Conversion of California corporation to Delaware corporation is a step that California companies often want to take to satisfy the request of a venture capitalist (VC). They make this request because Delaware has a reputation as a “business-friendly” state and provides appealing tax incentives for investors.

In most cases, a conversion transaction is a relatively quick and easy way for a C corporation to reorganize in a new state. However, for it to happen, both states must accept the process, and, unfortunately for many California businesses, California is one of a handful of states that does not recognize the concept. The state will not allow a domestic corporation to convert into what it deems to be a “foreign” corporation.

Converting a Foreign Corporation to Domestic Corporation

When confronted with a situation where the state it is incorporated in does not allow a corporate conversion to another state, the remedy most C corporations take is to merge the existing business into a new C corporation. To accomplish this, the corporation:

  • Creates a completely new corporation in the state where it wanted the existing corporation converted to. In this case, a new corporation is incorporated in the state of Delaware.
  • Merges the existing corporation, which in this case is incorporated in California, into the Delaware corporation.
  • Causes the California business to no longer exist as it is survived by the Delaware corporation.

Here are the specific steps the California corporation would take:

  • Draft an Agreement and Plan of Merger and Incorporation.
  • Bring the agreement first to the board of directors, and then to the shareholders of the corporation for a vote.
  • Receive board consent to the agreement.
  • Receive shareholder consent to the agreement.
  • File a Certificate of Merger with the Secretary of State of California’s office.

In Delaware, the corporation would take these steps:

  • File Articles of Incorporation with the office of the Delaware Secretary of State.
  • Adopt bylaws and appoint a board of directors.
  • Issue stock in the Delaware corporation to shareholders.
  • Draft an Agreement and Plan of Merger and Incorporation.
  • Bring the agreement first to the board of directors, and then to the shareholders of the corporation for a vote.
  • Receive board consent to the Agreement.
  • Receive shareholder consent to the agreement.
  • File a Certificate of Merger with the Secretary of State of Delaware’s office.

While it may appear from the above example that it is a very easy process to circumvent California’s refusal to recognize a conversion of one of its domestic corporations into a foreign corporation, that is hardly the case. It is strongly suggested that a corporation desiring to do so consult a corporate attorney with experience in conversions, reverse mergers, transfers of assets, or other forms of corporate reorganization.

The easiest part of the process is incorporating a business in Delaware. This is because the corporation is entirely new, with no existing stock issues, complex business arrangements, contracts with vendors, or any other legal issues that could complicate the C corporation’s incorporation. The Delaware Secretary of State has a webpage that provides information and forms for converting an existing entity.

It is the process of merging an existing corporation from another state into this Delaware corporation where complications could arise. Therefore, it is vital to understand the factors that may come into play when seeking to transfer the assets of the existing corporation to another before moving forward. For instance:

  • What exactly are California’s rules around conversion?
  • What degree of board approval is required to transfer the assets? Must it be a unanimous vote, or is majority consent simply required?
  • What documentation is required by both states?
  • Are there any existing agreements or contracts that must receive separate consent from a third party?
  • How will the transfer affect the company’s stock, and what will the tax implications be?

As you can see, moving the assets of a California corporation into a Delaware corporation can be a very involved process. Due to California’s refusal to allow corporate conversion, it is not merely a matter of visiting a website and downloading forms as might be the case when converting a corporation from another state into Delaware. It is an issue the board of directors should look at from all sides.

To learn more about a conversion of a California corporation to a Delaware corporation, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.