Legal Question in Business Law in California

Re: Failure of Compliance with Corporate Code

Every corporation, wherever incorporated, must have a board of directors. In some cases, a board may legally have only one member, but nonetheless it must have a board.

On the other hand, every corporation can have only one board of directors, regardless of how many states it does business in.

A Delaware corporation must comply with Delaware law as to the number, election, etc. of directors.

An out-of-state corporation can legally conduct certain minimal business activities in California without "qualifying" to do business here by registering with the California Secretary of State and paying California franchise and income taxes. Permitted activities without qualifying include soliciting orders, signing contracts, acquiring (but not managing) real estate, filing lawsuits, and a few other types of transactions. Anything more triggers a duty to qualify, and failure to qualify can be prosecuted as a misdemeanor.

A minority shareholder would not ordinarily be personally liable for improper acts and omissions of corporate directors or officers unless he is also a director, officer or agent of the corporation. Exceptions may exist.

A minority shareholder can act to correct corporate wrongs in at least two distinct ways. First, to the extent the shareholder himself is harmed, the shareholder can bring suit in his own name against the officer(s) or directors(s) or majority shareholder(s). Second, when the corporation is being harmed by its director(s) or officer(s), a minority shareholder can bring a so-called shareholder's derivative suit on behalf of the corporation and against the director(s), officer(s) or other third party responsible for the harm to the corporation.

In addition, you can consider other avenues such as, if the corporation has 'cumulative" voting for directors, a minority can elect one or more directors; you can negotiate with the majority; or you can be a whistle blower and contact the state authorities.

If the amount of money at stake (i.e. your investment or your expected profit) is large, you should consult a business lawyer. I have handled matters like this in the past with success, and would be willing to give you a free consultation if you desire it.

Re: Failure of Compliance with Corporate Code

From your letter it is unclear what is the minority shareholder's grievance against the Delaware corporation. This is important, because

for certain issues a closely held foreeign corporation's California shareholders will

be held entitled to the protections of the California corporations code, in addition to any protections

under the Delaware corporations code. If the foreign (Delaware) corporation has sufficient contacts with California,

it may be deemed a "pseudo-foreign" corporation, and the California statutes will afford certain minimal

protections to a minority shareholder in California. But, to tell you what rights a minority shareholder has, it is necessary to know

the specific problem that the corporation has caused. Of course, you will need to disclose enough facts for a business lawyer to advise

you whether the Delaware corporation is subject to treatment as a

pseudo-foreign corporation. You need to talk to a business lawyer and discuss the matter more fully, so that the lawyer can

advise you in possession of all the necessary facts

Re: Failure of Compliance with Corporate Code

One of the reasons the company chooses to incorporate in Delaware is that they have virtually no laws protecting minority shareholders. As long as they are a legal corporation in their home state, they�ll be recognized as a legal corporation in California. I do not know enough about Delaware law to tell you whether the Corporation in your particular case qualifies under Delaware law or not.