Substantive Law of Company’s Place of Incorporation Presumptively Applies to Claims Arising from its Internal Affairs

On May 23, 2024, the Court of Appeals issued a decision in Eccles v. Shamrock Capital Advisors, LLC, 2024 NY Slip Op. 02841, holding that the substantive law of a company’s place of incorporation presumptively applies to causes of action arising from its internal affairs, explaining:

Generally, under New York choice-of-law principles, courts apply the law of the forum to procedural questions and, to substantive issues, the law of the jurisdiction with the most significant relationship to the dispute . . . .

With respect to matters arising from the internal affairs of a corporation, as in this case, including the relationships between directors and shareholders, this Court has noted that the general approach is to apply the law of the state of incorporation. The United States Supreme Court has explained the policy underlying the internal affairs doctrine as ensuring that only one state should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands. In other words, the doctrine serves the vital need for a single, constant, and equal law to avoid the fragmentation of continuing, interdependent internal relationships. In addition to providing consistency to legal obligations, the internal affairs doctrine also protects the interests and expectations of shareholders by giving effect to their choice as to what jurisdiction’s laws will govern the corporation’s affairs.

Although the internal affairs doctrine has been framed as a rule of general application in New York, we have not had occasion to address the situations in which it might not apply to claims involving corporate governance. In Greenspun, the Court addressed a choice-of-law problem in a dispute involving a business trust where the plaintiff sought an accounting by the defendant trustees to an investment trust for damages stemming from the trustees allegedly making investment decisions that were in the interest of a third party, rather than the trust. The Court first noted that the law of the state of the trust’s organization, Massachusetts, was prima facie applicable because the trust was organized under the laws of Massachusetts, and the declaration provided that the law of Massachusetts would apply to determining the rights of the parties. Next, the Court, continuing its inquiry, noted that the record was barren of proof of a significant association or cluster of significant contacts to support a finding of a presence in New York as would, irrespective of other considerations, call for the application of New York law. Specifically, the Court explained that it had no information as to where the trust performed its business, where its principal office and records were located, the places where the trustees met, how many of the trust’s shareholders lived in New York, or other facts on which a finding of such presence in New York State might be predicated. The Court

rejected any automatic application of the so-called internal affairs choice-of-law rule, under which the relationship between shareholders and trustees of a business trust by strict analogy to the relationship between shareholders and directors of a business corporation would be governed by the law of the state in which the business entity was formed.

Instead, the Court expressly left open what law might apply were there proof of significant contacts with New York State such that this investment trust, although a Massachusetts business trust, was nonetheless so present in our state as perhaps to call for the application of New York law. A few years later, in Zion, the Court, citing Greenspun without elaboration, applied Delaware law to a dispute between the shareholders and directors of a Delaware corporation as that is the generally accepted choice-of-law rule with respect to such internal affairs.

Many state and federal courts in New York have relied on Greenspun and Zion for the proposition that New York generally, but not irrebuttably, applies the internal affairs doctrine in cases involving corporations and the actions of their directors. However, courts have provided varying descriptions of the degree of interest that would be required to overcome the doctrine. For example, in Norlin, the shareholders brought an action to enjoin the board from voting shares owned by plaintiff’s—a Panama corporation—subsidiary. The Second Circuit was not so certain that a New York court would apply the internal affairs rule and decide this case by reference to Panama law. The court interpreted Greenspun as requiring an evaluation of the company’s contacts with New York, which were far from insubstantial. The court, however, ultimately avoided the issue, because it determined that Panama would not apply its own law to the dispute and, in any event, New York and Panama law mandated the same result. More recently, the Second Circuit has refined its interpretation of New York choice-of-law principles implicating the internal affairs doctrine:

The internal affairs doctrine—a species of interest analysis—provides that the place of incorporation generally has the greatest interest in having its law apply to questions regarding the internal affairs of a corporation, such as ‘the relationship between shareholders and directors. Although New York courts reject a per se application of the internal affairs doctrine, they generally apply the law of the place of incorporation unless another state has an overriding interest in applying its own law and a defendant has little contact, apart from the fact of its incorporation, with the state of incorporation.

Scores of other state and federal cases have applied the internal affairs doctrine to require the application of the law of the place of incorporation, even after Greenspun.

Consistent with our precedent, we clarify that the substantive law of a company’s place of incorporation presumptively applies to causes of action arising from its internal affairs. Moreover, because of the important interests that the internal affairs doctrine represents, we decline to create any broad exceptions to that presumption. Rather, in order to overcome this presumption and establish the applicability of New York law, a party must demonstrate both that (1) the interest of the place of incorporation is minimal—i.e., that the company has virtually no contact with the place of incorporation other than the fact of its incorporation, and (2) New York has a dominant interest in applying its own substantive law. The simple balancing of contacts that plaintiff proposes would undermine the important interests of consistency and predictability that are critical to the internal affairs of a corporation. This method could result in a company’s directors being subject to conflicting duties, and the law applicable to their actions changing depending on where suit is brought and who the plaintiffs might be. It could also lead the applicable law to depend on highly variable factors such as where a deal is negotiated, where its records are kept, and where its shareholders live.

Plaintiffs’ allegations involve the internal affairs of FanDuel. Their complaint centers around the valuation of merger consideration by the director defendants in the course of approving a merger agreement and their legal duties to certain shareholders as it pertains to those actions. Thus, we begin with the presumption that Scots law, the law of FanDuel’s place of incorporation, applies to plaintiffs’ claims. Even accepting plaintiffs’ allegations as true, neither requirement is met here to overcome this presumption. FanDuel has considerable contacts with Scotland. Four of the plaintiffs founded FanDuel in Scotland and registered the company under the Companies Act. FanDuel’s Articles expressly referenced the Companies Act as the governing law, as did the agreement governing the distribution of the merger proceeds. FanDuel maintains offices in Scotland and a plurality of the plaintiffs live in Scotland. Moreover, New York does not have a dominant interest in applying its own law. Though FanDuel has its principal office in New York, held board meetings in this state, and negotiated the merger here, only 10-15% of FanDuel’s total revenue was derived from New York customers. This is simply not a situation where New York has an overriding interest in applying its own law to plaintiffs’ breach of fiduciary duty claims. Accordingly, the Appellate Division properly held that Scots law applies to these claims.

(Internal quotations and citations omitted).

Stay informed!
Sign up for email alerts and notifications here.
Read more about our Complex Commercial Litigation practice.