871 A.2d 1108 (Del. 2005)
Examen, Inc. was a Delaware corporation engaged in providing web-based legal expense management solutions.1 VantagePoint Venture Partners, Inc. was a Delaware limited partnership that owned eighty-three percent of Examen’s outstanding Series A Preferred Stock, consisting of 909,091 shares, and no shares of Common Stock.2
On February 17, 2005, Examen and Reed Elsevier executed a Merger Agreement scheduled to expire on April 15, 2005, if not closed.3 The agreement required the affirmative vote of holders of a majority of the issued and outstanding shares of Common Stock and Series A Preferred Stock voting together as a single class.4 VantagePoint’s 909,091 shares of Series A Preferred Stock entitled it to 1,392,727 votes on an as-converted basis.5 There were 9,717,415 total outstanding shares representing 10,297,608 votes, requiring at least 5,148,805 affirmative votes to approve the merger.6
On March 3, 2005, Examen filed a complaint in the Delaware Court of Chancery against VantagePoint seeking a declaration that VantagePoint was not entitled to a class vote of the Series A Preferred Stock on the proposed merger.7 On March 8, 2005, VantagePoint filed an action in the California Superior Court seeking declarations that Examen was a quasi-California corporation under section 2115 of the California Corporations Code and that VantagePoint was entitled to vote its shares as a separate class, along with injunctive relief and damages.8
On March 10, 2005, the Court of Chancery granted an expedited hearing.9 The California court stayed its action on March 21, 2005.10 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.1112 VantagePoint appealed to this Court on April 1, 2005.13 This Court denied an injunction against closing the merger but granted expedited appeal on April 5, 2005.14 The merger closed that same day.15 The appeal proceeded to resolve the parties’ rights with regard to the law that applies to the merger vote.16
Whether Delaware law governs the voting rights of a preferred shareholder of a Delaware corporation on a proposed merger with another Delaware entity?17
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.18 It applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders, including shareholder voting rights on mergers.19
Yes. 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. The Court of Chancery ruled that the case was governed by the internal affairs doctrine as explicated by this Court in McDermott v. Lewis.
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.20 VantagePoint acknowledges that if Delaware law applied it would not have a class vote.21
Delaware law governs the voting rights of the preferred shareholder on the merger.22
Whether section 2115 of the California Corporations Code determines the voting requirements applicable to a merger vote involving a Delaware corporation?23
Application of local internal affairs law to a foreign corporation 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 Section 2115's requirement that stockholders vote as a separate class conflicts with Delaware law, which mandates that the merger be authorized by a majority of all stockholders voting together as a single class.25
No. Section 2115 of the California Corporations Code is characterized as an outreach statute because it requires foreign corporations meeting the statute's factual prerequisites to conform to a broad range of internal affairs provisions.26 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.27 The Court of Chancery determined that section 2115 expressly states that it operates to the exclusion of the law of the jurisdiction in which the company is incorporated.28 The Court of Chancery concluded that it could not enforce both Delaware and California law.29
Section 2115 does not determine the voting requirements applicable to the merger vote involving the Delaware corporation.30