Pinney v. Nelson

Background

A group of stockholders formed the Los Angeles Iron and Steel Company under Colorado law but stated in the charter that the corporation would do much of its business in California. California law, unlike Colorado law, imposed personal liability on stockholders for certain corporate debts. Creditors sued based on business transactions that took place in California. The stockholders argued their liability should be governed only by Colorado law and that California could not change the terms of their charter contract.

Reasoning

The Court addressed whether the stockholders’ contract should be governed by Colorado law or by California law for business done in California. It explained that contracts are usually governed by the law of the place where they are made, but parties can be taken to have contracted with reference to another State’s laws if they so intended. Because the charter expressly said the corporation was created to do business in California, the Court treated the charter as made with reference to California law and held that California’s rules on stockholder liability apply to business carried out there. The Court also noted California’s laws predated the charter, so the federal constitutional protection against laws impairing contracts did not apply.

Real world impact

The decision means that when a corporation formed in one State specifically plans to do business in another State, the laws of the host State can govern liabilities arising from business there. Stockholders and corporations must therefore consider host-state rules when drafting charters and deciding where to operate. Creditors may rely on host-state laws to seek recovery for business transacted in that State.