William Ross
William Ross, a member and a past Co-Chair of the Corporations Committee of the Business Law Section of the California Lawyers Association, is of counsel to the firm of Hirschfeld Kraemer LLP. He is a transactional attorney with expertise in mergers and acquisitions and corporate governance matters for both for-profit and nonprofit entities.
The following article summarizes selected California legislative and case law developments in 2021 through September 15, 2021, relating to corporate law.
Changes to the California Corporations Code Relating to Underrepresented Communities on the Board of Directors of Publicly-Held Corporations
Effective January 1, 2021, section 301.4 of the Corporations Code went into effect.1 Patterned after California's gender diversity law (section 301.3 of the Corporations Code), section 301.4 requires publicly held corporations—those with outstanding shares listed on a major United States stock exchange—that have their principal executive offices in California to have at least one director from an underrepresented community on their board by December 31, 2021. No later than December 31, 2022, such corporations must have at least one underrepresented director if the number of their directors is four or fewer, at least two underrepresented directors if the number of their directors is between five and eight, and at least three underrepresented directors if the number of their directors is nine or more.
Under the law, a director from an underrepresented community means someone who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or as gay, lesbian, bisexual, or transgender.
Under section 2115.6(a) of the Corporations Code, section 301.4 applies to publicly held corporations formed outside of California "to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated."
Each publicly traded corporation and publicly traded foreign corporation (defined in sections 1502.1 and 2117.1, respectively, of the Corporations Code) is required to disclose on the Corporate Disclosure Statement (Form SI-PT) filed with the Secretary of State whether its principal executive office is in California and the number of directors from underrepresented communities on the corporation's board of directors.
The failure to timely file board member information with the Secretary of State may result in a fine of $100,000. In addition, a first violation in failing to meet the quotas established by the law may result in a fine of $100,000; each violation thereafter may result in a fine of $300,000.
As noted below, there have been several court challenges to the legality of section 301.4 as well as section 301.3, the gender diversity statute.
Changes to the California Corporations Code and Labor Code Regarding Disclosure of Violations of Labor Code and Establishing Successor Liability for Unpaid Wages
Effective January 1, 2022, sections 1502, 2117 and 17702.09 of the Corporations Code and section 1205 of the Labor Code were amended, and effective January 1, 2021, section 200.3 was added to the Labor Code.2The amendments to the Corporations Code require that California corporations, corporations formed elsewhere that have registered to transact intrastate business in California, California limited liability companies, and limited liability companies formed elsewhere that have registered to transact intrastate business in California
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must include in the statement of information they file with the Secretary of State whether any officer or director, or in the case of a limited liability company, any member or manager, has an outstanding final judgment issued by the Division of Labor Standards Enforcement or a court of law, for which no appeal is pending, for the violation of any wage order or provision of the Labor Code.
The new statement of information requirements became operative on January 1, 2022.
New section 200.3 of the Labor Code provides that a successor to a judgment debtor or predecessor employer shall be liable for any wages, damages, and penalties owed to any judgment debtor's former workforce pursuant to a final judgment, after the time to appeal has expired and for which no appeal is pending. Successorship means that the business meets any of the following criteria:
- It uses substantially the same facilities or substantially the same workforce to offer substantially the same services as the judgment debtor, subject to certain exceptions.
- It has substantially the same owners or managers that control the labor relations as the judgment debtor.
- It employs as a managing agent any person who directly controlled the wages, hours, or working conditions of the affected workforce of the judgment debtor.
- It operates a business in the same industry and the business has an owner, partner, officer, or director who is an immediate family member of any owner, partner, officer, or director of the judgment debtor.
The cases summarized below address the following matters:
- Whether Delaware or California law applies to a stock purchase agreement.
- Whether Delaware or California law applies to a directors' and officers' liability insurance policy.
- Whether a court would find a Delaware choice of law provision in a covenant not to compete invalid and issue a preliminary injunction prohibiting enforcement of the covenant against a former executive domiciled in California.
- Whether in a securities fraud claim under the California securities laws, the plaintiff must allege more than a mere increase in stock price to show loss causation.
- What is necessary to hold an owner, director, officer, or managing agent liable as acting on behalf of the employer for violation of certain provisions of the Labor Code.
- Whether plaintiffs had standing to challenge the constitutionality of California's gender diversity law as to the boards of directors of certain publicly-held corporations.
- When does an offer or sale of an option occur under the California securities laws?
- Whether a beneficial, as distinct from a record, holder of shares has inspection rights under California law.
- Whether California's gender diversity law and underrepresented communities law as to the boards of directors of certain publicly-held corporations violate the U.S. Constitution or the internal affairs doctrine.
- Whether a California court had personal jurisdiction over a Swiss company and one of its executives in a case arising from a purchase by the Swiss company of shares of a privately-held California corporation.
- Whether a director of a California nonprofit public benefit corporation who brought an action on behalf of the corporation lost standing to pursue her claims when she lost re-election to the board.
In this case, the Delaware Court of Chancery held that a Delaware choice of law provision in a stock purchase agreement must yield to the State of California's strong public policy that violations of its corporate securities laws are not waivable.
The case arose out of a disputed sale by Krauss and others of PLI Holdings, Inc. to Swipe. Swipe sued Krauss in Delaware for a variety of claims, including violation of the securities antifraud provision of section 25401 of the California Corporations Code. The defendants countered that the broad Delaware choice of law provision in the stock purchase agreement effectively prevented the plaintiff from bringing such a claim under California securities law. (Plaintiff alleged that because plaintiff was physically located in California and a key meeting
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and negotiations took place in California, the injury to it occurred in this state.)
In assessing this issue, the judge noted that although upholding freedom of contract is a fundamental policy of Delaware, there is an exception to that policy if enforcement contravenes the strong public policy of another state that has a materially greater interest than Delaware as to the particular issue in question. Here, the judge emphasized that section 25701 of the California Corporations Code provides that "any condition, stipulation or provision purporting to bind any person acquiring any security to waive compliance with any provision of [the California Securities Act] or any rule or order hereunder is void." Having found that the defendants failed to meet their burden to show that enforcement would not diminish unwaivable statutory rights under California law and that there was not a sufficient nexus to apply the Delaware Securities Act—no negotiations having occurred in Delaware, in contrast to California—the judge denied the defendants' motion to dismiss the California antifraud claim.
In this case, the Delaware Supreme Court affirmed the ruling of the lower court that a directors' and officers' liability insurance policy with no governing law clause issued to a Delaware corporation headquartered in California should be interpreted under Delaware law.
The case arose when an excess insurer (RSUI Indemnity Company) under Dole Food Company Inc.'s D & O policy sought a declaration, among other issues, that the policy was not available to fund the settlement of either a Delaware state lawsuit claiming fraud and breach of fiduciary duty or a lawsuit brought in a Delaware federal court alleging breach of the federal securities laws.
The excess insurer...
