Delaware is a small state with few people. When it comes to incorporation, however, Delaware dwarfs Texas. A huge percentage of corporations that are headquartered outside of Delaware are nevertheless incorporated in Delaware. Here are some of the reasons why:
Corporations that don’t do business in Delaware aren’t taxed at the state level. Even share purchases by non-residents are not taxed by Delaware.
Royalties are not taxed.
Delaware corporations don’t have to disclose the names of the corporation’s shareholders and directors.
Delaware judges understand corporate law better than judges in other states, and Delaware corporate law courts do not use juries (which tend to be naive about corporate law).
Shareholders, directors, and officers don’t have to be Delaware residents.
Investment bankers and venture capitalists prefer Delaware corporations.
Many other reasons
Nevertheless, you will find that some local hurdles need to be overcome before you can take advantage of the benefits of re-incorporating your California corporation in Delaware.
Complication #1: The California Long-Arm Statute
California’s “long-arm statute” classifies corporations with sufficient ties to California as “quasi-California” corporations, which in some instances can defeat the purpose of re-incorporating in Delaware. A corporation can be classified as “quasi-California” if:
Over 50 percent of its voting shares are held by shareholders with California addresses.
The corporation is considered to be “doing business” in California based on the location and use of its property, the location where its payroll is paid, and where it sells its goods and services.
Fortunately, courts have not always enforced California’s long-arm statute, and forum selection clauses can often take much of the bite out of the California long-arm statute.
Complication #2: The Securities Act of 1933
The Securities Act of 1933 requires registration and qualification (two very burdensome activities) when a corporation exchanges its shares with another party, which is what happens legally when a California corporation re-incorporates in another state.
A corporation is exempt from these requirements, however, if its “sole purpose” is to “change the issuer’s domicile” to another U.S. jurisdiction. Significantly changing shareholder rights might suggest an additional purpose.
Complication #3: Effect on Existing Contracts
If your company’s existing contracts contain assignment clauses, you could be breaching them by assigning contracts originally concluded with a California corporation to a Delaware corporation. Of course, any assignment restrictions can be waived by the counterparty. But it is still important to formalize this waiver in writing if a waiver turns out to be necessary.
Professional Legal Assistance Is Critical
Reincorporation is a big decision. Many of the consequences of which are likely be indirect, attenuated, and not at all obvious. At CKB Vienna LLP, we’ve seen it all before, and we know how to uncover the hidden complexities that always surface sooner or later.
We serve clients from all over Ontario, Claremont, Riverside, Fontana, Upland, Rancho Cucamonga, including Alta Loma and Etiwanda. Call us at 909-980-1040 or fill out our online contact form to learn how we can best assist you.