Reincorporate a Business from a California Entity to a Delaware Entity
A business corporation formed in California may want to reincorporate in the state of Delaware owing to a number of business, economic, or financial reasons that properly address the growing needs of the company. Reincorporation is a term that is used for a variety of transactions that result in an entity’s movement or transfer to a state other than its home state or switching entity type. For instance, if you convert California LLC to Delaware Corp then it would be switching. The process of reincorporation normally involves a quick and simple statutory mechanism that involves filing of specific forms related to conversion. However, in order to convert foreign LLC to Delaware LLC or corporation, both states (the home state and the new state) should accept the process of conversion.
If you have formed a corporation in California then it is important to understand that it is one of the few states that don’t recognize conversion. Hence, it will not allow you to convert a California entity to a Delaware entity or a domestic corporation into a foreign corporation. So, if you want to convert a California Corp to Delaware Corp then there are three methods to choose from and they are merger, asset sale, and stock-for-stock exchange. Let us delve a little deeper into these three methods.
If you want to convert California Corp to Delaware Corp through reincorporation using a merger, then there are specific statutory requirements that you need to follow or be compliant with. This type of merger is also known as a reverse merger or even a downstairs merger where-in you want to reincorporate in another state or jurisdiction. A downstairs or reverse merger is a type of transaction where-in the desired entity type is formed in a new state and the existing entity in the home state is merged with this new entity. This is considered quite a complex transaction as compared to a conversion or asset transfer. Let’s look at an example to understand how a merger can help convert a California entity to a Delaware entity.
- As an existing California corporation, you will need to create a new subsidiary in Delaware. This subsidiary is considered to be a shell corporation as it does not have any assets or businesses. Now, in order to convert a California Corp to Delaware Corp, the California Corporation merges into the newly formed Delaware subsidiary while ensuring the Delaware Corporation remains as the surviving entity. Post this merger, the stock and other securities of the Delaware subsidiary corporation will have preferences, rights, restrictions, and privileges identical to that of the California Corporation.
The California Corporations Code (CCC) requires the board of directors of the California Corporation as well as the Delaware subsidiary to approve the agreement of merger before you convert a California entity to a Delaware entity. The California and Delaware corporations participating in the merger need to sign the agreement of merger after reading the terms and conditions of the merger and amendments, if any, to the articles of the surviving Delaware corporation. The surviving corporation or the Delaware entity will be required to file a copy of the agreement of merger, along with officers’ certificates of each of the constituent corporations with the office of the California Secretary of State.
An asset transfer is one of the ways to convert California LLC to Delaware Corp. It refers to the fact that the newly formed business entity (Delaware corp) purchases the assets belonging to the former entity (California LLC). The process of asset sale will involve a California entity selling off all its assets to the Delaware entity and then the California entity is dissolved. It is important to ensure that prior to the asset sale, a new Delaware entity or corporation is formed so that transfer of assets can take place. The Delaware entity has to be formed with all desired interests, securities as well as stockholder rights and privileges. If you convert a California entity to a Delaware entity through asset sale then the shareholders of the converting entity will receive stock in the newly formed Delaware Corporation as for the sold assets.
A stock-for-stock exchange is the third way to convert a California Corp to a Delaware Corp. This exchange takes place when the newly formed Delaware Corporation issues as well as exchanges the shares of its unissued and authorized common stock to the shareholders of the converting California Corporation in exchange for all the outstanding shares of the said entity’s stock. This method to convert a California entity to a Delaware entity can be employed only if the converting California Corporation is closely held and its shareholders accept or allow the exchange to take place.