July 23, 2019

July 23, 2019

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July 22, 2019

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A Not So Fabulous Fable (Part II)

Yesterday's post told of Dick Plantagenet's "winter of discontent" when learned of Henry Tudor's demand to inspect the books, records, and minutes of his small Delaware corporation, Cwmni Cyfyngedig, Inc. ("CCL").  Henry based his demand on Section 1601 of the California Corporations Code and the fact that CCL's ultimate parent, Aksjeselskap, Inc., a Nevada corporation ("Aks"), had stored a handful of its records in the Golden State.  

Dick refused Henry's demand and so Henry went to court.  Because CCL's principal executive office was not located in California, Henry filed his action in the County of Sacramento (SeeCal. Corp. Code § 177) pursuant to Section 1604 of the California Corporations Code.  And this is where the difficulties piled up.  

The first question was whether the Superior Court has jurisdiction over CCL.  CCL had no wide-ranging, systematic and continuous activities in California that would give rise to the assertion of general jurisdiction.  Nor had it engaged in any forum related activity that might give rise to specific jurisdiction.  The same was true of CCL's immediate parent, Teoranta, Inc. ("Teo").  Aks has no office in California but does engage extensive business activities in the state.  Thus, Henry argued that the Court had general jurisdiction over Aks.

But what can Aks do?  It does not have possession of CCL's records.  Aks is a shareholder of a corporation that is a controlling shareholder of CCL.  Shareholders cannot directly order corporate officers to produce records.  At most they can threaten the board of directors with removal if the board fails to direct the officers to allow inspection.  Thus, the Court might order Aks as the sole shareholder of Teo to remove Teo's entire board of directors unless Teo removes CCL's entire board for failing to permit inspection.  The Court, however, would be ordering the impossible.  CCL is a Nevada corporation and under NRS 78.335(1) a two-thirds vote is requires for removal.  Teo, even if so inclined, has insufficient votes to remove CCL's board.  

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...