by Scott I. Unger, Esq.
Prospective corporations are free to incorporate in any state, regardless of where the corporation plans to physically operate or transact business. It is of no consequence that the corporate organizers or shareholders reside in the state where the corporation chooses to incorporate. Moreover, it is of no consequence that the corporation actually operate or conduct business in the state of incorporation. Despite the same, the state of incorporation may be extremely important to the internal affairs of the corporation. The exclusive right of regulation is known as the "Internal Affairs Doctrine." That is because, corporate law is state law.
Until recently, American Courts have uniformly expressed their reluctance to entertain controversies arising from the "internal affairs" of corporations incorporated in other states. Previously, it was generally accepted doctrine that State Courts will not interfere in the management of the internal affairs of a foreign corporation. Rather, they would dismiss without prejudice cases concerning them.
Several states legislatures have resisted the absolute right of an incorporating state to regulate the internal affairs of a corporation. See N.J.S.A. § 14A:13-2(2) (foreign corporations "shall be subject to the same duties, restrictions, penalties and liabilities" imposed on domestic corporations). Like New Jersey, New York and California have a long history of regulating foreign corporations operating inside its borders. California’s rationale for the regulation is the protection of its residents who have a personal stake in foreign corporations’ as shareholders or employees. Provident Gold Mining Co. v. Haynes, 159 P. 155, 156-157 (1919). In 1977, the California legislature enacted Corporations Code Section 2115 to allow it to regulate all corporations that conducted a majority of their business in California, despite the fact that they are incorporated elsewhere and considered "foreign corporations."
New Jersey Courts have lead the way of "modernizing" the Internal Affairs Doctrine with an adaption of modern choice of law doctrine. In Krzastek v. Global Resource Industrial Power, Inc, A-1815-06T2, the New Jersey Appellate Division had to decide whether or not a Bergen County, Chancery Court properly applied New Jersey’s minority oppression statute while declining to apply Massachusetts’ law to a Massachusetts’ corporation. The Krzastek Court affirmed the Trial Court’s application of New Jersey over Massachusetts law. In doing so, the Krzastek Court reaffirmed New Jersey’s utilization of the flexible "governmental-interest" standard, which requires the application of law of the state with the greatest interest in resolving the particular issue that is raised in the underlying action. Id., (citing Gantes v. Kason Corp., 145 N.J. 478, 484 (2007)). The "governmental-interest" standard, involves the consideration of some of the following factors:
(a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interest of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied.
Fu v. Fu, 160 N.J. 108, 122 (1999) (adopting, Restatement (Second) of Conflicts of Laws § 6 (1971)).
In Conway v. DialAmerica Marketing, Inc., BER-C-116-08, Judge Doyne applied the "governmental interest test" and held that New Jersey corporate law applied to DialAmerica, a Delaware corporation, because: the corporation’s principle place of business and headquarters were located in New Jersey; the entire board of directors resided here; and the corporation maintained critical books and records in the Garden State. Moreover, Judge Doyne found that the New Jersey legislature has "demonstrated a commitment to protecting minority shareholders," and as such, "the relevant policies of the forum" state would be best served by applying New Jersey’s minority oppression law to the Delaware corporation. Id.
These decisions clearly demonstrate New Jersey Courts have the power to adjudicate foreign corporations under certain circumstances. New Jersey is on the forefront of modernizing the Internal Affairs Doctrine.
Scott I. Unger is a Shareholder and member of Stark & Stark’s Litigation Group.