## Facts

- Western Air Lines, Inc. was a Delaware corporation with its principal place of business in California and substantial California operations and shareholders.
- Western’s charter provided for cumulative voting; in April 1956 minority shareholders cumulatively voted to elect two of thirteen directors.
- The board amended the bylaws to increase directors from 13 to 15 and initiated a Delaware-law charter amendment to eliminate cumulative voting.
- Western mailed a proxy statement and proxy form to shareholders (including California residents) seeking approval to eliminate cumulative voting; shareholder action and the meeting occurred in California.
- The California Commissioner of Corporations asserted the amendment would be a “sale” of securities under Corporations Code § 25009(a) and required a permit before proxy solicitation or the meeting under § 25500.
- Western applied for a permit while contesting jurisdiction; after a hearing, the Commissioner denied the permit, finding the proposed change “unfair” to California shareholders.
- Western sought a writ of mandate; the superior court held the Commissioner exceeded his jurisdiction and granted relief to Western; the Commissioner appealed.

## Issues

1. Whether eliminating cumulative voting by amending a Delaware corporation’s charter could be treated as a “sale” or “exchange” of securities subject to California’s Corporate Securities Law.
2. Whether California had sufficient regulatory nexus to require a permit and review “fairness” where the corporation was incorporated elsewhere but had substantial California contacts and affected California shareholders.
3. Whether applying California’s permit requirement impermissibly intruded on the internal affairs of a foreign corporation governed by the law of its state of incorporation.

## Decision

- The Court of Appeal held the Commissioner had jurisdiction to require a permit for the proposed amendment eliminating cumulative voting.
- The court accepted that altering voting rights attached to shares could constitute a regulated securities “sale” or “exchange” under California law.
- The court found a sufficient California nexus because proxy solicitation and shareholder voting occurred in California and affected California residents.
- The court rejected the view that the permit regime was an unlawful extraterritorial regulation of Delaware corporate law, characterizing it as permissible investor-protection regulation.
- The judgment granting mandate relief to Western was reversed.

## Legal Principles

- A material alteration of rights attached to outstanding shares (including voting rights) may be regulated as a securities “sale” or “exchange” under California’s Corporate Securities Law even without issuance of new shares or cash consideration.
- California may apply its securities permit and “fairness” review to a foreign-incorporated corporation with substantial in-state business and shareholder contacts, where essential steps of the transaction (proxy solicitation and voting) occur in California.
- The internal affairs doctrine does not bar application of state securities regulation to protect in-state investors when the regulated conduct is treated as an in-state securities transaction rather than a direct governance mandate for the foreign corporation.

## Conclusion

The Court of Appeal upheld California’s authority to require and deny a securities permit for a Delaware corporation’s charter amendment eliminating cumulative voting when the corporation’s substantial California contacts and in-state proxy solicitation and voting brought the change within California’s investor-protection regime.


Western Air Lines, Inc. v. Sobieski, 191 Cal. App. 2d 399, 12 Cal. Rptr. 719 (Cal. Ct. App. 1961)