A California Court of Appeal this past week determined that a foreign LLC which is not qualified to transact business in California can nonetheless enforce a judgment obtained in another state in California. Conseco Marketing, LLC v. IFA and Ins. Services, Inc., 2013 Cal. App. LEXIS 946 (Cal. App. 2d Dist. Nov. 22, 2013). Under both California's current LLC Act and the new one effective in 2014, neither maintaining or defending a lawsuit nor collecting a debt is by itself sufficient to constitute transaction intrastate business in California.
Brown, Neri, Smith & Khan LLP Blog
The Court of Appeal for California's Sixth District upheld the dismissal of a purported shareholder derivative suit against the directors of Yahoo (http://www.metnews.com/sos.cgi?1013//H037762). The shareholder plaintiff asserted that five of Yahoo's twelve directors had engaged in insider trading in violation of the California Corporations Code. The Court first correctly applied Delaware law in decided whether a pre-suit demand by the shareholder plaintiff was excused. The Court assumed for the sake of the appeal that the five directors who allegedly committed insider trading were not independent for purposes of whether demand was excused. However, the shareholder could not plead specific facts sufficient to taint the independence of the remaining seven directors. As is common in these cases, plaintiff asserted a hodgepodge of allegations against the other seven directors including that some also engaged in some insider trading, were beholden to their comrades, and failed to fix the problems at Yahoo or otherwise prevent the insider trading. The case provides an excellent explanation and summary of Delaware law on demand futility and properly applied that law to dismiss the claims asserted.
Earlier this year, Stanford Professor Joseph Grunfest surveyed corporate charters and by-laws for forum selection clauses relating to intra-corporate disputes. The incidence of these clauses remains very small and their enforceability is thus not yet established. Interestingly, however, corporations with California headquarters chartered in Delaware were by far the most common users of the forum selection clauses. This reflects an apparent strong desire to avoid California’s court system, which was recently ranked again near the bottom for “fairness and reasonableness” in business disputes by the U.S. Chamber of Commerce’s Institute for Legal Reform. For those corporations unprepared to flee the jurisdiction or which simply have not included a forum selection provision in their founding documents, the reputation of the California courts highlights the need for experienced counsel in intra-corporate disputes in California courts. Knowledge of judges and the ability to determine avenues such as the courts focused on complex matters can make the difference. The undersigned has successfully litigated derivative and intra-corporate disputes in multiple California state courts.