Internal-Affairs Doctrine Presumptively Applies, But Presumption Rebutted When New York Has Dominant Interest in Applying Its Own Law

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, while the substantive law of a company's place of incorporation presumptively applies to causes of action arising from its internal affairs, this presumption can be rebutted when (i) the interest of the place of incorporation is minimal, and (ii) New York has a "dominant interest" in applying its own substantive law, explaining:

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.

The court also went on to hold that plaintiffs here failed to rebut this presumption, and so the law of the company's place of incorporation, Scotland, applied, explaining:

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 fromN ew 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.

Under the internal-affairs doctrine, disputes involving the internal affairs of a company are governed by the law of the jurisdiction in which that company was formed. As the Court of Appeals held here, this doctrine presumptively applies in these types of cases. And while that presumption may be rebutted, doing so will often be difficult. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning the internal-affairs doctrine.