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New York Court Of Appeals Affirms Dismissal Of Derivative Action Brought By Shareholder Of Foreign Corporation, Holding That New York Statutes Do Not Displace Common-Law Internal Affairs Doctrine
05/28/2025On May 20, 2025, the New York Court of Appeals affirmed the dismissal of a derivative action asserting claims for breach of fiduciary duty against officers and directors of a corporation incorporated under the laws of England and Wales. Ezrasons, Inc. v. Rudd, —N.Y.3d—, 2025 WL 1436000 (May 20, 2025). Plaintiff argued that, even if it lacked derivative standing under English law because it was not a registered member of the corporation, it should nevertheless be able to pursue claims on behalf of the corporation because it met the requirements relating to derivative actions under New York’s Business Corporation Law (“BCL”). Specifically, plaintiff argued that the BCL displaced the internal affairs doctrine, which provides that the substantive law of a business’s place of incorporation generally governs the rights and relationships between a company’s shareholders and managers. The Court rejected this argument, holding that the BCL sets a minimum standard for conferring jurisdiction on New York courts to entertain derivative actions, but that the substantive law requirements of a corporation’s place of incorporation continue to apply pursuant to the internal affairs doctrine.
The Court of Appeals reviewed the development and application of the internal affairs doctrine in New York courts. The Court observed that the doctrine has evolved, having once been applied as a jurisdictional bar—meaning that courts would refuse to hear litigation implicating the internal affairs of foreign corporations. Id. at *2–4. However, since the mid-twentieth century, the doctrine throughout the United States has been treated as a choice-of-law rule, used to determine which jurisdiction’s law to apply rather than a reason to close the courthouse doors. Id. at *4. The Court of Appeals emphasized that the doctrine promotes “predictability and respect for stakeholders’ choices” by ensuring that the same substantive law will apply to a dispute, regardless of the court in which it is heard. Id. at *5.
Plaintiff’s argument focused on two provisions of the BCL. Section 626(a) provides that “[a]n 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.” Section 1319(a) of the BCL, in turn, lists Section 626 as among the BCL provisions that, “to the extent provided therein, shall apply to a foreign corporation doing business in this state, its directors, officers and shareholders.”
The Court of Appeals acknowledged that the New York legislature has the ability to override the judicially-developed internal affairs doctrine in specific contexts. 2025 WL 1436000, at *5. But the Court explained that the legislature must demonstrate a “clear and specific intent” to do so and that the displacement of the internal affairs doctrine, which would amount to “a radical change in the common law by statute,” would need to be “expressed with the clearness which the importance of the subject demands, so that its meaning is unmistakable.” Id.
Against this backdrop, the Court of Appeals interpreted Section 626(a) of the BCL as simply “establish[ing] minimum predicates for a New York court to entertain an action brought derivatively on behalf of a corporation.” Id. at *6. The Court also rejected plaintiff’s reliance on Section 1319(a) of the BCL, highlighting that “[n]owhere in the text of [S]ection 1319 is there a directive that [S]ection 626(a) controls in the event of a conflict with foreign substantive law.” Id. at *7. The Court of Appeals also noted that nothing in the legislative history of either of the provisions that plaintiff identified suggested that the New York legislature intended to displace the internal affairs doctrine. Id. at *8. And recognizing that there was only one decision by one New York court interpreting these statutory provisions in the manner advanced by plaintiff, which had since been disavowed, the Court noted that, if plaintiff’s interpretation were correct, “such widespread and extended misconception of the law would be odd, to say the least.” Id.
In a lengthy dissent, Chief Judge Rowan D. Wilson reasoned that the BCL provisions in question “allow New York beneficial holders to bring a derivative action on behalf of a foreign corporation doing business in New York” and “expressly overrode any foreign share registration requirement.” Id. at *12. Chief Judge Wilson argued primarily that, because the internal affairs doctrine did not exist as a choice-of-law rule when the statutory provisions were enacted in 1961, the presumption that the legislature must speak clearly and specifically to override common law did not apply. Chief Judge Wilson also took issue with the majority’s interpretation of the statutory text and legislative history, as well as the body of case law since 1961. Id. In response, the majority emphasized that courts continued to understand and apply the choice-of-law component of the internal affairs doctrine before and after 1961, notwithstanding that several cases appeared to have applied New York law without expressly mentioning any choice-of-law considerations. Id. at *9–11. The majority concluded that it would not “overrule a painstakingly developed body of law and decades worth of settled expectations” based on what it characterized as “one vague statutory sentence and equivocal legislative history.” Id. at *11–12.
