March 9, 2018

Governing Law: The Long Reach of The Golden State

Keith Bishop recently blogged about the rather unusual governing law section of’s asset purchase agreement with Houserie.  What’s so odd about it? This:, Inc. is an on-line retailer with its principal executive offices located in Midvale, Utah.  Earlier this month, announced that it had agreed to buy the assets of Houserie, Inc.  Both companies are incorporated in Delaware and the asset purchase agreement provides that the closing will occur in Utah. 

The asset purchase agreement provides that it “shall be governed by and construed in accordance with the internal laws of the State of Utah without giving effect to any choice or conflict of law provision or rule, except to the extent that the Laws of the State of Delaware or California are mandatorily applicable”.  How is it possible for California law to govern?

The blog says that the culprit is Section 2115 of the California Corporations Code, better known as the “pseudo-foreign corporation” statute. Section 2115 is complex, but its applicability generally depends on whether a company does most of its business in California and on whether a majority of its shares are owned by California residents.

The statute’s potential applicability mattered in this deal because the seller’s major shareholder was also one of the buyer’s executive officers – and if the pseudo-foreign corporation statute applied, the transaction would be subject to the heightened shareholder approval requirements applicable to entities under common control pursuant to Section 1001(d) of the California Corporations Code.

Since there were uncertainties about the potential application of the statute, these two Delaware corporations agreed to comply with the heightened approval requirements imposed under California law for their deal in Utah.

John Jenkins