Case Title: Vantagepoint Venture v. Examen, Inc.

Citation: 

Docket Number: 127, 2005

State: delaware

Court: Delaware Supreme Court

Date: 2005-05-05T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
VANTAGEPOINT VENTURE  
§  
PARTNERS 1996, a Delaware  
§   No. 127, 2005 
limited partnership, 
 
 
§  
 
 
 
 
 
 
§  
 
Defendant Below,  
 
§   Court Below – Court of Chancery 
 
Appellant,  
 
 
§   of the State of Delaware, 
 
 
 
 
 
 
§   in and for New Castle County 
 
v. 
 
 
 
 
§   C.A. No. 1142-N 
 
 
 
 
 
 
§  
EXAMEN, INC., a Delaware 
 
§  
corporation,  
 
 
 
§  
 
 
 
 
 
 
§  
 
Plaintiff Below, 
 
 
§  
 
Appellee. 
 
 
 
§  
 
 
 
 
 
  Submitted:  April 13, 2005 
 
 
 
 
     Decided:  May 5, 2005 
 
Before STEELE, Chief Justice, HOLLAND and JACOBS, Justices. 
 
 
Upon appeal from the Court of Chancery.  AFFIRMED. 
 
J. Travis Laster, Esquire, Brock E. Czeschin, Esquire, Philippe Y. 
Blanchard, Esquire, Richards, Layton & Finger, Wilmington, Delaware, for 
appellant. 
 
Martin P. Tully, Esquire, David J. Teklits, Esquire, and Thomas W. 
Briggs, Jr., Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, 
Delaware, for appellee. 
 
 
 
 
 
 
HOLLAND, Justice: 
 
2
 
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. 
Delaware Action 
 
On March 3, 2005, the plaintiff-appellant, 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. 
California Action 
 
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 
 
3
of the California Corporations Code1; (2) a declaration that Examen was 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. 
Delaware Action Decided 
 
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 
                                          
 
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.  
 
 
4
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.   
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.   
Merger Without Mootness 
 
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 
                                          
 
2 McDermott Inc. v. Lewis, 531 A.2d 206 (Del. 1987). 
 
5
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.  
Facts 
Examen was a Delaware corporation engaged in the business of 
providing web-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. 
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 
 
6
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.    
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.   
 
7
Chancery Court Decision 
 
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.’”   
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 
 
8
solely one of choice-of-law, and that it need not determine the 
constitutionality of section 2115.   
VantagePoint’s Argument 
 
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 
                                          
 
3 Kamen v. Kemper Fin. Serv., 500 U.S. 90 (1991).   
 
9
Standard of Review 
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 law4 
that this Court reviews de novo.5   
Internal Affairs Doctrine 
 
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 
                                          
 
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). 
5 See Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 394 (Del. 1996). 
6 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 91 (1987). 
 
10
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   
  
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  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   
 
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 
                                          
 
7 Id.   
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 (Cal. App. 2d 2003), citing Edgar v. 
MITE Corp., 457 US 624, 645 (1982).   
9 See Edgar v. Mite Corp., 457 U.S. at 645. 
10 See CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89-93 (1987). 
11 Id.   
12 McDermott Inc. v. Lewis, 531 A.2d at 214.   
 
11
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    
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 
                                          
 
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). 
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 (1933).   
15 McDermott Inc. v. Lewis, 531 A.2d at 216. 
16 Id. at 217. 
17 Id. (quoting Edgar v. MITE Corp. (1988) 457 U.S. 624, 645-46).   
 
12
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 
California Section 2115 
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 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 
 
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 
                                          
 
18 Id. (quoting CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 90 (1987)).   
19 Id.  
20 Cal. Corp. Code § 2115(a) (1977 & Supp. 1984). 
 
13
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   
 
In her comprehensive analysis of the internal affairs doctrine, 
Professor Deborah A. DeMott examined section 2115.  As she astutely 
points out: 
 
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 
                                          
 
21 Id.   
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). 
 
14
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 
 
Internal Affairs Require Uniformity 
 
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 . . . .”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 
                                          
 
23 Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 
Law & Contemp. Probs. 161, 166 (1985). 
24 McDermott Inc. v. Lewis, 531 A.2d 206, 216 (Del. 1987) (quoting Kozyris at 98). 
25 Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 
Law & Contemp. Probs. 161, 166 (1985). 
26 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 (1987). 
 
15
 
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 Burks29 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 
                                          
 
27 Kamen v. Kemper Fin. Serv., 500 U.S. 90 (1991). 
28 Id. 
29 Burks v. Lasker, 441 U.S. 471 (1979). 
30 Kamen v. Kemper Fin. Serv., 500 U.S. at 106. 
31 Id. (quoting Restatement (Second) of Conflict of Laws § 302, cmt. e, p. 309 (1971). 
 
16
under either the law of California or the law of the state of incorporation – 
dependent upon the vissitudes of the ever-changing facts. 
State Law of Incorporation Governs Internal Affairs 
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   
Examen is a Delaware corporation.  The legal issue in this case – 
whether a 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 
                                          
 
32 McDermott Inc. v. Lewis, 531 A.2d 206, 209 (Del. 1987). 
33 See Rosenmiller v. Bordes, 607 A.2d 465, 468-69 (Del. Ch. 1991). 
 
17
established than a State’s authority to regulate domestic corporations, 
including the authority to define the voting rights of shareholders.”34   
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 rules38 and 
the federal constitution39 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. 
                                          
 
34 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (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).   
35 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. at 89 (quoting Cooley v. Bd. of 
Wardens, 53 U.S. 299, 319 (1851)). 
36 Id. 
37 Id. (emphasis added). 
38 McDermott Inc. v. Lewis, 531 A.2d 206 (Del. 1987). 
39 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 (1987). 
 
18
Any Forum – Internal Affairs – Same Law 
 
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.   
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 voting provision to a Utah corporation that had not provided for 
                                          
 
40 Allstate Ins. Co. v. Hague, 449 U.S. 302 (1981). 
41 Wilson v. La. Pac. Res., Inc., 138 Cal. App. 3d 216 (1982). 
 
19
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   
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 
                                          
 
42 Id. at 230-31. 
43 Id. 
44 Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 
Law & Contemp. Probs. 161, 187-88 (1985). 
45 See Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148, 1155 (Cal. 1992), citing 
McDermott Inc. v. Lewis, 531 A.2d 206 (Del. 1987)). 
 
20
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. Dynamics47 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   
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 
footnote51 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 
                                          
 
46 State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal. App. 4th 434 (Cal. App. 2d 
2003). 
47 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. at 89-90. 
48 See State Farm Mut. Auto. Ins. Co. v. Superior Court, 114 Cal. App. 4th 434 (Cal. 
App. 2d 2003).   
49 Id. at 443-44. 
50 E.g., Edgar v. MITE Corp. 457 U.S. 624  (1988); CTS Corp. v. Dynamics Corp. of Am., 
481 U.S. 69 (1987).  See also Kamen v. Kemper Fin. Serv., 500 U.S. 90 (1991). 
51 Draper v. Gardner, 625 A.2d 859, 867 n.10 (Del. 1993). 
 
21
corporation], given the vitality and constitutional underpinnings of the 
internal affairs doctrine.”52  We adhere to that view in this case.   
Conclusion 
 
The judgment of the Court of Chancery is affirmed.  The Clerk of this 
Court is directed to issue the mandate immediately.53 
 
                                          
 
52 Id. at 867.   
53 Supr. Ct. R. 4(f).