32 Los Angeles Lawyer November 2008

THE FIRST STEP in organizing anyU.S. corporation is to decide where to incor-porate—and with 50 states offering theircharters, any systematic search for the bestone quickly proves daunting. Lawyers andtheir clients most often limit their consider-ation to just a handful of states, and if theydo consider a state other than the one inwhich they are resident, they most commonlychoose a Delaware charter.1 More recently,however, Nevada has waged an aggressive andsuccessful campaign to attract corporate char-ters. By 1999, Nevada was second only toDelaware when ranked by the national per-centage of out-of-state, publicly traded cor-porations.2 For publicly traded corporationslocated in California, the order of preferencefor charters has been Delaware, California,and Nevada.3

Much has been written about the preem-inence of Delaware as an importer of corpo-

rate charters. Much less has been writtenabout Nevada. Practitioners seeking to assisttheir corporate clients should be aware ofthe key differences between California andNevada corporate law.

California’s relationship with the corpo-rate form has been ambivalent at best. Thedrafters of the original 1849 Constitutionimposed personal liability on stockholders byspecifying that each stockholder of a corpo-ration “shall be individually and personallyliable for his proportion of all its debts andliabilities.”4 The 1879 Constitution sub-stantially expanded the provisions relating tocorporations.5 In addition to continuing toplace personal liability on stockholders forcorporate debts, the 1879 Constitution madedirectors jointly and severally liable to cred-itors and stockholders for all moneys embez-zled or misappropriated by the officers of thecorporation during the directors’ term of

office.6 The 1879 Constitution also prohib-ited corporations from holding any real estatefor a period longer than five years except asnecessary for carrying on their business.7

In 1930, voters approved the removal ofseveral of these detailed provisions from theconstitution. The following year, Californiaenacted its first modern general corporationlaw. By that time, attitudes toward corpora-tions had softened. More important, Californiahad awakened to the fact that it was com-peting with other states for corporate charters.In fact, the draftsmen of the 1931 CaliforniaGeneral Corporation Law stated that theirprimary object was to “put California on a

Keith Paul Bishop is a partner in the Irvine office

of Allen, Matkins, Leck, Gamble, Mallory & Natsis

LLP and an adjunct professor of law at Chapman

University Law School. He formerly served as

California’s commissioner of corporations.

There are many benefits to incorporating in Nevada, but tax avoidance is not one of them

SILVERS T A N D A R D

by Keith Paul Bishop

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competitive basis as to all legitimate corporateadvantages and facilities with Delaware,Nevada and other incorporating states….”8

Nevada has been far friendlier to the cor-porate form. Nevada’s constitution, adoptedin 1864 and still in effect, provides that “cor-porators in corporations formed under thelaws of this State shall not be individuallyliable for the debts or liabilities of such cor-poration.”9 In the last few decades, theNevada Legislature has been proactive in itsefforts to enact statutory provisions that arealluring to those in search of a corporatecharter.

Each organizer of a corporation has spe-cific priorities and objectives for the corpo-ration and for its internal structure and gov-ernance. In many instances, lawyers may beinclined to go with what they know—thecorporation law of the state in which they andtheir clients happen to be located. Indeed, todo otherwise would require a lawyer toexpend time and effort in becoming familiarwith the general corporation law of anotherjurisdiction. Moreover, lawyers are likely tobelieve that there is less risk of error or sur-prises due to their greater familiarity with theirhome state’s law. Lawyers may also be con-cerned about the cost and inconvenience oflitigation in another jurisdiction.

When lawyers do look out of state, theyare likely to look for specific provisions suchas manager liability, voting rights, and anti-takeover provisions. The extent to whichthese provisions will be of interest or evenavailable depends upon whether the corpo-ration is publicly traded.

Managerial Conduct

Both California and Nevada establish thestandard of care for directors by statute.10

Beyond that similarity, California and Nevadashare very little in their approaches to man-agerial conduct. In Nevada Revised StatutesSection 78.138(1), Nevada expresses a direc-tor’s duty of care simply and succinctly:“Directors shall exercise their powers in goodfaith and with a view to the interests of thecorporation.” In 1999, the Nevada Leg-islature, at the behest of the Business LawSection of the State Bar of Nevada, amendedSection 78.138 so that “directors and officers,in deciding upon matters of business, arepresumed to act in good faith, on an informedbasis and with a view to the interests of thecorporation.”11

On its face, Nevada’s statutory standardis subjective—that is, it addresses only adirector’s state of mind rather than whetherthe director measures up against some exter-nal standard. The Nevada Supreme Courthas not had occasion to explicate the mean-ing of “good faith” under Section 78.138.Thus, it remains to be seen to what extent an

objective standard of conduct will be judiciallyread into the Nevada statute.

California, on the other hand, requiresdirectors to act with due care in addition togood faith:

A director shall perform the duties ofa director, including duties as a mem-ber of any committee of the boardupon which the director may serve, ingood faith, and in a manner such direc-tor believes to be in the best interestsof the corporation and its sharehold-ers and with such care, including rea-sonable inquiry, as an ordinarily pru-dent person in a like position woulduse under similar circumstances.12

By requiring good faith and imposing an“ordinarily prudent person” standard,California imposes both subjective and objec-tive components to a director’s standard ofcare that contrasts with Nevada’s overtlysubjective standard.

California purports to afford directorsthe protection of the business judgment rule,which immunizes disinterested directors fromliability for the decisions that are made bythem in their capacity as directors.13 Nevada,in contrast, has its statutory good faith pre-sumption.14 While the statute does not indi-cate whether this presumption can be re-butted, presumably a plaintiff would bepermitted to make a contrary evidentiaryshowing.

Because of the dearth of decisions apply-ing Nevada’s unique statutory standard andpresumption, it is not possible to concludewith any degree of certainty that directors inNevada will be held to a lower standard thandirectors of California and Delaware corpo-rations. However, Nevada’s statute on itsface offers the prospect of a lower standard.

California allows for the inclusion of aprovision in a corporation’s articles of incor-poration that eliminates or limits the liabil-ity of directors. Until 2001, Nevada had alsopermitted such an exculpatory provision to beincluded in the articles. Thus, both stateshad followed an opt-in approach to limitingthe liability of directors. Now, in a significantbreak with California, Nevada automaticallyrelieves corporate directors and officers fromliability to the corporation or its stockhold-ers for damages unless it is proven that: 1) theact or failure to act constituted a breach offiduciary duty, and 2) the breach involvedintentional misconduct, fraud, or a know-ing violation of the law.15

The Nevada law contains a number ofvery specific exceptions. Thus, liability is notexcluded under Nevada Revised StatutesSections 35.230 (liability for judgment ofouster), 90.660 (civil liability in connectionwith sales of securities), 91.250 (commoditylaw), 452.200 (unauthorized use of endow-

ment funds), 452.270 (violation of laws per-taining to mausoleums, vaults, or crypts),668.045 (receiving deposits of insolventbanks), and 698A.030 (insider trading in aninsurer). In 2003, the Nevada Legislatureamended Section 78.138(7) to permit a cor-poration to provide for greater liability inarticles of incorporation or an amendment tothe articles filed on or after October 1, 2003.Thus, Nevada now takes an opt-out ap-proach, while California and Delaware con-tinue to take an opt-in approach.16

In addition to avoiding the necessity ofincluding an exculpatory provision in thearticles of incorporation, Nevada’s law offersbroader exculpation than does California’s.Perhaps most significantly, Nevada’s lawexculpates directors and officers, whereasCalifornia and Delaware permit exculpationonly of directors.

California’s General Corporation Lawdoes not permit liability to be eliminated orlimited for acts or omissions that:

• Involve intentional misconduct or a know-ing and culpable violation of law.

• A director believes to be contrary to thebest interests of the corporation or its share-holders.

• Involve the absence of good faith on the partof the director.

• Show a reckless disregard for the direc-tor’s duty to the corporation or its share-holders in circumstances in which the direc-tor was aware, or should have been aware, inthe ordinary course of performing a director’sduties, of a risk of serious injury to the cor-poration or its shareholders.

• Constitute an unexcused pattern of inat-tention that amounts to abdication of thedirector’s duty to the corporation or its share-holders.17

In addition, California’s law prohibitsabsolving a director from liability for:

• Any transaction in which the directorobtained an improper personal benefit.

• Contracts in which the director has a mate-rial financial interest.

• Improper distributions to shareholders orimproper loans.18

Thus, California’s statute permitting excul-pation of directors includes far more excep-tions than Nevada’s statute.

Stockholder Voting Rights

Cumulative voting rights generally operate bygiving each stockholder a number of votesequal to the number of shares multiplied bythe number of directors to be elected. Thestockholder may then distribute these votesamong the directors in any manner in whichthe stockholder sees fit. The debate over themerits of cumulative voting in the election ofdirectors has been longstanding. Proponentsof cumulative voting typically argue that cor-

34 Los Angeles Lawyer November 2008

porate performance is enhanced when minor-ity shareholders are able to attain some rep-resentation on the board of directors.19

Opponents, on the other hand, argue thatcumulative voting leads to divisiveness andspecial interest directors.20

California has a strong historical bias infavor of cumulative voting in the election ofdirectors. In fact, California’s 1879 Constit-ution enshrined cumulative voting as a consti-tutional right.21 The 1931 California GeneralCorporation Law continued mandatorycumulative voting.22 When the current Cali-fornia General Corporation Law was intro-duced, it contained a provision allowing a cor-poration to opt out of cumulative voting,but the bill was amended to include manda-tory cumulative voting.23

Nevada does not mandate cumulative vot-ing in the election of directors. Instead, itpermits a corporation to confer cumulativevoting rights by including a provision in thecertificate (articles) of incorporation.24

Because cumulative voting has beenstrongly disfavored by publicly traded cor-porations, California relaxed its cumulativevoting mandate in 1989 by enacting an excep-tion for “listed corporations.”25 The Corp-orations Code defines a “listed corporation”as a corporation with outstanding shareslisted on the New York Stock Exchange, theAmerican Stock Exchange, or the NationalMarket System of the Nasdaq Stock Market(or any successor to that entity).26 These cor-porations may eliminate cumulative voting byamending their articles of incorporation.27

Closely held corporations use superma-jority voting power to balance the relativevoting powers of investors. Supermajorityvoting requirements have also enjoyed pop-ularity with publicly traded companies dueto their utility as antitakeover devices. Forexample, a supermajority provision mayrequire the affirmative vote of at least 90 per-cent of the outstanding shares to approve amerger.28 Although the individual votingrights of each share remain unchanged undera supermajority voting provision, minoritystockholders may have significantly increasedpower because a higher vote requirementwill allow them to block certain corporatetransactions.

Nevada allows supermajority voting pro-visions to be included in either the articles ofincorporation or the bylaws.29 Further, thereis seemingly no limitation on these provi-sions.

California law is much more restrictive.The articles may include a provision requir-ing a supermajority vote of any class or seriesof stock for any or all corporation actions.30

There are several exceptions, however, tothis general rule. Thus, a supermajority votecannot be imposed regarding the removal of

directors, the election of directors, and vol-untary dissolution.31

California imposes additional restrictionsfor widely held corporations that on or afterJanuary 1, 1989, filed or file an amendmentto their articles or a certificate of determina-tion containing a supermajority vote provi-sion. If a corporation has outstanding sharesheld of record by 100 or more persons, thesupermajority vote requirement cannot exceed662⁄3 percent of the outstanding shares, or

662⁄3 percent of the outstanding shares of anyclass or series of those shares.32 These limi-tations do not apply to a corporation that filedor files an amendment of articles or certificateof determination on or after January 1, 1994,if, at the time of filing, the corporation has 1)outstanding shares of more than one class orseries of stock, 2) no class of equity securitiesregistered under Section 12(b) or 12(g) ofthe Securities Exchange Act of 1934, and 3)outstanding shares of record held by fewerthan 300 persons.33

Antitakeover Provisions

Takeover defense is an issue that primarilyconcerns widely held firms. In closely heldfirms there is often little or no separation ofcapital and management. Thus, there is lesslikelihood for the interests of the owners andthe managers to diverge.

States can enhance or diminish the capac-ity of corporate managers to intervene incorporate control transactions in primarilytwo ways. First, states can adopt legal schemesthat have the effect of validating or invali-dating managerial actions. Examples of val-idating schemes include legislative or judicialendorsement of stockholder rights plans or

deference to managerial decisions. Second,states can impose structural or proceduralrequirements that implicate managementinvolvement. Control share and businesscombination laws are examples of these typesof requirements. These laws operate by deny-ing opportunities or rights to those who tryto acquire a corporation without negotiatingwith the target’s board of directors.

Stockholder rights plans or “poison pills”are takeover defenses that were first con-

ceived over a quarter century ago but stillremain popular.34 They are not creations ofstatute but arrangements established by acompany’s board of directors—typically with-out the affirmative assent of the owners. TheDelaware Chancery Court has provided anoverview of the structure and operation of astockholder rights plan:

Under the Plan each shareholderreceives one right for each share ofcommon outstanding. The right, whichhas a term of ten years, entitles theholder to buy one hundredth of a shareof a new series of participating pre-ferred stock. The new preferred wouldbe nonredeemable and subordinate toother series of the Company’s pre-ferred stock. Its dividend right is tiedto the dividend for common at therate of 100 times the dividend declaredon common stock. Its liquidation pref-erence is similarly linked to paymentreceived by common shareholders. Theexercise price for the preferred, $100for 1/100 of a share, or $10,000 pershare, is conceded to be “out of themoney” in view of the current $1.75dividend yield on Household common

Los Angeles Lawyer November 2008 35

which has traded in recent months ina range of $30 to $33. The real impactof the rights is to be found in their“triggering” and “flip-over” featureswhich have led to their being labeledas “poison pills.”

The rights detach and may be exer-cised only if certain triggering events,referred to as the 20% and 30%events, occur. Prior to the occurrenceof any of these events the rights are nottransferable apart from the commonstock to which they are affixed. Thusif a person (a) acquires 20% of House-hold’s common shares or (b) achievesthe right to purchase 20% or (c)achieves the right to vote 20% or (d)announces the formation of a group ofpersons holding 20% to act together,the rights are triggered. The 30% trig-gering event occurs upon theannouncement of a tender offer orexchange offer for 30% of Household’soutstanding stock.

Once a triggering event hasoccurred the rights may be exchangedfor the new preferred upon the pay-ment of the exercise price. Moreover,if a merger or consolidation occursunder the terms of which Household’scommon shares are exchanged forsecurities of the acquiror, the right“flips-over” and enables the holder,at the then exercise price of the right,to purchase common stock of theacquiror at a price reflecting a marketvalue of twice the exercise price of theright. Thus the right holder would beentitled to purchase $200 worth ofthe acquiror’s common for $100. Theresultant dilution of the acquiror’s cap-ital is immediate and devastating.35

The court’s description makes it clearthat shareholder rights plans are effectivebecause they discriminate against specificshareholders. The discriminatory nature ofa shareholder rights plan constitutes bothits operative mechanism and its legal vul-nerability.

Nevada has enacted several statutory pro-visions that directly address the legal viabil-ity of shareholder rights plans. The provisionsof Nevada Revised Statutes Section 78.195(5),which apply to the issuance of shares of morethan one class or series, “do not restrict thedirectors of a corporation from taking actionto protect the interests of the corporationand its stockholders, including, but not lim-ited to, adopting or signing plans, arrange-ments or instruments that grant rights tostockholders or that deny rights, privileges,power or authority to a holder of a specifiednumber of shares or percentage of share own-ership or voting power.”36

A nearly identical statement is also foundin Nevada Revised Statutes Section 78.350(4),which governs the voting rights of stock-holders. Further, Section 78.378(3) providesthat nothing in Nevada’s control share lawprohibits signing plans, arrangements, orinstruments that deny rights, privileges, power,or authority to a holder of a specified num-ber of shares or percentage of share owner-ship or voting power. While these provisionsprovide strong evidence of the NevadaLegislature’s attempt to validate stockholderrights plans, they do not necessarily fore-close challenges to director action in adopt-ing or implementing a plan. Further, Nevadais far from the only state to have statutorilyendorsed shareholder rights plans.37

The status of stockholder rights plans isfar less clear under the California Corpora-tions Code, which is devoid of any analogueto the Nevada statutes that are applicable tothe plans. A stockholder rights plan could bechallenged on the basis of Corporations CodeSection 203, which mandates equality oftreatment: “Except as specified in the articlesor in any shareholders’ agreement, no dis-tinction shall exist between classes or seriesof shares or the holders thereof.”38 None-theless, this has not prevented California cor-porations from implementing stockholderrights plans.39 Section 203 as well as theabsence of any judicial precedent upholdingstockholder rights plans cast a significantshadow upon the enforceability of theseplans.40

In a very influential decision, the DelawareSupreme Court in 1985 applied a heightenedscrutiny standard to board actions taken inresponse to takeover threats. In UnocalCorporation v. Mesa Petroleum Company, thecourt held that a board of directors will beafforded the benefit of the business judgmentrule if it can show that it had reasonablegrounds for believing that a threat existed andthat its response was proportional to thethreat.41 The Nevada Supreme Court has notapplied the Unocal standard to boards ofNevada corporations. However, in 1997, aU.S. District Court in Nevada applied theUnocal standard to actions taken by thedirectors of ITT Corporation in response toa hostile tender offer made by Hilton HotelsCorporation.42

Shortly after the Hilton decision, theNevada Legislature enacted S.B. 61, whichcodified but also limited the Unocal stan-dard.43 Nevada practitioners had been con-cerned about the possible broad applicationof Unocal to change-in-control situationsinvolving Nevada corporations. UnderNevada Revised Statutes Section 78.139, thesecond prong of the Unocal standard, whichrequires a proportional response, will beapplied if, and only if, the action impedes the

exercise of the rights of stockholders to votefor or remove directors.44 Thus, the propor-tionality prong of the Unocal standard doesnot apply to other antitakeover actions of theboard of directors. These actions are subjectto the general standard of care set forth inSection 78.138(1) and have the benefit ofthe business-judgment-rule presumption cod-ified in Section 78.138(3).

In 1987, the Nevada Legislature adopteda control share law that was patterned aftera similar law adopted the previous year byIndiana. This action closely followed the U.S.Supreme Court’s decision to uphold the con-stitutionality of the Indiana statute.45

Nevada’s control share law operates by pro-viding that an “acquiring person” and itsassociates obtain voting rights in “controlshares” only to the extent conferred by avote of the stockholders. The statute alsoprovides for redemption of control shares incertain circumstances.

Nevada also has had a business combi-nation law on the books since 1991. Thislaw, like the control share law, is patternedafter Indiana’s statute. Generally, the lawoperates to prohibit certain combinationsbetween a corporation and an interestedstockholder for a three-year period. Afterthis three-year moratorium, combinationswith an interested stockholder are permit-ted if certain qualitative and quantitativeconditions are met. California is among theminority of states that has not adopted eithera control share or business combination law.46

California’s Extraterritorial Reach

In deciding whether to advise clients to incor-porate outside of California, practitionersmust consider the California statutes thatpurport to impose various provisions of thestate’s General Corporation Law on foreigncorporations. Corporations Code Section2115, the most far-reaching of these statutes,has been a part of California’s GeneralCorporation Law since the law was enactedmore than a quarter century ago. The logicbehind Section 2115 is straightforward: If aforeign corporation has a majority of its con-tacts with California, then California has aninterest in applying its corporate laws to thecorporation even if that corporation has beenorganized in another state.47

The tests that California has establishedto implement this premise are also straight-forward. Essentially there are two. The firsttest is met when persons having addresses inCalifornia hold more than 50 percent of thecorporation’s outstanding voting securities.The second test focuses on where a corpora-tion does most of its business. This test is metwhen the average of the corporation’s payroll,property, and sales factors are more than 50percent for the latest full income year. These

36 Los Angeles Lawyer November 2008

factors are reported on the corporation’sCalifornia franchise tax return.48

If both of these tests are met, then Section2115 specifies numerous provisions of theGeneral Corporation Law that will apply tothe corporation “to the exclusion of the lawof the jurisdiction in which it is incorpo-rated.” These include provisions relating todirectors (i.e., annual election, removal, fill-ing of vacancies, standard of care, indemni-fication, and liability for improper distribu-tions to shareholders); limitations oncorporate distributions; shareholders (i.e.,liability for unlawful distributions, annualmeeting requirement, cumulative voting, lim-itations on supermajority voting); corporatetransactions (i.e., limitations on sales of assets,mergers and conversions, requirements forconversions, reorganizations, and dissenters’rights); records and reports; and rights ofinspection. In addition, Section 2115 sub-jects a foreign corporation to the possibilityof suit by the California attorney general forviolations of specified provisions of theGeneral Corporation Law.

While Section 2115 is the most expansiveof California’s outreach statutes, it is not theonly provision of the General CorporationLaw that requires the application of Californialaw. Thus, California’s statute governinginspection of the share register is available toshareholders of a foreign corporation thathas its principal executive offices in Californiaor that customarily holds meetings of itsboard of directors in California.49 Californiaextends to directors of the same foreign cor-porations the absolute right to inspect cor-porate records.50 In addition, California pro-vides shareholders of a foreign corporation theright to inspect accounting books and recordsand corporate minutes if the corporationmaintains those records or its principal exec-utive offices in California.51 Finally, Califor-nia’s requirement that a corporation providean annual report to its shareholders is applic-able to a foreign corporation that either main-tains its principal executive office in or cus-tomarily holds meetings of its board ofdirectors in California.52

To the extent that any of these Californiaoutreach statutes applies, a corporation organ-ized in Nevada may be subject to the veryCalifornia law provisions that it is seeking toescape—including cumulative voting, forexample. Recently, the Delaware SupremeCourt refused to apply Section 2115 based onthe “internal affairs doctrine,”53 whichrequires that the law of the state of incorpo-ration govern the internal affairs of a corpo-ration. While this decision strongly suggeststhat the Delaware courts will pay little respectto California’s outreach statutes, it is not thelast word. Indeed, at least one legal scholarcriticizes the Delaware Supreme Court’s deci-

sion and argues that it is intended not somuch to persuade but “to deter other states,such as California and New York, from seek-ing to regulate the affairs of Delaware entities,or, in the alternative, to create the very con-ditions which might convince federal actors toprevent other states from doing so.”54

California courts are likely to be moredeferential to California law. Moreover, itremains to be seen whether the courts willconclude that every California corporatestatute imposed on a foreign corporationinvolves the corporation’s “internal affairs.”55

In the meantime, practitioners should bebraced for races to the courthouse.

In most cases, Section 2115 will be a

source of concern for privately held corpo-rations, for two reasons. First, a privatelyheld corporation located in California willmore likely satisfy the criteria for the appli-cation of the statute. Second, Section 2115does not apply to corporations that eitherhave outstanding securities listed on theNew York Stock Exchange or the AmericanStock Exchange or are designated as quali-fied for trading on the Nasdaq NationalMarket.56

Proponents of incorporating in Nevadaoften tout the fact that Nevada has no cor-porate income tax.57 Accordingly, some busi-ness owners may be led to believe that theycan avoid paying California franchise tax

Los Angeles Lawyer November 2008 37

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simply by incorporating their California busi-ness in Nevada. However, this is purecodswallop. A business that has businessincome from sources both within and outsideCalifornia is required to apportion its incomeand pay California tax. The portion of thecorporation’s total income that has its sourcein California is determined under Revenueand Taxation Code Sections 25120 through25141. In addition, a corporation with aCalifornia “commercial domicile” is subjectto California tax on any income that is notsubject to apportionment.58 Thus, a corpo-ration that does business in California cannotescape California taxation by incorporatingin another state. The California FranchiseTax Board is well aware of the use of Nevadacorporations to avoid California tax and haseven published a form titled “Don’t Gamblewith Your Taxes: Read the Fine Print aboutIncorporating in Nevada.”59

California remains a popular charteringstate for privately held firms located inCalifornia. However, it has proven remark-ably ineffectual in retaining the charters ofpublicly traded corporations located in thestate. While Delaware continues to attractan overwhelming percentage of these emi-grant corporations, Nevada has establisheditself as a viable second choice. Because thereasons for going out of state will vary fromfirm to firm, there is no single right answerto the question of where a business shouldincorporate. For those firms looking for asignificantly different approach to Cali-fornia, a Nevada corporate charter is worthconsidering. ■

1 Lucian Bebchuk & Alma Cohen, Firms DecisionsWhere to Incorporate, 46 J. LAW & ECON. 383, 392-93 (2003). The data produced by these two authorsshow that in the case of California headquartered,publicly traded corporations, Delaware as of the endof 1999 represented over 91 percent of the out-of-statecharters.2 Despite achieving second place, Nevada still lags farbehind Delaware. Nevada claims only 2.66% of out-of-state, publicly traded corporations. Yet, this placesNevada significantly ahead of California, which claimsa minuscule .19% of out-of-state publicly traded cor-porations. Id. at 395. During the periods of 1980 to1989 and 1990 to 1999, Nevada also ranked a distantsecond behind Delaware (and well ahead of California)in attracting incorporations among a sample of initialpublic offerings. Robert Daines, The IncorporationChoices of IPO Firms, 77 N.Y.U. L. REV. 1559, 1583(2002).3 Bebchuk & Cohen, supra note 1, at 392-93.4 CAL. CONST. of 1849, art. IV, §36.5 Article XII of the 1879 Constitution devoted 16 sec-tions specifically to corporations in general and anotherseven to railroad and transportation companies.6 CAL. CONST. of 1879, art. XII, §3.7 Id. at art. XII, §9.8 Henry W. Ballantine, Questions of Policy in Draftinga Modern Corporation Law: California GeneralCorporation Law (1931), 19 CAL. L. REV. 465, 466(1931).9 NEV. CONST. art. 8, §3.

10 California’s General Corporation Law prescribes thestandard of care for directors but not officers. HAROLD

MARSH, JR., R. ROY FINKLE, & LARRY SONSINI, MARSH’SCALIFORNIA CORPORATION LAW §11.02 (4th ed. 2001)(“The statute does not purport to specify the duties ofofficers of a corporation….”). However, some statu-tory standards applicable to officers can be found instatutes governing the relationships between principaland agent. See, e.g., LAB. CODE §§2850-66 (governingthe obligations of employees to employers).11 1999 Nev. Stat. ch. 357. See Minutes of the NevadaSenate Committee on Judiciary, Feb. 3, 1999, ExhibitD.12 CORP. CODE §309.13 See Gaillard v. Natomas Co., 208 Cal. App. 3d1250, 1264 (1989) (incorrectly describing CorporationsCode §309 as “codifying California’s business judg-ment rule”); MARSH, FINKLE & SONSINI, supra note 10,at §11.03[A] (“[I]t is highly doubtful that the Californiacourts will hold that [Section 309] was intended to abol-ish the business judgment rule….”). See also 1975Assembly Committee Comment to Section 309: “It isintended that a person who performs his duties as adirector in accordance with this standard shall have noliability by reason of being or having been a director.”14 NEV. REV. STAT. §78.138(3).15 NEV. REV. STAT. §78.138(7), added by S.B. 577, 2001Nev. Stat. ch. 601.16 2003 Nev. Stat. ch. 485.17 CORP. CODE §§204(a)(10), 309(c).18 CORP. CODE §204(a)(10).19 Sanjai Bhagat & James A. Brickley, CumulativeVoting: The Value of Minority Shareholder VotingRights, 27 J.L. & ECON. 339 (1984).20 Ralph E. Axley, The Case against Cumulative Voting,1950 WIS. L. REV. 278 (1950).21 CAL. CONST. of 1879, art. XII, §12 (repealed).22 Ballantine, supra note 8, at 484.23 MARSH, FINKLE & SONSINI, supra note 10, at §12.02.California’s attachment to cumulative voting is sostrong that governmental bodies are statutorily obli-gated to vote for resolutions authorizing cumulativevoting. GOV’T CODE §6900.24 NEV. REV. STAT. §78.360. Delaware takes a simi-lar opt-in approach to cumulative voting. DEL. CODE

ANN., tit. 8, §214.25 1989 Cal. Stat. ch. 876, §2 (adding CORP. CODE

§301.5).26 CORP. CODE §301.5(d). On January 13, 2006, theSecurities and Exchange Commission issued an orderapproving the application of the Nasdaq Stock Market,Inc., to register one of its subsidiaries, The NasdaqStock Market LLC, as a national securities exchange.SEC Rel. No. 34-53128, 71 FR 3550 (Jan. 13, 2006).As the successor to the Nasdaq Stock Market, NAS-DAQ Stock Market LLC has operated as a nationalsecurities exchange since August 1, 2006. In addition,the Nasdaq National Market was renamed the NAS-DAQ Global Market effective July 1, 2006. The NAS-DAQ Global Market now contains two tiers: NASDAQGlobal Market and NASDAQ Global Select Market.California has not yet amended the statute to reflectthese changes.27 CORP. CODE §301.5(a).28 For an in-depth discussion of the history and role ofsupermajority voting rules, see Brett W. King, TheUse of Supermajority Voting Rules in CorporateAmerica: Majority Rule, Corporate Legitimacy, andMinority Shareholder Protection, 21 DEL. J. CORP. L.895 (1996).29 NEV. REV. STAT. §78.320(1). However, there issome question about the effectiveness of placing super-majority voting provisions in the bylaws alone.30 CORP. CODE §204(a)(5).31 Id. A supermajority vote requirement (not to exceed662⁄3%) may be imposed for a class or series of preferred

38 Los Angeles Lawyer November 2008

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shares designated as “preferred” or “preference”regarding voluntary dissolution. CORP. CODE §402.5.32 CORP. CODE §710. The determination of the num-ber of persons holding shares of record must be madein accordance with Corporations Code §605.33 CORP. CODE §710(c). This exception was added atthe request of the Business Law Section of the CaliforniaState Bar for the purpose of allowing supermajority voteprovisions in late round venture capital financings.S.B. 497 (Beverly), California Senate Floor Analysis,Apr. 13, 1993, available at http://www.leginfo.ca.gov/pub/93-94/bill/sen/sb_0451-0500/sb_479_cfa_930413_111241_sen_floor.34 Martin Lipton fathered the stockholder rights planin 1982 with the publication of a memorandum titled“Warrant Dividend Plan.” Martin Lipton & Paul K.Rowe, Pills, Polls and Professors: A Reply to ProfessorGilson, 27 DEL. J. CORP. L. 1, 9 (2002).35 Moran v. Household Int’l, Inc., 490 A. 2d 1059, 1066(Del. Ch. 1985).36 Over the years, the Nevada Legislature has mademinor refinements to the wording of the statute. Forexample, the phrase “or grants rights” was added in 2001for the apparent purpose of clarifying that discrimina-tion could be either positive or negative. 2001 Nev.Stat. ch. 296, §10. In 2003, the legislature substitutedthe word “signing” for “executing,” even though direc-tors do not typically execute or sign stockholder rightsplans qua directors. 2003 Stat. ch. 485, §27.37 See Guhan Subramanian, The Influence of Anti-takeover Statutes on Incorporation Choice: Evidenceof the “Race” Debate and Antitakeover Overreaching,150 U. PENN. L. REV. 1795, 1813-14 (2002) (listing 24other states with statutory endorsement of shareholderrights plans).38 The reference in the statute to a “shareholders agree-ment” is not to any agreement among or with theshareholders. Rather, the term means a written agree-ment among all the shareholders of a close corporation,or if a close corporation has only one shareholder,between that shareholder and the corporation. CORP.CODE §186.39 For example, Cisco Systems, Inc., a California cor-poration, adopted a shareholder rights plan in 1998 thatit terminated in 2005. Securities & ExchangeCommission Form 8-K (filed Mar. 30, 2005).40 In 1997 Emeritus Corporation filed an action forinjunctive and declaratory relief against ARV AssistedLiving, Inc., challenging the validity of its shareholderrights plan. Among other things, the complaint allegedthat the rights plan violated Corporations Code §§203and 400 “in that under the terms of the pill [rights plan]all shares of ARV are not granted the same rights,preferences, privileges and restrictions.” Emeritus Corp.v. ARV Assisted Living, Inc., O.C. Super. Ct. Case No.787788 (Dec. 9, 1997), filed as an exhibit to Schedule14d-1 by Emeritus Corporation with the Securitiesand Exchange Commission, Dec. 19, 1997, availableat: http://www.sec.gov/Archives/edgar/data/949322/0000950103-97-000758.txt. The lawsuit did notresult in a reported decision addressing the validity ofshareholder rights plans.41 Unocal Corp. v. Mesa Petroleum Co., 493 A. 2d 946(Del. 1985).42 Hilton Hotels Corp. v. ITT Corp., 978 F. Supp.1342 (D. Nev. 1997). See Keith Paul Bishop, Battle forControl of ITT Corporation Spotlights Nevada (andDelaware) Corporate Law: Did Nevada Law GetStockholders a Better Deal? 12 INSIGHTS 15 (1998).43 1999 Nev. Stat. ch. 357, §58.44 See Minutes of the Nevada Senate Committee onJudiciary, Feb. 3, 1999 (“Both standards are establishedunder Delaware law. Mr. Fowler [chairman, BusinessLaw Section, State Bar of Nevada] stated they wantedto make sure that the directors did not have this higherduty in a take-over situation unless they take an action

Los Angeles Lawyer November 2008 39

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that might impede the right of stockholders to vote foror against their staying in office as directors. He saidhe thought the directors should have the benefit ofthe business judgment rule until they do something thatmight impede the right of stockholders to vote fordirectors.”).45 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69,107 S. Ct. 1637 (1987). The Indiana statute is oftenreferred to as a “second generation” of takeover statute.The “first generation” antitakeover statutes generallyoperated by requiring disclosure of specific informationand slowing down the process. See Edgar v. MITECorp., 457 U.S. 634 (1982) (striking down the first gen-eration Illinois antitakeover law).46 See Subramanian, supra note 37, at 1813-14 (listing27 states with control share laws).47 California’s General Corporation Law establishes anelaborate taxonomy of corporations. A “domestic cor-poration” is a corporation formed under the laws ofCalifornia. CORP. CODE §162. The term “foreign cor-poration” generally refers to any corporation other thana domestic corporation. CORP. CODE §171. The term“corporation” is also frequently used and defined tomean only a corporation organized under the CaliforniaGeneral Corporation Law (as opposed, for example,to corporations organized under California’s nonprofitcorporations law) and certain other domestic corpo-rations. CORP. CODE §162.48 The factors are fractions defined in California’sRevenue and Taxation Code that are used to appor-tion taxes when a corporation has business activitiesthat are taxable in California as well as outsideCalifornia. See text, infra. Thus, a corporation’s “prop-erty factor” is a fraction, the numerator of which is theaverage value of the corporation’s real and tangible per-sonal property owned or rented and used in Californiaduring the taxable year, and the denominator of whichis the average value of all the corporation’s real andtangible personal property owned or rented and usedduring the taxable year. A corporation’s “payroll fac-tor” is a fraction, the numerator of which is the totalamount paid in California during the taxable year bythe corporation for compensation, and the denomi-nator of which is the total compensation paid every-where during the taxable year. REV. & TAX CODE

§25132. A corporation’s “sales factor” is a fraction,the numerator of which is the total sales of the cor-poration in California during the taxable year, and thedenominator of which is the total sales of the corpo-ration everywhere during the taxable year. REV. & TAX

CODE §25134.49 CORP. CODE §1600(d).50 CORP. CODE §1602.51 CORP. CODE §1601(a).52 CORP. CODE §1501(g).53 VantagePoint Venture Partners 1996 v. Examen,Inc., 871 A. 2d 1108 (Del. 2005).54 Timothy Glynn, Delaware’s Vantagepoint: TheEmpire Strikes Back in the Post-Post-Enron Era, 102NW. U. L. REV. 91, 95 (2008).55 See Keith Paul Bishop, The War between the States—Delaware’s Supreme Court Ignores California’sCorporate Outreach Statute, 19 INSIGHTS 19 (July2005).56 CORP. CODE § 2115(c). See note 26, supra (Californiahas not yet updated the Corporations Code to reflectthe conversion of Nasdaq to an exchange.).57 The Nevada Secretary of State Web site cites the lackof corporate income taxes in response to the ques-tion, “Why incorporate in Nevada?” See http://sos.state.nv.us/business/comm_rec/whyinc.asp.58 “Commercial domicile” means the principal placefrom which the trade or business of the taxpayer isdirected or managed. REV. & TAX. CODE §25120(b).59 Available at http://www.ftb.ca.gov/forms/misc/689.pdf.

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