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New York Court of Appeals Reaffirms the Internal Affairs Doctrine for Foreign Corporations
Wednesday, June 4, 2025

In Ezrasons, Inc. v. Rudd, 2025 NY Slip Op. 03008, 2025 N.Y. LEXIS 717 (N.Y. May 20, 2025), the New York Court of Appeals reaffirmed the fundamental and controlling nature of the internal affairs doctrine as it relates to the choice of law regarding corporate governance disputes. Specifically, the Court held that in enacting Sections 626(a) and 1319(a)(2) of New York’s Business Corporation Law (“BCL”), the New York legislature did not clearly manifest an intent to displace the long-settled doctrine as it applies to shareholder derivative standing with respect to corporations formed under the laws of another jurisdiction. This decision provides further assurance to foreign corporations that New York courts will enforce the substantive law of the place of incorporation for litigation involving the corporation’s internal affairs.

Plaintiff Ezrasons, Inc., a purported beneficial owner of shares in Barclays PLC (“Barclays”), a bank holding company incorporated under the laws of England and Wales and headquartered in London, commenced a shareholder derivative action on behalf of Barclays. Plaintiff alleged that current and former Barclays directors and officers, aided and abetted by New York-based affiliate, Barclays Capital Inc. (“BCI”), breached their fiduciary duties owed to Barclays under English law. BCI and certain individual defendants moved to dismiss, arguing that under English law plaintiff lacked standing to maintain the action as it was not a registered member of Barclays. Under English law, only members registered as shareholders on the company’s books may commence litigation, not mere beneficial owners. In response, plaintiff argued that sections 626(a) and 1319(a)(2) of New York’s BCL granted it standing to bring the case under New York law irrespective of English law. Both the New York Supreme Court for the County of New York and the Appellate Division, First Judicial Department decided in favor of defendants, holding that sections 626(a) and 1319(a)(2) neither displaced the internal affairs doctrine nor precluded the application of English standing law against plaintiff. See Ezrazons, Inc. v. Rudd, 217 A.D.3d 406 (1st Dep’t 2023).

The Court of Appeals affirmed. The Court, citing its recent holding in Eccles v. Shamrock Capital Advisors, LLC, 42 N.Y.3d 321 (2024), reaffirmed that the internal affairs doctrine acts as a choice-of-law rule mandating that “with rare exception, the substantive law of the place of incorporation applies to disputes involving the internal affairs of a corporation.” In examining the long history of the internal affairs doctrine, the Court cited cases going as far back as 1866 to support a finding that the place of incorporation supplies the substantive law when it comes to examining the internal management of a foreign corporation. The Court in examining the internal affairs doctrine underscored its importance for both predictability in corporate affairs and deference to stakeholders’ jurisdictional expectations.

The Court, however, did acknowledge that because the internal affairs doctrine is a judicially created rule, it could be overridden by statute. For a statute to nullify a judicial rule, there must be clear and specific legislative intent and the language must be unambiguous. These requirements must be especially apparent when attempting to overrule a long-observed rule such as the internal affairs doctrine. 

Neither sections of the BCL implicated in this case show clear legislative intent to overturn this doctrine. Section 626(a) states that “an action may be brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” The Court held that while this provides a legislative intent to establish a baseline New York standing rule, it does not indicate that section 626(a) serves as both a standing rule and a choice-of-law directive. Section 1319(a)(2) states that various sections within the BCL, including section 626(a) “to the extent provided therein, shall apply to a foreign corporation doing business in this state, its directors, officers and shareholders.” The Court likewise found no clear directive in section 1319(a)(2) that any section of the BCL would control where a conflict exists between New York law and foreign substantive law.

Writing in dissent, Chief Judge Wilson noted the fact that at the time sections 626(a) and 1391(a)(2) were drafted, a common law choice-of-law doctrine did not exist. At that time, the internal affairs doctrine was still regarded as a jurisdictional matter. Thus, the legislature would not have known to draft around the internal affairs doctrine at all, let alone in a specific and unambiguous way.

This decision from New York’s highest court provides even greater assurance to foreign corporations doing business in New York that the substantive law of their place of incorporation will control such key issues as shareholder plaintiff standing to pursue remedies against officers and directors purportedly on their behalf.

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