The internal affairs doctrine is a

choice of law Choice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states (as in ...

rule in

corporate law Corporate law (also known as company law or enterprise law) is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corpora ...

. Simply stated, it provides that the "internal affairs" of a

corporation A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...

(e.g. conflicts between

shareholder A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

s and

management Management (or managing) is the administration of organizations, whether businesses, nonprofit organizations, or a Government agency, government bodies through business administration, Nonprofit studies, nonprofit management, or the political s ...

figures such as the

board of directors A board of directors is a governing body that supervises the activities of a business, a nonprofit organization, or a government agency. The powers, duties, and responsibilities of a board of directors are determined by government regulatio ...

and

corporate officer A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the state to act as a single entity (a legal entity recognized by private and public law as "born out of st ...

s) will be governed by the corporate

statute A statute is a law or formal written enactment of a legislature. Statutes typically declare, command or prohibit something. Statutes are distinguished from court law and unwritten law (also known as common law) in that they are the expressed wil ...

s and

case law Case law, also used interchangeably with common law, is a law that is based on precedents, that is the judicial decisions from previous cases, rather than law based on constitutions, statutes, or regulations. Case law uses the detailed facts of ...

of the state in which the corporation is incorporated,
VantagePoint Venture Partners 1996 v. Examen, Inc.
'' 871 A.2d 1108, 1112-1113 (2005). sometimes referred to as the ''lex incorporationis''.

Practical effects of the doctrine

The internal affairs doctrine ensures that such issues as voting rights of shareholders, distributions of

dividend A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...

s and corporate

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...

, and the

fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (legal person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, ...

obligations of management are all determined in accordance with the law of the state in which the company is incorporated. On the other hand, the "external affairs" of a corporation, such as labor and employment issues and tax liability, are typically governed by the law of the state in which the corporation is doing business. Some issues and activities, such as

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...

, and sales of

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

to third parties, may be governed both by the laws of the state of incorporation and by the laws of the state in which the transaction takes place, and in some cases, by

federal law Federal law is the body of law created by the federal government of a country. A federal government is formed when a country has a central government as well as regional governments, such as subnational states or provinces, each with constituti ...

as well (for example,

United States securities law Securities regulation in the United States is the field of Law of the United States, U.S. law that covers transactions and other dealings with Security (finance), securities. The term is usually understood to include both federal and state-level r ...

and

antitrust law Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...

Relation to federalism

In the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

, each

state State most commonly refers to: * State (polity), a centralized political organization that regulates law and society within a territory **Sovereign state, a sovereign polity in international law, commonly referred to as a country **Nation state, a ...

has the power to set its own corporate law. Because of this, and the fact that the internal affairs doctrine has been used by courts to allow application of the ''lex incorporationis'', this has created a competitive market for incorporations among the states. Several states have taken advantage of this situation by becoming

corporate haven Corporate haven, corporate tax haven, or multinational tax haven is used to describe a jurisdiction that multinational corporations find attractive for establishing subsidiaries or Incorporation (business), incorporation of regional or main company ...

s, particularly

Delaware Delaware ( ) is a U.S. state, state in the Mid-Atlantic (United States), Mid-Atlantic and South Atlantic states, South Atlantic regions of the United States. It borders Maryland to its south and west, Pennsylvania to its north, New Jersey ...

and

Nevada Nevada ( ; ) is a landlocked state in the Western United States. It borders Oregon to the northwest, Idaho to the northeast, California to the west, Arizona to the southeast, and Utah to the east. Nevada is the seventh-most extensive, th ...

. Likewise, many jurisdictions apply the internal affairs doctrine internationally, which has permitted offshore financial centres to flourish.

Exceptions

A few states, like California, narrowly apply the internal affairs doctrine. California broadly applies the public policy exception to the internal affairs doctrine, meaning that it will not defer to the law of the state of incorporation whenever that law contradicts its own domestic regulatory schemes that were intended to serve broad public interests as distinguished from the "more narrow interests of a corporation's shareholders". Thus, California does not defer to Delaware law with respect to the enforcement of California's statutes against

insider trading Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider informati ...

. California has also adopted the "pseudo-foreign corporation doctrine", in which it refuses to treat a foreign corporation as such "because most of its owners and operations are physically located within the state".

Practical effects of the doctrine

Relation to federalism

Exceptions

See also

References

Further reading