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CALIFORNIA CORPORATE & SECURITIES LAW

Nevada Legislature Mulls Codification Of The Internal Affairs Doctrine

Delaware and Nevada are each in the business of marketing their corporate laws to businesses in other states.  Thus, it should surprise no one that these states don’t appreciate it when their legal offerings are undermined by other states.  One way to protect the franchise is by embracing the “internal affairs doctrine”.

The internal affairs doctrine is a conflict of laws principle holding that only one state should have authority to regulate a corporation’s internal affairs.  Edgar v. MITE Corp. 457 U.S. 624, 645 (1982).  In Delaware, the internal affairs doctrine has become tantamount to holy writ.  The Delaware Supreme Court, for example, has held that “internal affairs doctrine is a major tenet of Delaware corporation law having important federal constitutional underpinnings.” McDermott Inc. v. Lewis, 531 A.2d 206, 209 (Del.1987).  In contrast to Delaware’s near veneration of the doctrine, the U.S. Supreme Court’s view has been more pedestrian: “The rationale for the general rule appears to be based more on the need for a uniform and certain standard to govern the internal affairs of a corporation than on the perceived interest of the State of incorporation”.  Shaffer v. Heitner, 433 U.S. 186, 215 n.44 (1977).  The Court in that same footnote even acknowledges California’s often maligned statutory exception to the internal affairs doctrine – Corporations Code Section 2115.

I can find no published opinion of the Nevada Supreme Court adopting the internal affairs doctrine.  Various federal courts, however, have applied the internal affairs doctrine to bestow Nevada law on Nevada corporations after finding that the forum state applies the internal affairs doctrine.  For example, the Fifth Circuit Court of Appeals has applied Texas law in order to apply Nevada law:

We apply Texas law in this diversity action.  Texas, like most other states, follows the “internal affairs doctrine.” That is, the internal affairs of the foreign corporation, “including but not limited to the rights, powers, and duties of its board of directors and shareholders and matters relating to its shares,” are governed by the laws of the jurisdiction of incorporation.  Nevada corporate law therefore determines the existence and scope of duties between Hollis and Hill.

Hollis v. Hill, 232 F.3d 460, 464-465 (5th Cir. 2000) (footnote omitted).  See also, Super Pawn Jewelry & Loan, LLC v. Am. Envtl. Energy, Inc., 2013 U.S. Dist. LEXIS 45112 (N.D. Ill. Mar. 29, 2013).  [Aside to readers, three of my articles on Nevada are mentioned in Hollis.]

Now, the Nevada is considering whether to give legislative endorsement to the internal affairs doctrine.  SB 203 would, among other things, provide:

The laws of this State must govern the incorporation and internal affairs of a domestic corporation and the rights, privileges, powers, duties and liabilities, if any, of its directors, officers and stockholders.

Notably, SB 203 would apply only to domestic corporations.  Thus, it leaves open the question of whether Nevada applies the internal affairs doctrine to foreign corporations.  This is the reverse of California’s somewhat limited formulation of the internal affairs doctrine in Corporations Code Section 2116:

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.

SB 203’s focus on domestic corporations suggests that the Nevada legislature is concerned that Nevada courts have or will apply foreign law to Nevada corporations, a subject that I plan to address in future posts.

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