Founders Beware: California Law Could Take Control of Your Delaware Startup

If your company operates in California or has shareholders there, you might fall under

California’s legal jurisdiction, even if you’re incorporated in Delaware. This “quasi-

California” status introduces extra legal hurdles that can complicate your funding rounds.

Cumulative Voting: What You Need to Know

Unlike Delaware, California allows cumulative voting by default. This gives minority

shareholders more power in board elections. If your Delaware-incorporated company is

subject to California’s laws, failing to include cumulative voting in your charter can create legal disputes. You may need to amend your charter, which could shift control of your board.

Stricter Rules on Distributions

California’s laws are tougher on distributing dividends and stock buybacks than Delaware’s. Your company must meet certain financial standards before making any payouts to shareholders, and failing to comply can expose your directors to personal liability. It’s crucial to ensure you’re meeting these requirements to avoid potential legal risks.

Indemnification Limits

California law also restricts how much protection you can offer to your directors and

officers, leaving them more vulnerable to personal liability than in Delaware. If your

company is caught between these two legal systems, you may need to revise your bylaws or charter to offer adequate protection.

Complications in Mergers and Asset Sales

California adds complexity to mergers and asset sales, requiring separate votes from

different classes of shareholders. Shareholders also have dissenter rights, meaning they can demand the fair value of their shares rather than accepting stock in the acquiring company, which can slow down or complicate transactions.

Final Thoughts

Being classified as a quasi-California company can complicate governance, especially during funding rounds. Issues like cumulative voting, stricter distribution laws, and

indemnification limits can create significant challenges. With the right legal guidance, you can navigate these complexities smoothly and protect your business.