Yesterday, The Guardian reported that Facebook had acquired Oculus VR using a combination of cash and stock. Facebook avoided SEC registration by availing itself of a fairness hearing before the Department of Business Oversight. Readers may recall, that Facebook used the fairness hearing process in 2011 to acquire Instagram.
In reviewing the notice of hearing, I was attracted to the discussion of the possible application of California Corporations Code Section 2115. That statute purports to apply a laundry list of California General Corporation Code sections to out-of-state corporations to the exclusion of the law of their state of incorporation. An out-of-state corporation is subject to Section 2115 if: (i) more than 1/2 of its outstanding voting securities are held of record by persons having addresses in California; and (ii) the average of the property factor, payroll factor and sales factor is more than 50%. The three factors referred to in the statute are defined in Sections 25129, 25132 & 25134 of the California Revenue and Taxation Code. These tests are found in Section 2115(a).
Oculus VR, however, wasn’t always a foreign corporation. According to the notice of hearing, the company started life as a California limited liability company in June 2012 that converted to a California corporation in September 2012. In May 2013, it reincorporated in Delaware. Thus, Section 2115 didn’t become a potential issue for Oculus VR until May 2013 when it became a foreign corporation. But this gave rise to a question of statutory interpretation that is described in the notice of hearing as follows:
Oculus VR was reincorporated as a Delaware corporation in May 2013, making 2014 Oculus VR’s first full income year. Pursuant to Section 2115(d) of the CCC, the requirements of Section 2115(b) do not become applicable to a foreign corporation until the first day of the first income year of the corporation commencing on or after the 135th day of the income year immediately following the latest income year with respect to which the tests set forth in Section 2115(a) of the CCC have been met. The earliest date on which Oculus VR believes it could become subject to the requirements of Section 2115(b) would be January 1, 2016.
For those readers wondering why the Section 2115(d) is so complicated, the timing is intended to allow the corporation to complete its tax return. The tax return is important because it includes the property, payroll and sales factors that are needed to complete the test under Section 2115(a).
Finally, I was disheartened by the Department of Business Oversight’s apparent failure to post the notice of hearing on its website until July 14, the day before the hearing.