Opinion ID: 2180171
Heading Depth: 1
Heading Rank: 9

Heading: Internal Affairs Doctrine

Text: In CTS Corp. v. Dynamics Corp. of Am ., the United States Supreme Court stated that it is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares. [6] In CTS, it was also recognized that [a] State has an interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs. [7] The internal affairs doctrine is a long-standing choice of law principle which recognizes that only one state should have the authority to regulate a corporation's internal affairs  the state of incorporation. [8] The internal affairs doctrine developed on the premise that, in order to prevent corporations from being subjected to inconsistent legal standards, the authority to regulate a corporation's internal affairs should not rest with multiple jurisdictions. [9] It is now well established that only the law of the state of incorporation governs and determines issues relating to a corporation's internal affairs. [10] By providing certainty and predictability, the internal affairs doctrine protects the justified expectations of the parties with interests in the corporation. [11] The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders. [12] The Restatement (Second) of Conflict of Laws § 301 provides: application of the local law of the state of incorporation will usually be supported by those choice-of-law factors favoring the need of the interstate and international systems, certainty, predictability and uniformity of result, protection of the justified expectations of the parties and ease in the application of the law to be applied. [13] Accordingly, the conflicts practice of both state and federal courts has consistently been to apply the law of the state of incorporation to the entire gamut of internal corporate affairs. [14] The internal affairs doctrine is not, however, only a conflicts of law principle. Pursuant to the Fourteenth Amendment Due Process Clause, directors and officers of corporations have a significant right ... to know what law will be applied to their actions [15] and [s]tockholders ... have a right to know by what standards of accountability they may hold those managing the corporation's business and affairs. [16] Under the Commerce Clause, a state has no interest in regulating the internal affairs of foreign corporations. [17] Therefore, this Court has held that an application of the internal affairs doctrine is mandated by constitutional principles, except in the `rarest situations,' [18] e.g., when the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce. [19]