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CALIFORNIA CORPORATE & SECURITIES LAW

Officers And The Internal Affairs Doctrine

My guess is that most attorneys would say that the duty of an officer to the corporation are governed by the law of the state of incorporation under the “internal affairs doctrine”.  As explained by the U.S. Supreme Court, the “internal affairs doctrine” is a conflict of laws principle that “recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands.” Edgar v. MITE Corp. 457 U.S. 624, 645 (1982), quoted with approval in Havlicek v. Coast-to-Coast Analytical Services, Inc.  39 Cal. App. 4th 1844, 1854 (1995).  Some courts have observed that California has codified the internal affairs doctrine in Corporations Code Section 2116.  Vaughn v. LJ Int’l Inc., 174 Cal. App. 4th 213, 223 (2009) and Friese v. Superior Court, 134 Cal. App. 4th 693, 706 (2005).

I want to test the notion that the duties of officers are governed by the law of the state of incorporation.  First, Section 2116 mentions only directors:

The directors of a foreign corporation transacting intrastate business are liable to the corporation, its shareholders, creditors, receiver, liquidator or trustee in bankruptcy for the making of unauthorized dividends, purchase of shares or distribution of assets or false certificates, reports or public notices or other violation of official duty according to any applicable laws of the state or place of incorporation or organization, whether committed or done in this state or elsewhere.  Such liability may be enforced in the courts of this state.

The failure to specify officers in the statute creates the question, if not the negative implication (expressio unius est exclusio alterius) that officers are not covered by this so-called codification of the internal affairs doctrine.  (Interestingly, the statute by its terms also doesn’t address the liability of directors of foreign corporations that are not transacting intrastate business.)

Second, officers, unlike directors, are corporate agents.  (For an explanation of why directors are not agents, see this recent post by UCLA Professor Stephen Bainbridge.)  Under Section 291 of the Restatement (Second) Conflict of Laws, the rights and duties of a principal and agent toward each other are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the parties and the transaction under the principles stated in Section 6 of the Restatement.  Under Section 6, a court should follow the statutory directive of its own state on choice of law.  As noted above, however, Section 2116 is silent as to officers.  In the absence of any such directive, Section 6 lists seven factors (“Hanc marginis exiguitas non caperet”).

Finally, the officer and the corporation may have entered into an employment agreement that includes an explicit choice of law.

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