Delaware Corporation Headquartered In Utah Agrees To Buy Assets Of Another Delaware Corporation For Cash, So Why Does California Law Govern Shareholder Approval?
Overstock.com, Inc. is an on-line retailer with its principal executive offices located in Midvale, Utah. Earlier this month, Overstock.com announced that it had agreed to buy the assets of Houserie, Inc. Both companies are incorporated in Delaware and the asset purchase agreement provides that the closing will occur in Utah. The asset purchase agreement provides that it "shall be governed by and construed in accordance with the internal laws of the State of Utah without giving effect to any choice or conflict of law provision or rule, except to the extent that the Laws of the State of Delaware or California are mandatorily applicable". How is it possible for California law to govern?
According to the agreement, "Buyer has assumed but not conceded that Seller is subject to Section 2115 of the California Corporations Code, and that Seller and the transactions contemplated by this Agreement may therefore be subject to portions of the California Corporations Code". If the Buyer is subject to Section 2115, then California Corporations Code Section 1001(d) potentially governs. That statute provides:
If the acquiring party in a transaction pursuant to subdivision (a) of this section or subdivision (g) of Section 2001 is in control of or under common control with the disposing corporation, the principal terms of the sale must be approved by at least 90 percent of the voting power of the disposing corporation unless the disposition is to a domestic or foreign corporation or other business entity in consideration of the nonredeemable common shares or nonredeemable equity securities of the acquiring party or its parent.
The asset purchase agreement includes the following recital that explains why Section 1001(d) might be applicable to this particular transaction:
Buyer has informed Seller and the Majority Stockholders that Vikram Raghavan, who is one of the Majority Stockholders, is also an executive officer of Buyer, and Buyer has assumed but not conceded that the transactions contemplated by this Agreement are subject to Section 2001(d) [sic] of the California Corporations Code, and that Seller therefore requires the approval of the principal terms of the sale of its assets contemplated hereby by the holders of at least 90% of the voting power of the outstanding capital stock of Seller;
This acknowledgement, albeit grudging, is a useful reminder that the California Corporations Code purports to govern transactions closed in another state when neither corporation is a California corporation.