shareholders in States other than the State of incorporation. Large corporations that are listed on national exchanges, or even regional exchanges, will have shareholders in many States and shares that are traded frequently. The markets that facilitate this national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that a corporation — except in the rarest situations — is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation.

    69

    These regulatory laws may affect directly a variety of corporate transactions. Mergers are a typical example. In view of the substantial effect that a merger may have on the shareholders' interests in a corporation, many States require supermajority votes to approve mergers. See, e. g., 2 MBCA § 73 (requiring approval of a merger by a majority of all shares, rather than simply a majority of votes cast); RMBCA § 11.03 (same). By requiring a greater vote for mergers than is required for other transactions, these laws make it more difficult for corporations to merge. State laws also may provide for "dissenters' rights" under which minority shareholders who disagree with corporate decisions to take particular actions are entitled to sell their shares to the corporation at fair market value. See, e. g., 2 MBCA §§ 80, 81; RMBCA § 13.02. By requiring the corporation to purchase the shares of dissenting shareholders, these laws may inhibit a corporation from engaging in the specified transactions.[12]

    70

    [91] It thus is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares. A State has an interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.

    71

    There can be no doubt that the Act reflects these concerns. The primary purpose of the Act is to protect the shareholders of Indiana corporations. It does this by affording shareholders, when a takeover offer is made, an opportunity to decide collectively whether the resulting change in voting control of the corporation, as they perceive it, would be desirable. A change of management may have important effects on the shareholders' interests; it is well within the State's role as overseer of corporate governance to offer this opportunity. The autonomy provided by allowing shareholders collectively to determine whether the takeover is advantageous to their [92] interests may be especially beneficial where a hostile tender offer may coerce shareholders into tendering their shares.

    72

    Appellee Dynamics responds to this concern by arguing that the prospect of coercive tender offers is illusory, and that tender offers generally should be favored because they reallocate corporate assets into the hands of management who can use them most effectively.[13] See generally Easterbrook & Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161 (1981). As indicated supra, at 82-83, Indiana's concern with tender offers is not groundless. Indeed, the potentially coercive aspects of tender offers have been recognized by the SEC, see SEC Release No. 21079, p. 86,916, and by a number of scholarly commentators, see, e. g., Bradley & Rosenzweig, Defensive Stock Repurchases, 99 Harv. L. Rev. 1377, 1412-1413 (1986); Macey & McChesney, A Theoretical Analysis of Corporate Greenmail, 95 Yale L. J. 13, 20-22 (1985); Lowenstein, 83 Colum. L. Rev., at 307-309. The Constitution does not require the States to subscribe to any particular economic theory. We are not inclined "to secondguess the empirical judgments of lawmakers concerning the utility of legislation," Kassel v. Consolidated Freightways Corp., 450 U. S., at 679 (BRENNAN, J., concurring in judgment). In our view, the possibility of coercion in some takeover bids offers additional justification for Indiana's decision to promote the autonomy of independent shareholders.

    73

    [93] Dynamics argues in any event that the State has " `no legitimate interest in protecting the nonresident shareholders.' " Brief for Appellee 21 (quoting Edgar v. MITE Corp., 457 U. S., at 644). Dynamics relies heavily on the statement by the MITE Court that "[i]nsofar as the . . . law burdens out-of-state transactions, there is nothing to be weighed in the balance to sustain the law." 457 U. S., at 644. But that comment was made in reference to an Illinois law that applied as well to out-of-state corporations as to in-state corporations. We agree that Indiana has no interest in protecting nonresident shareholders of nonresident corporations. But this Act applies only to corporations incorporated in Indiana. We reject the contention that Indiana has no interest in providing for the shareholders of its corporations the voting autonomy granted by the Act. Indiana has a substantial interest in preventing the corporate form from becoming a shield for unfair business dealing. Moreover, unlike the Illinois statute invalidated in MITE, the Indiana Act applies only to corporations that have a substantial number of shareholders in Indiana. See Ind. Code § 23-1-42-4(a)(3) (Supp. 1986). Thus, every application of the Indiana Act will affect a substantial number of Indiana residents, whom Indiana indisputably has an interest in protecting.

    74
    D
    75

    Dynamics' argument that the Act is unconstitutional ultimately rests on its contention that the Act will limit the number of successful tender offers. There is little evidence that this will occur. But even if true, this result would not substantially affect our Commerce Clause analysis. We reiterate that this Act does not prohibit any entity — resident or nonresident — from offering to purchase, or from purchasing, shares in Indiana corporations, or from attempting thereby to gain control. It only provides regulatory procedures designed for the better protection of the corporations' shareholders. We have rejected the "notion that the Commerce [94] Clause protects the particular structure or methods of operation in a . . . market." Exxon Corp. v. Governor of Maryland, 437 U. S., at 127. The very commodity that is traded in the securities market is one whose characteristics are defined by state law. Similarly, the very commodity that is traded in the "market for corporate control" — the corporation — is one that owes its existence and attributes to state law. Indiana need not define these commodities as other States do; it need only provide that residents and nonresidents have equal access to them. This Indiana has done. Accordingly, even if the Act should decrease the number of successful tender offers for Indiana corporations, this would not offend the Commerce Clause.[14]

    76
    IV
    77

    On its face, the Indiana Control Share Acquisitions Chapter evenhandedly determines the voting rights of shares of Indiana corporations. The Act does not conflict with the provisions or purposes of the Williams Act. To the limited extent that the Act affects interstate commerce, this is justified by the State's interests in defining the attributes of shares in its corporations and in protecting shareholders. Congress has never questioned the need for state regulation of these matters. Nor do we think such regulation offends the Constitution. Accordingly, we reverse the judgment of the Court of Appeals.

    78

    It is so ordered.

    79
    JUSTICE SCALIA, concurring in part and concurring in the judgment.
    80

    I join Parts I, III-A, and III-B of the Court's opinion. However, having found, as those Parts do, that the Indiana [95] Control Share Acquisitions Chapter neither "discriminates against interstate commerce," ante, at 88, nor "create[s] an impermissible risk of inconsistent regulation by different States," ante, at 89, I would conclude without further analysis that it is not invalid under the dormant Commerce Clause. While it has become standard practice at least since Pike v. Bruce Church, Inc., 397 U. S. 137 (1970), to consider, in addition to these factors, whether the burden on commerce imposed by a state statute "is clearly excessive in relation to the putative local benefits," id., at 142, such an inquiry is ill suited to the judicial function and should be undertaken rarely if at all. This case is a good illustration of the point. Whether the control shares statute "protects shareholders of Indiana corporations," Brief for Appellant in No. 86-97, p. 88, or protects incumbent management seems to me a highly debatable question, but it is extraordinary to think that the constitutionality of the Act should depend on the answer. Nothing in the Constitution says that the protection of entrenched management is any less important a "putative local benefit" than the protection of entrenched shareholders, and I do not know what qualifies us to make that judgment — or the related judgment as to how effective the present statute is in achieving one or the other objective — or the ultimate (and most ineffable) judgment as to whether, given importance-level x, and effectiveness-level y, the worth of the statute is "outweighed" by impact-on-commerce z.

    81

    One commentator has suggested that, at least much of the time, we do not in fact mean what we say when we declare that statutes which neither discriminate against commerce nor present a threat of multiple and inconsistent burdens might nonetheless be unconstitutional under a "balancing" test. See Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 Mich. L. Rev. 1091 (1986). If he is not correct, he ought to be. As long as a State's corporation law governs only its own corporations and does not discriminate against out-of-state interests, it should survive this Court's scrutiny under [96] the Commerce Clause, whether it promotes shareholder welfare or industrial stagnation. Beyond that, it is for Congress to prescribe its invalidity.

    82

    I also agree with the Court that the Indiana Control Share Acquisitions Chapter is not pre-empted by the Williams Act, but I reach that conclusion without entering into the debate over the purposes of the two statutes. The Williams Act is governed by the antipre-emption provision of the Securities Exchange Act of 1934, 15 U. S. C. § 78bb(a), which provides that nothing it contains "shall affect the jurisdiction of the securities commission (or any agency or officer performing like functions) of any State over any security or any person insofar as it does not conflict with the provisions of this chapter or the rules and regulations thereunder." Unless it serves no function, that language forecloses pre-emption on the basis of conflicting "purpose" as opposed to conflicting "provision." Even if it does not have literal application to the present case (because, perhaps, the Indiana agency responsible for securities matters has no enforcement responsibility with regard to this legislation), it nonetheless refutes the proposition that Congress meant the Williams Act to displace all state laws with conflicting purpose. And if any are to survive, surely the States' corporation codes are among them. It would be peculiar to hold that Indiana could have pursued the purpose at issue here through its blue-sky laws, but cannot pursue it through the State's even more sacrosanct authority over the structure of domestic corporations. Prescribing voting rights for the governance of state-chartered companies is a traditional state function with which the Federal Congress has never, to my knowledge, intentionally interfered. I would require far more evidence than is available here to find implicit pre-emption of that function by a federal statute whose provisions concededly do not conflict with the state law.

    83

    I do not share the Court's apparent high estimation of the beneficence of the state statute at issue here. But a law can [97] be both economic folly and constitutional. The Indiana Control Share Acquisitions Chapter is at least the latter. I therefore concur in the judgment of the Court.

    84
    JUSTICE WHITE, with whom JUSTICE BLACKMUN and JUSTICE STEVENS join as to Part II, dissenting.
    85

    The majority today upholds Indiana's Control Share Acquisitions Chapter, a statute which will predictably foreclose completely some tender offers for stock in Indiana corporations. I disagree with the conclusion that the Chapter is neither pre-empted by the Williams Act nor in conflict with the Commerce Clause. The Chapter undermines the policy of the Williams Act by effectively preventing minority shareholders, in some circumstances, from acting in their own best interests by selling their stock. In addition, the Chapter will substantially burden the interstate market in corporate ownership, particularly if other States follow Indiana's lead as many already have done. The Chapter, therefore, directly inhibits interstate commerce, the very economic consequences the Commerce Clause was intended to prevent. The opinion of the Court of Appeals is far more persuasive than that of the majority today, and the judgment of that court should be affirmed.

    86
    I
    87

    The Williams Act expressed Congress' concern that individual investors be given sufficient information so that they could make an informed choice on whether to tender their stock in response to a tender offer. The problem with the approach the majority adopts today is that it equates protection of individual investors, the focus of the Williams Act, with the protection of shareholders as a group. Indiana's Control Share Acquisitions Chapter undoubtedly helps protect the interests of a majority of the shareholders in any corporation subject to its terms, but in many instances, it will effectively prevent an individual investor from selling his stock at a premium. Indiana's statute, therefore, does not [98] "furthe[r] the federal policy of investor protection," ante, at 83 (emphasis added), as the majority claims.

    88

    In discussing the legislative history of the Williams Act, the Court, in Piper v. Chris-Craft Industries, Inc., 430 U. S. 1 (1977), looked to the legislative history of the Williams Act and concluded that the Act was designed to protect individual investors, not management and not tender offerors: "The sponsors of this legislation were plainly sensitive to the suggestion that the measure would favor one side or the other in control contests; however, they made it clear that the legislation was designed solely to get needed information to the investor, the constant focal point of the committee hearings." Id., at 30-31. The Court specifically noted that the Williams Act's legislative history shows that Congress recognized that some "takeover bids . . . often serve a useful function." Id., at 30. As quoted by the majority, ante, at 82, the basic purpose of the Williams Act is " `plac[ing] investors on an equal footing with the takeover bidder.' " Piper, supra, at 30 (emphasis added).

    89

    The Control Share Acquisitions Chapter, by design, will frustrate individual investment decisions. Concededly, the Control Share Acquisitions Chapter allows the majority of a corporation's shareholders to block a tender offer and thereby thwart the desires of an individual investor to sell his stock. In the context of discussing how the Chapter can be used to deal with the coercive aspects of some tender offers, the majority states: "In such a situation under the Indiana Act, the shareholders as a group, acting in the corporation's best interest, could reject the offer, although individual shareholders might be inclined to accept it." Ante, at 83. I do not dispute that the Chapter provides additional protection for Indiana corporations, particularly in helping those corporations maintain the status quo. But it is clear to me that Indiana's scheme conflicts with the Williams Act's careful balance, which was intended to protect individual investors and permit them to decide whether it is in their best interests [99] to tender their stock. As noted by the plurality in MITE, "Congress . . . did not want to deny shareholders `the opportunities which result from the competitive bidding for a block of stock of a given company,' namely, the opportunity to sell shares for a premium over their market price. 113 Cong. Rec. 24666 (1967) (remarks of Sen. Javits)." Edgar v. MITE Corp., 457 U. S. 624, 633, n. 9 (1982).

    90

    The majority claims that if the Williams Act pre-empts Indiana's Control Share Acquisitions Chapter, it also pre-empts a number of other corporate-control provisions such as cumulative voting or staggering the terms of directors. But this view ignores the fundamental distinction between these other corporate-control provisions and the Chapter: unlike those other provisions, the Chapter is designed to prevent certain tender offers from ever taking place. It is transactional in nature, although it is characterized by the State as involving only the voting rights of certain shares. "[T]his Court is not bound by `[t]he name, description or characterization given [a challenged statute] by the legislature or the courts of the State,' but will determine for itself the practical impact of the law." Hughes v. Oklahoma, 441 U. S. 322, 336 (1979) (quoting Lacoste v. Louisiana Dept. of Conservation, 263 U. S. 545, 550 (1924)). The Control Share Acquisitions Chapter will effectively prevent minority shareholders in some circumstances from selling their stock to a willing tender offeror. It is the practical impact of the Chapter that leads to the conclusion that it is pre-empted by the Williams Act.

    91
    II
    92

    Given the impact of the Control Share Acquisitions Chapter, it is clear that Indiana is directly regulating the purchase and sale of shares of stock in interstate commerce. Appellant CTS' stock is traded on the New York Stock Exchange, and people from all over the country buy and sell CTS' shares daily. Yet, under Indiana's scheme, any prospective purchaser will be effectively precluded from purchasing CTS' [100] shares if the purchaser crosses one of the Chapter's threshold ownership levels and a majority of CTS' shareholders refuse to give the purchaser voting rights. This Court should not countenance such a restraint on interstate trade.

    93

    The United States, as amicus curiae, argues that Indiana's Control Share Acquisitions Chapter "is written as a restraint on the transferability of voting rights in specified transactions, and it could not be written in any other way without changing its meaning. Since the restraint on the transfer of voting rights is a restraint on the transfer of shares, the Indiana Chapter, like the Illinois Act [in MITE], restrains `transfers of stock by stockholders to a third party.' " Brief for Securities and Exchange Commission and United States as Amici Curiae 26. I agree. The majority ignores the practical impact of the Chapter in concluding that the Chapter does not violate the Commerce Clause. The Chapter is characterized as merely defining "the attributes of shares in its corporations," ante, at 94. The majority sees the trees but not the forest.

    94

    The Commerce Clause was included in our Constitution by the Framers to prevent the very type of economic protectionism Indiana's Control Share Acquisitions Chapter represents:

    95
    "The few simple words of the Commerce Clause — `The Congress shall have Power . . . To regulate Commerce. . . among the several States . . .' — reflected a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation." Hughes, supra, at 325-326.
    96

    The State of Indiana, in its brief, admits that at least one of the Chapter's goals is to protect Indiana corporations. The State notes that the Chapter permits shareholders "to determine [101] . . . whether [a tender offeror] will liquidate the company or remove it from the State." Brief for Appellant in No. 86-97, p. 19. The State repeats this point later in its brief: "The Statute permits shareholders (who may also be community residents or employees or suppliers of the corporation) to determine the intentions of any offeror concerning the liquidation of the company or its possible removal from the State." Id., at 90. A state law which permits a majority of an Indiana corporation's stockholders to prevent individual investors, including out-of-state stockholders, from selling their stock to an out-of-state tender offeror and thereby frustrate any transfer of corporate control, is the archetype of the kind of state law that the Commerce Clause forbids.

    97

    Unlike state blue sky laws, Indiana's Control Share Acquisitions Chapter regulates the purchase and sale of stock of Indiana corporations in interstate commerce. Indeed, as noted above, the Chapter will inevitably be used to block interstate transactions in such stock. Because the Commerce Clause protects the "interstate market" in such securities, Exxon Corp. v. Governor of Maryland, 437 U. S. 117, 127 (1978), and because the Control Share Acquisitions Chapter substantially interferes with this interstate market, the Chapter clearly conflicts with the Commerce Clause.

    98

    With all due respect, I dissent.

    99

    -----------

    100

    [*] Together with No. 86-97, Indiana v. Dynamics Corporation of America, also on appeal from the same court.

    101

    [†] Briefs of amici curiae urging reversal were filed for the State of New York by Robert Abrams, Attorney General, O. Peter Sherwood, Solicitor General, Mary Ellen Burns, Deputy Chief Assistant Attorney General, and Colvin W. Grannum, Assistant Attorney General; for the State of Minnesota by Hubert H. Humphrey III, Attorney General, and Alan I. Gilbert and Barry R. Greller, Special Assistant Attorneys General; and for the Indiana Chamber of Commerce et al. by Donald F. Elliott, Jr., and Barton R. Peterson.

    102

    Briefs of amici curiae urging affirmance were filed for the Securities and Exchange Commission et al. by Solicitor General Fried, Deputy Solicitor General Cohen, Roy T. Englert, Jr., Daniel L. Goelzer, and Paul Gonson; for the Securities Industry Association, Inc., by Marc P. Cherno, Irwin Blum, and William J. Fitzpatrick; and for the United Shareholders Association by James Edward Maloney and David E. Warden.

    103

    [1] These thresholds are much higher than the 5% threshold acquisition requirement that brings a tender offer under the coverage of the Williams Act. See 15 U. S. C. § 78n(d)(1).

    104

    [2] "Interested shares" are shares with respect to which the acquiror, an officer, or an inside director of the corporation "may exercise or direct the exercise of the voting power of the corporation in the election of directors." § 23-1-42-3. If the record date passes before the acquiror purchases shares pursuant to the tender offer, the purchased shares will not be "interested shares" within the meaning of the Act; although the acquiror may own the shares on the date of the meeting, it will not "exercise . . . the voting power" of the shares.

    105

    As a practical matter, the record date usually will pass before shares change hands. Under Securities and Exchange Commission (SEC) regulations, the shares cannot be purchased until 20 business days after the offer commences. 17 CFR § 240.14e-1(a) (1986). If the acquiror seeks an early resolution of the issue — as most acquirors will — the meeting required by the Act must be held no more than 50 calendar days after the offer commences, about three weeks after the earliest date on which the shares could be purchased. See § 23-1-42-7. The Act requires management to give notice of the meeting "as promptly as reasonably practicable . . . to all shareholders of record as of the record date set for the meeting." § 23-1-42-8(a). It seems likely that management of the target corporation would violate this obligation if it delayed setting the record date and sending notice until after 20 business days had passed. Thus, we assume that the record date usually will be set before the date on which federal law first permits purchase of the shares.

    106

    [3] The United States and appellee Dynamics Corporation suggest that § 23-1-42-9(b)(1) requires a second vote by all shareholders of record. Brief for SEC and United States as Amici Curiae 5, and n. 6; Brief for Appellee 2-3, and n. 5. Indiana disputes this interpretation of its Act. Brief for Appellant in No. 86-87, p. 29, n. Section 23-1-42-9(b)(1) provides:

    107

    "[T]he resolution must be approved by:

    108

    "(1) each voting group entitled to vote separately on the proposal by a majority of all the votes entitled to be cast by that voting group, with the holders of the outstanding shares of a class being entitled to vote as a separate voting group if the proposed control share acquisition would, if fully carried out, result in any of the changes described in [Indiana Code § 23-1-38-4(a) (describing fundamental changes in corporate organization)]."

    109

    The United States contends that this section always requires a separate vote by all shareholders and that the last clause merely specifies that the vote shall be taken by separate groups if the acquisition would result in one of the listed transactions. Indiana argues that this section requires a separate vote only if the acquisition would result in one of the listed transactions. Because it is unnecessary to our decision, we express no opinion as to the appropriate interpretation of this section.

    110

    [4] An "acquiring person statement" is an information statement describing, inter alia, the identity of the acquiring person and the terms and extent of the proposed acquisition. See § 23-1-42-6.

    111

    [5] CTS and Dynamics have settled several of the disputes associated with Dynamics' tender offer for shares of CTS. The case is not moot, however, because the judgment of this Court still affects voting rights in the shares Dynamics purchased pursuant to the offer. If we were to affirm, Dynamics would continue to exercise the voting rights it had under the judgment of the Court of Appeals that the Act was pre-empted and unconstitutional. Because we decide today to reverse the judgment of the Court of Appeals, Dynamics will have no voting rights in its shares unless shareholders of CTS grant those rights in a meeting held pursuant to the Act. See Settlement Agreement, p. 7, par. 12, reprinted in letter from James A. Strain, Counsel for CTS, to Joseph F. Spaniol, Jr., Clerk of the United States Supreme Court (Mar. 13, 1987).

    112

    [6] JUSTICE WHITE's opinion on the pre-emption issue, 457 U. S., at 630-640, was joined only by Chief Justice Burger and by JUSTICE BLACKMUN. Two Justice disagreed with JUSTICE WHITE's conclusion. See id., at 646-647 (POWELL, J., concurring in part); id., at 655 (STEVENS, J., concurring in part and concurring in judgment). Four Justices did not address the question. See id., at 655 (O'CONNOR, J., concurring in part); id., at 664 (MARSHALL, J., with whom BRENNAN, J., joined, dissenting); id., at 667 (REHNQUIST, J., dissenting).

    113

    [7] Dynamics finds evidence of an intent to favor management in several features of the Act. It argues that the provision of the Act allowing management to opt into the Act, see § 23-1-17-3(b), grants management a strategic advantage because tender offerors will be reluctant to take the expensive preliminary steps of a tender offer if they do not know whether their efforts will be subjected to the Act's requirements. But this provision is only a temporary option available for the first 17 months after enactment of the Act. The Indiana Legislature reasonably could have concluded that corporations should be allowed an interim period during which the Act would not apply automatically. Because of its short duration, the potential strategic advantage offered by the opportunity to opt into the Act during this transition period is of little significance.

    114

    The Act also imposes some added expenses on the offeror, requiring it, inter alia, to pay the costs of special shareholder meetings to vote on the transfer of voting rights, see § 23-1-42-7(a). In our view, the expenses of such a meeting fairly are charged to the offeror. A corporation pays the costs of annual meetings that it holds to discuss its affairs. If an offeror — who has no official position with the corporation — desires a special meeting solely to discuss the voting rights of the offeror, it is not unreasonable to have the offeror pay for the meeting.

    115

    Of course, by regulating tender offers, the Act makes them more expensive and thus deters them somewhat, but this type of reasonable regulation does not alter the balance between management and offeror in any significant way. The principal result of the Act is to grant shareholders the power to deliberate collectively about the merits of tender offers. This result is fully in accord with the purposes of the Williams Act.

    116

    [8] Although the SEC does not appear to have spoken authoritatively on this point, similar transactions are not uncommon. For example, Hanson Trust recently conditioned consummation of a tender offer for shares in SCM Corporation on the removal of a "lockup option" that would have seriously diminished the value of acquiring the shares of SCM Corporation. See Hanson Trust PLC, HSCM v. ML SCM Acquisition Inc., ML L.B.O., 781 F. 2d 264, 272, and n. 7 (CA2 1986).

    117

    [9] Dynamics argues that conditional tender offers are not an adequate alternative because they leave management in place for three extra weeks, with "free rein to take other defensive steps that will diminish the value of tendered shares." Brief for Appellee 37. We reject this contention. In the unlikely event that management were to take actions designed to diminish the value of the corporation's shares, it may incur liability under state law. But this problem does not control our pre-emption analysis. Neither the Act nor any other federal statute can assure that shareholders do not suffer from the mismanagement of corporate officers and directors. Cf. Cort v. Ash, 422 U. S. 66, 84 (1975).

    118

    [10] Every State except Arkansas and California allows classification of directors to stagger their terms of office. See 2 Model Business Corp. Act Ann. § 8.06, p. 830 (3d ed., Supp. 1986).

    119

    [11] "Cumulative voting is a means devised to protect minorities by providing a method of voting which assures to a minority, if it is sufficiently purposeful poseful and cohesive, representation on the board of directors to an extent roughly proportionate to the minority's size. This is achieved by permitting each shareholder . . . to cast the total number of his votes for a single candidate for election to the board, or to distribute such total among any number of such candidates (the total number of his votes being equal to the number of shares he is voting multiplied by the number of directors to be elected)." 1 MBCA § 33, ¶ 4 comment. Every State permits cumulative voting. See 2 Model Business Corp. Act Ann. § 7.28, pp. 675-677 (3d ed., Supp. 1986).

    120

    [12] Numerous other common regulations may affect both nonresident and resident shareholders of a corporation. Specified votes may be required for the sale of all of the corporation's assets. See 2 MBCA § 79; RMBCA § 12.02. The election of directors may be staggered over a period of years to prevent abrupt changes in management. See 1 MBCA § 37; RMBCA § 8.06. Various classes of stock may be created with differences in voting rights as to dividends and on liquidation. See 1 MBCA § 15; RMBCA § 6.01(c). Provisions may be made for cumulative voting. See 1 MBCA § 33, ¶ 4; RMBCA § 7.28; n. 9, supra. Corporations may adopt restrictions on payment of dividends to ensure that specified ratios of assets to liabilities are maintained for the benefit of the holders of corporate bonds or notes. See 1 MBCA § 45 (noting that a corporation's articles of incorporation can restrict payment of dividends); RMBCA § 6.40 (same). Where the shares of a corporation are held in States other than that of incorporation, actions taken pursuant to these and similar provisions of state law will affect all shareholders alike wherever they reside or are domiciled.

    121

    Nor is it unusual for partnership law to restrict certain transactions. For example, a purchaser of a partnership interest generally can gain a right to control the business only with the consent of other owners. See Uniform Partnership Act § 27, 6 U. L. A. 353 (1969); Uniform Limited Partnership Act § 19 (1916 draft), 6 U. L. A. 603 (1969); Revised Uniform Limited Partnership Act §§ 702, 704 (1976 draft), 6 U. L. A. 259, 261 (Supp. 1986). These provisions — in force in the great majority of the States — bear a striking resemblance to the Act at issue in this case.

    122

    [13] It is appropriate to note when discussing the merits and demerits of tender offers that generalizations usually require qualification. No one doubts that some successful tender offers will provide more effective management or other benefits such as needed diversification. But there is no reason to assume that the type of conglomerate corporation that may result from repetitive takeovers necessarily will result in more effective management or otherwise be beneficial to shareholders. The divergent views in the literature — and even now being debated in the Congress — reflect the reality that the type and utility of tender offers vary widely. Of course, in many situations the offer to shareholders is simply a cash price substantially higher than the market price prior to the offer.

    123

    [14] CTS also contends that the Act does not violate the Commerce Clause — regardless of any burdens it may impose on interstate commerce — because a corporation's decision to be covered by the Act is purely "private" activity beyond the reach of the Commerce Clause. Because we reverse the judgment of the Court of Appeals on other grounds, we have no occasion to consider this argument.

  • 2 VantagePoint v. Examen Inc. (Del. 2005)

    This Delaware case deals with the only sustained challenge to the internal affairs doctrine in the U.S.: section 2115 of the California Corporations Code.

    1. By its own terms, does section 2115 apply in this case?
    2. Why does the Delaware Supreme Court not apply section 2115?
    3. Does the Delaware Supreme Court hold that the internal affairs doctrine is embodied in the U.S. constitution?
    4. What is better for Delaware’s business – section 2115 or strict adherence to the internal affairs doctrine?
    5. As a policy matter, did the party arguing for application of section 2115, VantagePoint, deserve its protection in this case?



    1
    871 A.2d 1108 (2005)
    2
    VANTAGEPOINT VENTURE PARTNERS 1996, a Delaware limited partnership, Defendant Below, Appellant,
    v.
    EXAMEN, INC., a Delaware corporation, Plaintiff Below, Appellee.
    3
    No. 127, 2005.
    4

    Supreme Court of Delaware.

    5
    Submitted: April 13, 2005.
    6
    Decided: May 5, 2005.
    7

    J. Travis Laster, Brock E. Czeschin, Philippe Y. Blanchard, Richards, Layton & Finger, Wilmington, DE, for appellant.

    8

    Martin P. Tully, David J. Teklits, and Thomas W. Briggs, Jr., Morris, Nichols, Arsht & Tunnell, Wilmington, DE, for appellee.

    9

    Before STEELE, Chief Justice, HOLLAND and JACOBS, Justices.

    10
    [1109] HOLLAND, Justice:
    11

    This is an expedited appeal from the Court of Chancery following the entry of a final judgment on the pleadings. We have concluded that the judgment must be affirmed.

    12
    Delaware Action
    13

    On March 3, 2005, the plaintiff-appellee, Examen, Inc. ("Examen"), filed a Complaint in the Court of Chancery against VantagePoint Venture Partners, Inc. ("VantagePoint"), a Delaware Limited Partnership and an Examen Series A Preferred shareholder, seeking a judicial declaration that pursuant to the controlling Delaware law and under the Company's Certificate of Designations of Series A Preferred Stock ("Certificate of Designations"), VantagePoint was not entitled to a class vote of the Series A Preferred Stock on the proposed merger between Examen and a Delaware subsidiary of Reed Elsevier Inc.

    14
    California Action
    15

    On March 8, 2005, VantagePoint filed an action in the California Superior Court seeking: (1) a declaration that Examen was required to identify whether it was a "quasi-California corporation" under section 2115 of the California Corporations Code[1]; (2) a declaration that Examen was [1110] a quasi-California corporation pursuant to California Corporations Code section 2115 and therefore subject to California Corporations Code section 1201(a), and that, as a Series A Preferred shareholder, VantagePoint was entitled to vote its shares as a separate class in connection with the proposed merger; (3) injunctive relief; and (4) damages incurred as the result of alleged violations of California Corporations Code sections 2111(F) and 1201.

    16
    Delaware Action Decided
    17

    On March 10, 2005, the Court of Chancery granted Examen's request for an expedited hearing on its motion for judgment on the pleadings. On March 21, 2005, the California Superior Court stayed its action pending the ruling of the Court of Chancery. On March 29, 2005, the Court of Chancery ruled that the case was governed by the internal affairs doctrine as explicated by this Court in McDermott v. Lewis.[2] In applying that doctrine, the Court of Chancery held that Delaware law governed the vote that was required to approve a merger between two Delaware corporate entities.

    18

    On April 1, 2005, VantagePoint filed a notice of appeal with this Court. On April 4, 2005, VantagePoint sought to enjoin the merger from closing pending its appeal. On April 5, 2005, this Court denied VantagePoint's request to enjoin the merger from closing, but granted its request for an expedited appeal.

    19
    Merger Without Mootness
    20

    Following this Court's ruling on April 5, 2005, Examen and the Delaware subsidiary of Reed Elsevier consummated the merger that same day. This Court directed the parties to address the issue of mootness, simultaneously with the expedited briefing that was completed on April 13, 2005. VantagePoint argues that if we agree with its position "that a class vote was required, then VantagePoint could pursue remedies for loss of this right, including rescission of the Merger, rescissory damages or monetary damages." Examen submits that "the need for final resolution of the validity of the merger vote remains important to the parties and to the public interest" because a decision from this Court will conclusively determine the parties' rights with regard to the law that applies to the merger vote. We have concluded that this appeal is not moot.

    21
    Facts
    22

    Examen was a Delaware corporation engaged in the business of providing web-based [1111] based legal expense management solutions to a growing list of Fortune 1000 customers throughout the United States. Following consummation of the merger on April 5, 2005, LexisNexis Examen, also a Delaware corporation, became the surviving entity. VantagePoint is a Delaware Limited Partnership organized and existing under the laws of Delaware. VantagePoint, a major venture capital firm that purchased Examen Series A Preferred Stock in a negotiated transaction, owned eighty-three percent of Examen's outstanding Series A Preferred Stock (909,091 shares) and no shares of Common Stock.

    23

    On February 17, 2005, Examen and Reed Elsevier executed the Merger Agreement, which was set to expire on April 15, 2005, if the merger had not closed by that date. Under the Delaware General Corporation Law and Examen's Certificate of Incorporation, including the Certificate of Designations for the Series A Preferred Stock, adoption of the Merger Agreement required the affirmative vote of the holders of a majority of the issued and outstanding shares of the Common Stock and Series A Preferred Stock, voting together as a single class. Holders of Series A Preferred Stock had the number of votes equal to the number of shares of Common Stock they would have held if their Preferred Stock was converted. Thus, VantagePoint, which owned 909,091 shares of Series A Preferred Stock and no shares of Common Stock, was entitled to vote based on a converted number of 1,392,727 shares of stock.

    24

    There were 9,717,415 total outstanding shares of the Company's capital stock (8,626,826 shares of Common Stock and 1,090,589 shares of Series A Preferred Stock), representing 10,297,608 votes on an as-converted basis. An affirmative vote of at least 5,148,805 shares, constituting a majority of the outstanding voting power on an as-converted basis, was required to approve the merger. If the stockholders were to vote by class, VantagePoint would have controlled 83.4 percent of the Series A Preferred Stock, which would have permitted VantagePoint to block the merger. VantagePoint acknowledges that, if Delaware law applied, it would not have a class vote.

    25
    Chancery Court Decision
    26

    The Court of Chancery determined that the question of whether VantagePoint, as a holder of Examen's Series A Preferred Stock, was entitled to a separate class vote on the merger with a Delaware subsidiary of Reed Elsevier, was governed by the internal affairs doctrine because the issue implicated "the relationship between a corporation and its stockholders." The Court of Chancery rejected VantagePoint's argument that section 2115 of the California Corporation Code did not conflict with Delaware law and operated only in addition to rights granted under Delaware corporate law. In doing so, the Court of Chancery noted that section 2115 "expressly states that it operates `to the exclusion of the law of the jurisdiction in which [the company] is incorporated.'"

    27

    Specifically, the Court of Chancery determined that section 2115's requirement that stockholders vote as a separate class conflicts with Delaware law, which, together with Examen's Certificate of Incorporation, mandates that the merger be authorized by a majority of all Examen stockholders voting together as a single class. The Court of Chancery concluded that it could not enforce both Delaware and California law. Consequently, the Court of Chancery decided that the issue presented was solely one of choice-of-law, and that it need not determine the constitutionality of section 2115.

    28
    [1112] VantagePoint's Argument
    29

    According to VantagePoint, "the issue presented by this case is not a choice of law question, but rather the constitutional issue of whether California may promulgate a narrowly-tailored exception to the internal affairs doctrine that is designed to protect important state interests." VantagePoint submits that "Section 2115 was designed to provide an additional layer of investor protection by mandating that California's heightened voting requirements apply to those few foreign corporations that have chosen to conduct a majority of their business in California and meet the other factual prerequisite of Section 2115." Therefore, VantagePoint argues that "Delaware either must apply the statute if California can validly enact it, or hold the statute unconstitutional if California cannot." We note, however, that when an issue or claim is properly before a tribunal, "the court is not limited to the particular legal theories advanced by the parties, but rather retains the independent power to identify and apply the proper construction of governing law."[3]

    30
    Standard of Review
    31

    In granting Examen's Motion for Judgment on the Pleadings, the Court of Chancery held that, as a matter of law, the rights of stockholders to vote on the proposed merger were governed by the law of Delaware — Examen's state of incorporation — and that an application of Delaware law resulted in the Class A Preferred shareholders having no right to a separate class vote. The issue of whether VantagePoint was entitled to a separate class vote of the Series A Preferred Stock on the merger is a question of law[4] that this Court reviews de novo.[5]

    32
    Internal Affairs Doctrine
    33

    In CTS Corp. v. Dynamics Corp. of Am., the United States Supreme Court stated that it is "an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares."[6] In CTS, it was also recognized that "[a] State has an interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs."[7] The internal affairs doctrine is a long-standing choice of law principle which recognizes that only one state should have the authority to regulate a corporation's internal affairs — the state of incorporation.[8]

    34

    The internal affairs doctrine developed on the premise that, in order to prevent corporations from being subjected to inconsistent legal standards, the authority to regulate a corporation's internal affairs should not rest with multiple jurisdictions.[9] [1113] It is now well established that only the law of the state of incorporation governs and determines issues relating to a corporation's internal affairs.[10] By providing certainty and predictability, the internal affairs doctrine protects the justified expectations of the parties with interests in the corporation.[11]

    35

    The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders.[12] The Restatement (Second) of Conflict of Laws § 301 provides: "application of the local law of the state of incorporation will usually be supported by those choice-of-law factors favoring the need of the interstate and international systems, certainty, predictability and uniformity of result, protection of the justified expectations of the parties and ease in the application of the law to be applied."[13] Accordingly, the conflicts practice of both state and federal courts has consistently been to apply the law of the state of incorporation to "the entire gamut of internal corporate affairs."[14]

    36

    The internal affairs doctrine is not, however, only a conflicts of law principle. Pursuant to the Fourteenth Amendment Due Process Clause, directors and officers of corporations "have a significant right ... to know what law will be applied to their actions"[15] and "[s]tockholders ... have a right to know by what standards of accountability they may hold those managing the corporation's business and affairs."[16] Under the Commerce Clause, a state "has no interest in regulating the internal affairs of foreign corporations."[17] Therefore, this Court has held that an "application of the internal affairs doctrine is mandated by constitutional principles, except in the `rarest situations,'"[18] e.g., when "the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce."[19]

    37
    California Section 2115
    38

    VantagePoint contends that section 2115 of the California Corporations Code is a limited exception to the internal affairs doctrine. Section 2115 is characterized as an outreach statute because it requires certain foreign corporations to conform to a broad range of internal affairs provisions. Section 2115 defines the foreign corporations for which the California statute has an outreach effect as those foreign [1114] corporations, half of whose voting securities are held of record by persons with California addresses, that also conduct half of their business in California as measured by a formula weighing assets, sales and payroll factors.[20]

    39

    VantagePoint argues that section 2115 "mandates application of certain enumerated provisions of California's corporation law to the internal affairs of `foreign' corporations if certain narrow factual prerequisites [set forth in section 2115] are met." Under the California statute, if more than one half of a foreign corporation's outstanding voting securities are held of record by persons having addresses in California (as disclosed on the books of the corporation) on the record date, and the property, payroll and sales factor tests are satisfied, then on the first day of the income year, one hundred and thirty five days after the above tests are satisfied, the foreign corporation's articles of incorporation are deemed amended to the exclusion of the law of the state of incorporation.[21] If the factual conditions precedent for triggering section 2115 are established, many aspects of a corporation's internal affairs are purportedly governed by California corporate law to the exclusion of the law of the state of incorporation.[22]

    40

    In her comprehensive analysis of the internal affairs doctrine, Professor Deborah A. DeMott examined section 2115. As she astutely points out:

    41
    In contrast to the certainty with which the state of incorporation may be determined, the criteria upon which the applicability of section 2115 hinges are not constants. For example, whether half of a corporation's business is derived from California and whether half of its voting securities have record holders with California addresses may well vary from year to year (and indeed throughout any given year). Thus, a corporation might be subject to section 2115 one year but not the next, depending on its situation at the time of filing the annual statement required by section 2108.[23]
    42
    Internal Affairs Require Uniformity
    43

    In McDermott, this Court noted that application of local internal affairs law (here California's section 2115) to a foreign corporation (here Delaware) is "apt to produce inequalities, intolerable confusion, and uncertainty, and intrude into the domain of other states that have a superior claim to regulate the same subject matter [1115] ...."[24] Professor DeMott's review of the differences and conflicts between the Delaware and California corporate statutes with regard to internal affairs, illustrates why it is imperative that only the law of the state of incorporation regulate the relationships among a corporation and its officers, directors, and shareholders.[25] To require a factual determination to decide which of two conflicting state laws governs the internal affairs of a corporation at any point in time, completely contravenes the importance of stability within inter-corporate relationships that the United States Supreme Court recognized in CTS.[26]

    44

    In Kamen v. Kemper Fin. Serv., the United States Supreme Court reaffirmed its commitment to the need for stability that is afforded by the internal affairs doctrine.[27] In Kamen, the issue was whether the federal courts could superimpose a universal-demand rule upon the corporate doctrine of all states.[28] The United States Supreme Court held that a federal court universal-demand rule would cause disruption to the internal affairs of corporations and that its holding in Burks[29] had counseled "against establishing competing federal — and state — law principles on the allocation of managerial prerogatives within [a] corporation."[30] In Kamen v. Kemper, the Restatement (Second) of Conflict of Laws was cited for the proposition that "[u]niform treatment of directors, officers and shareholders is an important objective which can only be attained by having the rights and liabilities of those persons with respect to the corporation governed by a single law."[31] If a universal-demand rule in federal courts would be disruptive because the demand rule in a state court would be different, a fortiori, it would be disruptive for section 2115's panoply of different internal affairs rules to operate intermittently within corporate relationships under either the law of California or the law of the state of incorporation — dependent upon the vissitudes of the ever-changing facts.

    45
    State Law of Incorporation Governs Internal Affairs
    46

    In McDermott, this Court held that the "internal affairs doctrine is a major tenet of Delaware corporation law having important federal constitutional underpinnings."[32] Applying Delaware's well-established choice-of-law rule — the internal affairs doctrine — the Court of Chancery recognized that Delaware courts must apply the law of the state of incorporation to issues involving corporate internal affairs, and that disputes concerning a shareholder's right to vote fall squarely within the purview of the internal affairs doctrine.[33]

    47

    Examen is a Delaware corporation. The legal issue in this case — whether a [1116] preferred shareholder of a Delaware corporation had the right, under the corporation's Certificate of Designations, to a Series A Preferred Stock class vote on a merger — clearly involves the relationship among a corporation and its shareholders. As the United States Supreme Court held in CTS, "[n]o principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations, including the authority to define the voting rights of shareholders."[34]

    48

    In CTS, the Supreme Court held that the Commerce Clause "prohibits States from regulating subjects that `are in their nature national, or admit only of one uniform system, or plan of regulation,'"[35] and acknowledged that the internal affairs of a corporation are subjects that require one uniform system of regulation.[36] In CTS, the Supreme Court concluded that "[s]o long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one State."[37] Accordingly, we hold Delaware's well-established choice of law rules[38] and the federal constitution[39] mandated that Examen's internal affairs, and in particular, VantagePoint's voting rights, be adjudicated exclusively in accordance with the law of its state of incorporation, in this case, the law of Delaware.

    49
    Any Forum — Internal Affairs — Same Law
    50

    VantagePoint acknowledges that the courts of Delaware, as the forum state, may apply Delaware's own substantive choice of law rules.[40] VantagePoint argues, however, that Delaware's "choice" to apply the law of the state of incorporation to internal affairs issues — notwithstanding California's enactment of section 2115 — will result in future forum shopping races to the courthouse. VantagePoint submits that, if the California action in these proceedings had been decided first, the California Superior Court would have enjoined the merger until it was factually determined whether section 2115 is applicable. If the statutory prerequisites were found to be factually satisfied, VantagePoint submits that the California Superior Court would have applied the internal affairs law reflected in section 2115, "to the exclusion" of the law of Delaware — the state where Examen is incorporated.

    51

    In support of those assertions, VantagePoint relies primarily upon a 1982 decision by the California Court of Appeals in Wilson v. Louisiana-Pacific Resources, Inc.[41] In Wilson v. Louisiana-Pacific Resources, Inc., a panel of the California Court of Appeals held that section 2115 did not violate the federal constitution by applying the California Code's mandatory cumulative [1117] voting provision to a Utah corporation that had not provided for cumulative voting but instead had elected the straight voting structure set forth in the Utah corporation statute.[42] The court in Wilson did not address the implications of the differences between the Utah and California corporate statutes upon the expectations of parties who chose to incorporate in Utah rather than California.[43] As Professor DeMott points out, "[a]lthough it is possible under the Utah statute for the corporation's charter to be amended by the shareholders and the directors, that mechanical fact does not establish California's right to coerce such an amendment" whenever the factual prerequisites of section 2115 exist.[44]

    52

    Wilson was decided before the United States Supreme Court's decision in CTS and before this Court's decision in McDermott. Ten years after Wilson, the California Supreme Court cited with approval this Court's analysis of the internal affairs doctrine in McDermott, in particular, our holding that corporate voting rights disputes are governed by the law of the state of incorporation.[45] Two years ago, in State Farm v. Superior Court, a different panel of the California Court of Appeals questioned the validity of the holding in Wilson following the broad acceptance of the internal affairs doctrine over the two decades after Wilson was decided.[46] In State Farm, the court cited with approval the United States Supreme Court decision in CTS Corp. v. Dynamics[47] and our decision in McDermott.[48] In State Farm, the court also quoted at length that portion of our decision in McDermott relating to the constitutional imperatives of the internal affairs doctrine.[49]

    53

    Since Wilson was decided, the United States Supreme Court has recognized the constitutional imperatives of the internal affairs doctrine.[50] In Draper v. Gardner, this Court acknowledged the Wilson opinion in a footnote[51] and nevertheless permitted the dismissal of a Delaware action in favor of a California action in which a California court would be called upon to decide the internal affairs "demand" issue involving a Delaware corporation. As stated in Draper, we had no doubt that after the Kamen and CTS holdings by the United States Supreme Court, the California courts would "apply Delaware [demand] law [to the internal affairs of a Delaware corporation], given the vitality and constitutional underpinnings of the internal affairs [1118] doctrine."[52] We adhere to that view in this case.

    54
    Conclusion
    55

    The judgment of the Court of Chancery is affirmed. The Clerk of this Court is directed to issue the mandate immediately.[53]

    56

    [1] Section 2115 of the California Corporations Code purportedly applies to corporations that have contacts with the State of California, but are incorporated in other states. See Cal. Corp.Code §§ 171 (defining "foreign corporation"); and Cal. Corp.Code §§ 2115(a), (b). Section 2115 of the California Corporations Code provides that, irrespective of the state of incorporation, foreign corporations' articles of incorporation are deemed amended to comply with California law and are subject to the laws of California if certain criteria are met. See Cal. Corp.Code § 2115 (emphasis added). To qualify under the statute: (1) the average of the property factor, the payroll factor and the sales factor as defined in the California Revenue and Taxation Code must be more than 50 percent during its last full income year; and (2) more than one-half of its outstanding voting securities must be held by persons having addresses in California. Id. If a corporation qualifies under this provision, California corporate laws apply "to the exclusion of the law of the jurisdiction where [the company] is incorporated." Id. Included among the California corporate law provisions that would govern is California Corporations Code section 1201, which states that the principal terms of a reorganization shall be approved by the outstanding shares of each class of each corporation the approval of whose board is required. See Cal. Corp.Code §§ 2115, 1201.

    57

    [2] McDermott Inc. v. Lewis, 531 A.2d 206 (Del.1987).

    58

    [3] Kamen v. Kemper Fin. Serv., 500 U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991).

    59

    [4] See, e.g., Warner Communications, Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962 (Del.Ch.1989), aff'd, 567 A.2d 419 (Del.1989).

    60

    [5] See Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 394 (Del.1996).

    61

    [6] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 91, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987).

    62

    [7] Id.

    63

    [8] McDermott Inc. v. Lewis, 531 A.2d 206 (Del.1987). Accord State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal.App.4th 434, 442, 8 Cal.Rptr.3d 56 (2d Dist.2003), citing Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982).

    64

    [9] See Edgar v. MITE Corp., 457 U.S. at 645.

    65

    [10] See CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89-93, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987).

    66

    [11] Id.

    67

    [12] McDermott Inc. v. Lewis, 531 A.2d at 214.

    68

    [13] Restatement (Second) of Conflict of Laws § 301 (1971). See Restatement (Second) of Conflict of Laws § 303 cmt. d (stressing importance of uniform treatment of shareholders).

    69

    [14] McDermott Inc. v. Lewis, 531 A.2d at 216 (quoting John Kozyris, Corporate Wars and Choice of Law, 1985 Duke L.J. 1, 98 (1985)). The internal affairs doctrine does not apply where the rights of third parties external to the corporation are at issue, e.g., contracts and torts. Id.See also Rogers v. Guaranty Trust Co. of N.Y., 288 U.S. 123, 130-31, 53 S.Ct. 295, 77 L.Ed. 652 (1933).

    70

    [15] McDermott Inc. v. Lewis, 531 A.2d at 216.

    71

    [16] Id. at 217.

    72

    [17] Id. (quoting Edgar v. MITE Corp. 457 U.S. 624, 645-46, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982)).

    73

    [18] Id. (quoting CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 90, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987)).

    74

    [19] Id.

    75

    [20] Cal. Corp.Code § 2115(a) (1977 & Supp.1984).

    76

    [21] Id.

    77

    [22] If Section 2115 applies, California law is deemed to control the following: the annual election of directors; removal of directors without cause; removal of directors by court proceedings; the filing of director vacancies where less than a majority in office are elected by shareholders; the director's standard of care; the liability of directors for unlawful distributions; indemnification of directors, officers, and others; limitations on corporate distributions in cash or property; the liability of shareholders who receive unlawful distributions; the requirement for annual shareholders' meetings and remedies for the same if not timely held; shareholder's entitlement to cumulative voting; the conditions when a supermajority vote is required; limitations on the sale of assets; limitations on mergers; limitations on conversions; requirements on conversions; the limitations and conditions for reorganization (including the requirement for class voting); dissenter's rights; records and reports; actions by the Attorney General and inspection rights. See Cal. Corp.Code § 2115(b) (1977 & Supp.1984).

    78

    [23] Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 Law & Contemp. Probs. 161, 166 (1985).

    79

    [24] McDermott Inc. v. Lewis, 531 A.2d 206, 216 (Del.1987) (quoting Kozyris at 98).

    80

    [25] Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 Law & Contemp. Probs. 161, 166 (1985).

    81

    [26] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987).

    82

    [27] Kamen v. Kemper Fin. Serv., 500 U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991).

    83

    [28] Id.

    84

    [29] Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979).

    85

    [30] Kamen v. Kemper Fin. Serv., 500 U.S. at 106, 111 S.Ct. 1711.

    86

    [31] Id. (quoting Restatement (Second) of Conflict of Laws § 302, cmt. e, p. 309 (1971)).

    87

    [32] McDermott Inc. v. Lewis, 531 A.2d 206, 209 (Del.1987).

    88

    [33] See Rosenmiller v. Bordes, 607 A.2d 465, 468-69 (Del.Ch.1991).

    89

    [34] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987) (emphasis added). See Restatement (Second) of Conflict of Laws § 304 (1971) (concluding that the law of the incorporating State generally should "determine the right of a shareholder to participate in the administration of the affairs of the corporation").

    90

    [35] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. at 89, 107 S.Ct. 1637 (quoting Cooley v. Bd. of Wardens, 53 U.S. 299, 319, 12 How. 299, 13 L.Ed. 996 (1851)).

    91

    [36] Id.

    92

    [37] Id. (emphasis added).

    93

    [38] McDermott Inc. v. Lewis, 531 A.2d 206 (Del.1987).

    94

    [39] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987).

    95

    [40] Allstate Ins. Co. v. Hague, 449 U.S. 302, 101 S.Ct. 633, 66 L.Ed.2d 521 (1981).

    96

    [41] Wilson v. La.-Pac. Res., Inc., 138 Cal.App.3d 216, 187 Cal.Rptr. 852 (1982).

    97

    [42] Id. at 230-31, 187 Cal.Rptr. 852.

    98

    [43] Id.

    99

    [44] Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 Law & Contemp. Probs. 161, 187-88 (1985).

    100

    [45] See Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 11 Cal.Rptr.2d 330, 834 P.2d 1148, 1155 (1992), citing McDermott Inc. v. Lewis, 531 A.2d 206 (Del.1987).

    101

    [46] State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal.App.4th 434, 8 Cal.Rptr.3d 56 (2d Dist.2003).

    102

    [47] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. at 89-90, 107 S.Ct. 1637.

    103

    [48] See State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal.App.4th 434, 8 Cal.Rptr.3d 56 (2d Dist.2003).

    104

    [49] Id. at 443-44, 8 Cal.Rptr.3d 56.

    105

    [50] E.g., Edgar v. MITE Corp. 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982); CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987). See also Kamen v. Kemper Fin. Serv., 500 U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991).

    106

    [51] Draper v. Gardner, 625 A.2d 859, 867 n. 10 (Del.1993).

    107

    [52] Id. at 867.

    108

    [53] Supr. Ct. R. 4(f).

  • 3 Lidow v. Superior Court (Cal. 2012)

    This California decision accepts the internal affairs doctrine in principle. Nevertheless, in this case it applies California law to a dispute between a Delaware corporation and its officer.

    1. How does the Court of Appeals of California determine the scope of the internal affairs doctrine?
    2. Looking beyond this particular case, what scope of the internal affairs doctrine increases the application of California law – a narrow scope or a broad scope?
    3. What can corporations—or rather those who control them—do to escape application of California law under section 2115 or under Lidow, and are they likely to do that? What can corporations do to escape application of Delaware law under the internal affairs doctrine, and are they likely to do that?



    1
    206 Cal.App.4th 351 (2012)
    2
    141 Cal. Rptr. 3d 729
    3
    ALEXANDER LIDOW, Petitioner,
    v.
    THE SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent;
    INTERNATIONAL RECTIFIER CORP., Real Party in Interest.
    4
    No. B239042.
    5

    Court of Appeals of California, Second District, Division Two.

    6
    May 23, 2012.
    7

    [353] Sullivan & Cromwell, Robert A. Sacks, Adam S. Paris, Diane L. McGimsey and Edward E. Johnson for Petitioner.

    8

    No appearance for Respondent.

    9

    Robins, Kaplan, Miller & Ciresi, Roman M. Silberfeld, Michael A. Geibelson and Rebecka M. Biejo for Real Party in Interest.

    10
    [354] CERTIFIED FOR PARTIAL PUBLICATION[1]
    11
    OPINION
    12
    BOREN, P. J.—
    13

    The novel question presented in this case is whether, under a conflict of laws principle known as the internal affairs doctrine, California law or foreign law applies to a claim brought by an officer of a foreign corporation for wrongful termination in violation of public policy. We hold that under the circumstances alleged here, specifically where a foreign corporation has removed or constructively discharged a corporate officer in retaliation for that person's complaints of possible harmful or unethical activity, California law applies.

    14
    BACKGROUND
    15

    The parties do not dispute the following facts for the purposes of summary adjudication:

    16

    Petitioner, Alexander Lidow, has a Ph.D. in applied physics. Real party in interest, International Rectifier Corporation (IR), is incorporated in Delaware and based in El Segundo, California. IR is a semiconductor company founded by petitioner's father. Petitioner began working for IR in 1977 after graduating from Stanford University. Petitioner became a member of IR's board of directors (Board) in 1994, co-chief executive officer (CEO) in 1995, and sole CEO in 1999. At no point in time did petitioner have a written employment contract with IR. IR's bylaws provided at all relevant times that the corporation's officers (including the CEO) "shall be chosen annually by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal, or other disqualification from service." Removal of an officer, according to IR's bylaws, may be "with or without cause, by the Board at any time."

    17

    In early 2007, IR commenced an internal investigation after accounting irregularities surfaced at IR's subsidiary in Japan. In late August 2007, the Board placed petitioner on paid administrative leave. Prior to being placed on administrative leave, petitioner had not received any negative criticisms or negative reviews about his performance as CEO. Petitioner stepped down as CEO and Board member in October 2007 pursuant to a negotiated separation agreement entered into by petitioner and IR. Although the separation agreement did not include a release of liability for either party, it did specify that petitioner's resignation was "[a]t the Company's request," and that petitioner had signed the agreement "freely and voluntarily."

    18

    [355] Approximately 18 months later, petitioner sued IR in superior court, alleging causes of action for (1) breach of contract; (2) wrongful termination in violation of public policy; (3) breach of employment contract; (4) failure to pay outstanding wages at the time of termination (Lab. Code, §§ 201, 203); (5) failure to make personnel records available in a timely manner (Lab. Code, §§ 226, 1198.5); (6) tortious interference; and (7) unfair business practices (Bus. & Prof. Code, § 17200). After IR prevailed on several pleading motions, only petitioner's second, fourth, and fifth causes of action remained.

    19

    IR moved for summary adjudication of petitioner's cause of action for wrongful termination on three grounds: First, pursuant to the "internal affairs doctrine," Delaware law governed petitioner's wrongful termination claim. Under Delaware law, a CEO serves at the pleasure of the corporation's board of directors and is barred from bringing a wrongful termination claim (unless authorized by specific statutory enactments) as a matter of law. Second, to bring a claim for wrongful termination, a plaintiff must either be terminated or constructively discharged. Here, petitioner freely and voluntarily resigned as CEO. Third, even assuming IR had removed or constructively discharged petitioner, IR had legitimate, nonretaliatory reasons for doing so.

    20

    Petitioner opposed the motion for summary adjudication, arguing the following: First, the circumstances underlying his wrongful termination claim did not constitute an internal affair of the corporation, and thus California law (and not Delaware law) governed his claim. Second, petitioner had raised a triable issue of material fact as to whether he was constructively discharged. Third, petitioner had raised a triable issue of material fact as to whether IR had retaliated against him for complaints he raised about the treatment of Japanese employees during the investigation into the alleged accounting irregularities.

    21

    The superior court granted IR's motion for summary adjudication on the first ground raised by IR. It reasoned that pursuant to the internal affairs doctrine, Delaware law applied to petitioner's wrongful termination claim, and under Delaware law, petitioner "could be removed without the threat of litigation arising from a wrongful termination claim (except a claim based upon a subsequent statutory enactment such as one relating to discrimination of which there is no allegation or proof before this Court)."

    22

    Petitioner timely filed the present petition for writ of mandate challenging the superior court's order. After considering IR's preliminary opposition to the petition, this court issued an alternative writ of mandate directing the [356] superior court to set aside its order granting summary adjudication in favor of IR, or show cause why this court should not issue a peremptory writ of mandate ordering the superior court to do so. The superior court elected not to set aside its order. As a result, this court set the matter for argument and received a formal return from IR and reply from petitioner.

    23

    Based on our de novo review, we conclude the superior court erred by granting summary adjudication in favor of IR. Accordingly, we direct the superior court to vacate the order in question and to enter a new order denying IR's motion for summary adjudication of petitioner's cause of action for wrongful termination in violation of public policy.

    24
    STANDARD OF REVIEW
    25

    The standard of review for an order granting or denying a motion for summary judgment or adjudication is de novo. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860 [107 Cal.Rptr.2d 841, 24 P.3d 493] (Aguilar).) The trial court's stated reasons for granting summary relief are not binding on the reviewing court, which reviews the trial court's ruling, not its rationale. (Kids' Universe v. In2Labs (2002) 95 Cal.App.4th 870, 878 [116 Cal.Rptr.2d 158].)

    26

    A party moving for summary adjudication "bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law" on a particular cause of action. (Aguilar, supra, 25 Cal.4th at p. 850, fn. omitted.) "There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof." (Ibid., fn. omitted.) "A defendant bears the burden of persuasion that `one or more elements of' the `cause of action' in question `cannot be established,' or that `there is a complete defense' thereto. [Citation.]" (Ibid.)

    27
    DISCUSSION
    28
    I. Overview
    29

    In the published portion of this decision, we hold that a claim for wrongful termination of public policy brought by an officer of a foreign corporation [357] falls outside the scope of the internal affairs doctrine, and thus is governed by California law.[2] In the unpublished portion of this decision, we address IR's alternative grounds for summary adjudication.

    30
    II. Internal Affairs Doctrine
    31
    A. Allegations
    32

    As related to the claim for wrongful termination in violation of public policy, petitioner alleged the following events took place:[3]

    33

    In October 2006, IR's internal finance department raised concerns that possible accounting improprieties were taking place at the corporation's subsidiary in Japan. In response, the Board's audit committee, which was comprised of all the Board members except for petitioner and his father, and IR's general counsel hired the law firm of Sheppard Mullin Richter & Hampton LLP (Sheppard Mullin) to conduct an investigation into the possible accounting improprieties. Sheppard Mullin had a long-standing relationship with the general counsel and had advised him on past occasions when he had received negative performance reviews from petitioner.

    34

    Sheppard Mullin outsourced the accounting investigation to a private company made up predominantly of ex-law enforcement officers from the United States and the United Kingdom. The investigators conducted interrogations during which they physically intimidated employees at IR's Japanese subsidiary, lied to these employees in an attempt to coerce inconsistent statements, and failed to advise these employees that they could, or should, retain independent counsel, despite the possibility that the employees could be criminally prosecuted based on the statements they gave during the interrogations. As a result of the investigators' aggressive and coercive tactics, employees at the Japanese subsidiary filed multiple complaints and threatened to resign in mass numbers. Productivity at the Japanese subsidiary came to a halt.

    35

    [358] Concerned about the deteriorating situation, petitioner travelled to Japan in order to convince the remaining employees to cooperate with the investigation, and to ensure, that going forward, the employees were treated with fairness and respect. Petitioner called for the implementation of protocols that would restore integrity to the investigation process and stem the loss of Japanese personnel. At the same time, petitioner spoke out against the tactics used by the investigators, and criticized how Sheppard Mullin, the general counsel, and the audit committee were overseeing the investigation. Additionally, petitioner criticized the audit committee for failing to control the mounting legal and accounting fees associated with the investigation, which were already in the millions of dollars.

    36

    When news broke that IR was investigating possible accounting improprieties at its Japanese subsidiary, a class action securities lawsuit was filed against IR. IR's general counsel decided to retain Sheppard Mullin to defend the lawsuit. Petitioner protested Sheppard Mullin's retention, complaining that it would be a conflict of interest for Sheppard Mullin to defend a lawsuit based on accounting irregularities and to conduct a purportedly independent investigation into the irregularities at the same time.

    37

    Because of petitioner's complaints about the manner in which employees were being treated in Japan, his critical remarks about how the investigation was progressing, and his protestations over Sheppard Mullin's retention to defend the securities lawsuit, petitioner became a target of Sheppard Mullin, the general counsel, and the audit committee. Approximately 10 months after the investigation commenced, Sheppard Mullin issued a report to the audit committee implicating petitioner in the alleged accounting irregularities. According to the report, which petitioner claims is pure conjecture, petitioner either ordered employees at the Japanese subsidiary to create false accounting documents, or knew that the employees were creating false accounting documents and turned a blind eye to the fraud.

    38

    Based on the report, the audit committee, which was now acting as the de facto Board, placed petitioner on administrative leave without giving him an opportunity to respond to the charges. Shortly after the audit committee placed petitioner on administrative leave, it informed him that if he did not resign as CEO in seven days, he would be removed. Petitioner entered in a separation agreement with IR wherein he agreed to step down as CEO and Board member at IR's request.

    39
    B. Legal Framework
    40

    (1) "`The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a [359] 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 be faced with conflicting demands.' (Edgar v. MITE Corp. (1982) 457 U.S. 624, 645 [73 L.Ed.2d 269, 102 S.Ct. 2629] [citation].)" (Vaughn v. LJ Internat., Inc. (2009) 174 Cal.App.4th 213, 223 [94 Cal.Rptr.3d 166] (Vaughn).) `"States normally look to the State of a business' incorporation for the law that provides the relevant corporate governance general standard of care."' (Vaughn, supra, at p. 223.)

    41

    "Matters falling within the scope of the [internal affairs doctrine] and which involve primarily a corporation's relationship to its shareholders include steps taken in the course of the original incorporation, the election or appointment of directors and officers, the adoption of by-laws, the issuance of corporate shares, preemptive rights, the holding of directors' and shareholders' meetings, methods of voting including any requirement for cumulative voting, shareholders' rights to examine corporate records, charter and by-law amendments, mergers, consolidations and reorganizations and the reclassification of shares." (Rest.2d Conf. of Laws, § 302, com. a, p. 307; see State Farm Mutual Automobile Ins. Co. v. Superior Court (2003) 114 Cal.App.4th 434, 442 [8 Cal.Rptr.3d 56] (State Farm) [adopting the Restatement's definition of "internal affairs"].) "[I]t would be impractical to have matters of the sort mentioned in the previous paragraph, which involve a corporation's organic structure or internal administration, governed by different laws." (Rest.2d Conf. of Laws, § 302, com. e, p. 310.)

    42

    (2) `"The policy underlying the internal affairs doctrine is an important one ...: "Under the prevailing conflicts practice, neither courts nor legislatures have maximized the imposition of local corporate policy on foreign corporations but have consistently applied the law of the state of incorporation to the entire gamut of internal corporate affairs."' (State Farm, supra, 114 Cal.App.4th at p. 443.) Applying local law to the internal affairs of a foreign corporation `""produce[s] inequalities, intolerable confusion, and uncertainty, and intrude[s] into the domain of other states that have a superior claim to regulate the same subject matter.""' (Id. at p. 444.)

    43

    There is, however, a vital limitation to the internal affairs doctrine: "The local law of the state of incorporation will be applied ... except where, with respect to the particular issue, some other state has a more significant relationship ... to the parties and the transaction ...." (Rest.2d Conf. of Laws, § 309, italics added.) Indeed, "[t]here is no reason why corporate acts" involving "the making of contracts, the commission of torts and the transfer of property" "should not be governed by the local law of different states." (Id., § 302, com. e, p. 309.)

    44

    [360] The issue of whether the termination of a corporate officer for reasons that allegedly violate public policy falls within the scope of a corporation's internal affairs is one of first impression. For guidance, we turn to those cases in which courts of this state have applied, or not applied, the internal affairs doctrine to particular claims.

    45

    In Western Air Lines, Inc. v. Sobieski (1961) 191 Cal.App.2d 399 [12 Cal.Rptr. 719] (Western), the plaintiff, a Delaware corporation with its principal place of business in California, sought to amend its bylaws to eliminate cumulative voting rights for its shareholders. California's Commissioner of Corporations took the position that this proposed change in voting rights would constitute a "sale" of securities under California law, and thus petitioner would have to apply for and obtain a permit authorizing such action from the commissioner.[4] After petitioner filed the requisite application, the commissioner declined to issue a permit, finding that the proposed elimination of cumulative voting "would be `... unfair, unjust and inequitable to the great number of security holders residing in California.'" (191 Cal.App.2d at p. 403.)

    46

    The plaintiff sought review of the commissioner's decision through a petition for writ of administrative mandate before the superior court. The superior court granted the petition and ruled that the commissioner had acted without jurisdiction because the amendment of the plaintiff's articles of incorporation was an "internal affair" of the corporation and its shareholders. (Western, supra, 191 Cal.App.2d at p. 405.) The Court of Appeal reversed the superior court's order. It reasoned, in part, that `"ordinarily speaking the issuance of capital stock or the stock structure of a corporation is an internal affair, yet the issuance and sale of stock within a state other than that of its organization may be regulated in order to protect the residents and citizens of the former state."' (Id. at p. 410, italics added.)

    47

    In Friese v. Superior Court (2005) 134 Cal.App.4th 693 [36 Cal.Rptr.3d 558] (Friese), the plaintiff, the successor in interest to a Delaware corporation headquartered in California, sued a group of former directors and officers under Corporations Code section 25502.5 (part of California's Corporate Securities Law of 1968 (Corp. Code, § 25000 et seq.)), a statute that gives an issuer of securities standing to sue its own directors and officers for insider trading. The former directors and officers demurred to the plaintiff's complaint, arguing that because their actions violated internal duties owed to the [361] corporation, Delaware law applied under the internal affairs doctrine. And because Delaware did not have a statute analogous to Corporations Code section 25502.5, they were entitled to judgment as a matter of law. (Friese, supra, at p. 698.) The superior court agreed and sustained the demurrer.

    48

    The Court of Appeal granted writ relief. It explained that "California's corporate securities laws are designed to protect participants in California's securities marketplace and deter unlawful conduct which takes place [in California]." (Friese, supra, 134 Cal.App.4th at p. 698; see id. at p. 710 ["California's corporate securities regulation scheme . . . serves broad public interests rather than the more narrow interests of a corporation's shareholders."].) Although the scope of a director's or officer's duties to a corporation is ordinarily an internal affair of that corporation, the appellate court reasoned that where the conduct in question also implicates the broader public interest of securities regulation, California has a greater stake in applying its law (as opposed to Delaware law) to maintain a fair and equitable marketplace for its shareholder citizens. Thus, the appellate court concluded, the internal affairs doctrine could not be used to shield the directors and officers from liability for insider trading. (134 Cal.App.4th at pp. 706-708.)

    49

    The Court of Appeal's decisions in Western and Friese serve as instructional contrasts to the decisions in State Farm, supra, 114 Cal.App.4th 434, and Vaughn, supra, 174 Cal.App.4th 213. In State Farm, insurance policy holders residing in California sued an insurance company incorporated and headquartered in Illinois, alleging that the company's board of directors did not pay promised dividends. The policyholders framed their claim as an alleged breach of contract, and argued that California had an interest in enforcing contracts made in California under California law. The Court of Appeal rejected this argument. It held that the issuance of dividends was strictly an internal corporate affair, regardless of how the policyholders had framed their claim, and thus Illinois law applied. (State Farm, supra, at p. 446 ["Simply put, the policyholders challenge a decision of the board of directors that falls within State Farm's internal affairs. The causes of action in the complaint, though labeled in common terms—breach of contract and breach of the covenant of good faith and fair dealing—involve `matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders . . . .'"].)

    50

    In Vaughn, supra, 174 Cal.App.4th 213, the defendant corporation, LJ, was incorporated in the British Virgin Islands (BVI), headquartered in Hong Kong, and had a "few employees" based in California. (Id. at p. 216.) A [362] shareholder (who did not reside in Cal.) brought a derivative suit against the corporation based on allegedly false and misleading financial statements that it had issued in Los Angeles. The corporation demurred to the complaint, arguing that BVI law applied under the internal affairs doctrine, and that the shareholder had failed to comply with a BVI statute requiring approval from the high court of that jurisdiction before a shareholder could sue derivatively. (Id. at p. 217.) The superior court sustained the demurrer without leave to amend, and the Court of Appeal affirmed, reasoning that the BVI statute in question "establish[ed] a condition precedent to the right of a shareholder to derivatively sue corporate directors on behalf of the company," which "most definitely [implicated] the internal affairs of the corporation." (Id. at p. 225.) The appellate court noted that California had "no extraordinary interest" in an international corporation that was not headquartered in the state, and the shareholder had failed to show that a "significant California public policy" would "be offended" if he were forced to bring the derivative suit under BVI law. (Id. at p. 226.)

    51

    (3) What we learn from the decisions in Friese and Western is that courts are less apt to apply the internal affairs doctrine when vital statewide interests are at stake, such as maintaining the integrity of California security markets and protecting its citizens from harmful conduct. In contrast, what we learn from the decisions in State Farm and Vaughn is that when less vital state interests are at stake (e.g., whether a foreign corporation headquartered in another state pays promised dividends to its shareholders, or whether the shareholder of a foreign corporation must fulfill certain procedural requirements set before bringing a derivative suit), courts are more apt to apply the internal affairs doctrine.

    52

    (4) We now turn to the situation presented in this case. Certainly, the removal of a CEO for any number of reasons (e.g., the corporation is not performing well, the CEO did not meet certain financial expectations set by the board of directors) falls within the scope of a corporation's internal governance, thus triggering the application of the internal affairs doctrine. This case, however, presents an entirely different set of allegations. Removing an officer in retaliation for his complaints about possible illegal or harmful activity (e.g., witness intimidation, physical threats to employees, etc.) and breaches of ethical conduct (e.g., defending a client against allegations of accounting irregularities and conducting an independent investigation in the same irregularities) goes beyond internal governance and touches upon broader public interest concerns that California has a vital interest in protecting. (Accord, Rest.2d Conf. of Laws, § 6, subd. (2)(b); id., com. c. p. 12 [under general choice-of-law principles, one factor to consider is the relevant public policies of the forum state].)

    53

    [363] At oral argument, counsel for IR relied heavily on VantagePoint Venture Partners 1996 v. Examen, Inc. (Del. 2005) 871 A.2d 1108 (VantagePoint), a decision issued by the Delaware Supreme Court. The reasoning articulated in that case, however, only supports our conclusion in this case.

    54

    VantagePoint involved three Delaware entities: Examen, a corporation incorporated in Delaware; VantagePoint, a limited partnership organized under Delaware law, and a Delaware subsidiary of Reed Elsevier Inc. Examen and Reed proposed a merger. VantagePoint, which owned 83 percent of Examen's series A preferred stock, and none of Examen's common stock, wanted to block the proposed merger. Under Delaware law, which makes no distinction between preferred and common stock shareholders when voting for mergers, VantagePoint did not have sufficient shares to block the merger; under California law, VantagePoint did. VantagePoint claimed that California law applied because Examen met the criteria of California's "outreach statute," codified at Corporations Code section 2115.[5]

    55

    The Delaware Supreme Court held that Delaware law applied in that case because "courts must apply the law of the state of incorporation to issues involving corporate internal affairs, and . . . disputes concerning a shareholder's right to vote fall squarely within the purview of the internal affairs doctrine." (VantagePoint, supra, 871 A.2d at p. 1115, fn. omitted.) Quoting the United States Supreme Court's decision in CTS Corp. v. Dynamics Corp. of America (1987) 481 U.S. 69 [95 L.Ed.2d 67, 107 S.Ct. 1637], the Delaware Supreme Court stated that "`[n]o principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations, including the authority to define the voting rights of shareholders.'" (VantagePoint, supra, 871 A.2d at p. 1116, fn. omitted.)

    56

    This court agrees that the voting rights of shareholders, just like the payment of dividends to shareholders (see State Farm, supra, 114 Cal.App.4th 434) and the procedural requirements of shareholder derivative suits (see Vaughn, supra, 174 Cal.App.4th 213), involve matters of internal corporate governance and thus, fall within a corporation's internal affairs. But, as stated above, the allegations made by petitioner involve circumstances that go beyond internal corporate governance.

    57

    (5) Our Supreme Court has long recognized that claims for wrongful termination in violation of public policy serve vital interests insofar as they impose liability on employers who coerce their employees to engage in [364] criminal or other harmful conduct, or employers who retaliate against their employees for speaking out against such conduct. (See Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 178 [164 Cal.Rptr. 839, 610 P.2d 1330] ["an employer's authority over its employee does not include the right to demand that the employee commit a criminal act to further its interests, and an employer may not coerce compliance with such unlawful directions by discharging an employee who refuses to follow such an order. An employer engaging in such conduct violates a basic duty imposed by law upon all employers, and thus an employee who has suffered damages as a result of such discharge may maintain a tort action for wrongful discharge against the employer."]; Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 665 [254 Cal.Rptr. 211, 765 P.2d 373] [an employer's right to discharge an "at will" employee is still subject to limits imposed by public policy, "since otherwise the threat of discharge could be used to coerce employees into committing crimes, concealing wrongdoing, or taking other action harmful to the public weal" (fn. omitted)]; Roby v. McKesson Corp. (2009) 47 Cal.4th 686, 702 [101 Cal.Rptr.3d 773, 219 P.3d 749] ["The central assertion of a claim of wrongful termination in violation of public policy is that the employer's motives for terminating the employee are so contrary to fundamental norms that the termination inflicted an injury sounding in tort." (italics added)].)

    58

    (6) For these reasons, we conclude that under the circumstances presented here, i.e., where there are allegations made by a corporate officer that he was removed for complaining about possible illegal or harmful activity, the internal affairs doctrine is inapplicable and California law governs the claim.[6]

    59
    III. Alternative Grounds for Summary Adjudication[7]
    60
    DISPOSITION
    61

    The alternative writ is discharged. Let a peremptory writ of mandate issue directing the superior court to vacate its order of February 6, 2012, granting real party in interest's motion for summary adjudication of petitioner's claim [365] for wrongful termination in violation of public policy, and to enter a new order denying said motion. The parties shall bear their own costs related to this petition.

    62

    Ashmann-Gerst, J., and Chavez, J., concurred.

    63

    [1] Pursuant to California Rules of Court, rules 8.1100 and 8.1110, this opinion is certified for publication with the exception of part III of the Discussion.

    64

    [2] For the purposes of this opinion, we assume, without deciding, that the policies implicated here satisfy the requirements to support a tortious discharge claim. (Stevenson v. Superior Court (1997) 16 Cal.4th 880, 889-890 [66 Cal.Rptr.2d 888, 941 P.2d 1157].) This issue was neither raised nor briefed by the parties in the petition, return, or reply.

    65

    [3] We emphasize that these are petitioner's allegations and for this reason entirely one sided. At this juncture, a trier of fact has made no findings about the truth or falsity of these allegations, and our discussion of these allegations should not be interpreted as lending any credibility to them.

    66

    [4] At the time, Corporations Code section 25500 provided that `"No company shall sell any security of its own issue ... until it has first applied for and secured from the commissioner a permit authorizing it to do so."' (Western, supra, 191 Cal.App.2d at p. 401, fn. 2.) Under section 25510 of the same code, the commissioner could refuse to issue the permit `"if in his opinion the [planned sale was] not fair, just, or equitable to all security holders affected."' (Western, supra, at p. 401, fn. 3.)

    67

    [5] Corporations Code section 2115, as succinctly explained by IR, enumerates the various California laws that apply to certain foreign corporations that meet specified financial and operating criteria. IR points out that section 2115 "expressly states that it does not apply to companies, like IR, whose securities are listed on the New York Stock Exchange."

    68

    [6] Because we conclude that California law governs in this instance, we need not address IR's argument and supporting authorities that the Board was entitled to remove petitioner under Delaware law.

    69

    [7] See footnote, ante, page 351.

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