Corporate Governance

Delaware's Preeminence and the Internal Affairs Doctrine

By J. Robert Brown

Tim Glynn has put up two posts on the threat faced by Delaware from other states.  Some of the threat might come from states adopting statutes that contain greater rights for shareholders.  This is the approach taken byNorth Dakota. 

In addition, as Tim notes, other states may challenge Delaware's preeminence by giving less dignity to the internal affairs doctrine.  That is, even though Delaware law would control the law with respect to the internal affairs of a corporation, another state might nonetheless ladle on top some additional or different governance requirements for the corporations operating in their jurisdiction.

A flavor of this recently occurred in Grosset v. Wenaas, 42 Cal. 4th 1100; 72 Cal. Rptr. 3d 129; 2008 Cal. LEXIS 1414 (Cal. February 14, 2008).  The case involved a Delaware court.  Plaintiff in a derivative action lost standing because the company merged.  Plaintiff argued, among other things, that the continuous share ownership requirement ought not to apply, at least where ownership was terminated involuntarily.  As a Delaware corporation, the issue under the internal affairs doctrine turned on Delaware law. 

But the California Supreme Court did not rule out the possibility that California law might override the requirement.  As the opinion noted:  "But if we conclude that Delaware law imposes this requirement while California law does not, we must then analyze the governmental interests of the two states, including the effect of the internal affairs doctrine, to determine which state's law ought to apply."  As it turned out, the California Court determined that the law in the two jurisdictions was the same, making any resolution of the choice of law issue unnecessary.  Nonetheless, the opinion made clear that Delaware law would not automatically control, something that portends a future battle over the nature and extent of the internal affairs doctrine. 

Full post as published by The Race to the Bottom on April 01, 2008 (boomark / email).