The Internal Affairs Doctrine in Alabama
| Publication year | 2011 |
| Pages | 0143 |
| Citation | Vol. 72 No. 2 Pg. 0143 |
The Alabama Supreme Court's recent opinion in Ex parte Bentley1 helps clarify the choice of law determination for internal disputes of foreign companies. Although Alabama has long recognized the principle that the law of the state of incorporation governs internal corporate relationships, Alabama courts have occasionally applied Alabama law to the internal affairs of a business. Therefore, counsel involved in a business dispute must be diligent to ensure that the court makes the correct choice of law determination. Bentley, as well as the decisions cited therein, provides strong precedent that internal business disputes should be decided based on the law of the state of organization.
Internal Affairs Doctrine
A business is free to organize itself under the law of any state regardless of where it will be physically located or where it will transact business. The state of incorporation or organization generally has the exclusive right to regulate the "internal affairs" of the business. This exclusive right is known as the Internal Affairs Doctrine.2 The Alabama Supreme Court has defined "internal affairs" as follows:
[W]here the act complained of affects the complainant solely in his capacity as a member of the corporation, whether it be as stockholder, director, president, or other officer, and is the act of the corporation, whether acting in stockholder's meeting, or through its agent, the board of directors, that then such action is the management of the internal affairs of the corporation...3
The purpose of the Internal Affairs Doctrine is to prevent inconsistent regulations of business in different states.4 The doctrine protects the expectations of those involved with the internal affairs of the business by providing a level of predictability regarding the law that governs the business. Much like the terms of a contract that sets forth governing law, and therefore provides the parties a greater level of predictability as to how the contractual terms will be interpreted, applying the law of the organizational forum provides a greater level of certainty of the legal obligations of those who choose to be a part of a business organization.
Almost every state employs some version of the Internal Affairs Doctrine.5 One of the leading cases on the Internal Affairs Doctrine is VantagePoint Venture Partners 1996 v. Examen, Inc.6 In VantagePoint, the Delaware Supreme Court set forth three reasons for the application of the Internal Affairs Doctrine without exception. First, there is strong precedent from both the Delaware Supreme Court and the United States Supreme Court supporting the Internal Affairs Doctrine. The Delaware Supreme Court held that it "[i]s a long-standing choice of law principle which recognizes that only one state should have the authority to regulate a corporation's internal affairs—the state of incorporation."7
Second, the Internal Affairs Doctrine is supported by important public policy because it "prevent[s] corporations from being subjected to inconsistent legal standards..." and provides certainty and predictability.8 The Delaware Supreme Court also relieved heavily on the United States Supreme Court's discourse on the public policy underpinning the Internal Affairs Doctrine:
It thus is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares. A State has an interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.9
Third, the Delaware Supreme Court held in VantagePoint that application of the Internal Affairs Doctrine is mandatory under the Fourteenth Amendment Due Process Clause because "[d]irectors and officers of corporations 'have a significant right...to know what law will be applied to their actions' and 'stockholders...have a right to know by what standards of accountability they may hold those managing the corporation's business and affairs,'" and under the Commerce Clause because "[a] state 'has no interest in regulating the internal affairs of foreign corporation.'"10 In fact, the Delaware Supreme Court held that the only time that application of the Internal Affairs Doctrine is not required is the rare instance when "'the law of the state of incorporation is inconsistent with a national policy on foreign or interstate commerce.'"11
Internal Affairs Doctrine in Alabama
The State of Alabama has adhered to the Internal Affairs Doctrine since 1921, when the Alabama Supreme Court first held that the laws of Delaware regulated the relationship among shareholders in a corporation formed under the laws of the state.12 In Massey v. Disc Mfg., Inc., the Alabama Supreme Court stated that "the established rule of conflicts law is that the internal corporate relationship is governed by the law of the state of incorpo-ration."13 Likewise, the Internal Affairs Doctrine is adopted by statute in Alabama. Alabama Code § 10-2B-15.05 precludes any attempt by the State "[t]o regulate the organization or the internal affairs of a foreign corporation authorized to transact business in [Alabama]."14
Nevertheless, there have also been lawsuits involving the internal affairs of a business organized in another state in which the Alabama Supreme Court chose to apply Alabama law—not the law of the state of incorporation. For example, in Galbreath v. Scott,15 the Alabama Supreme Court applied Alabama law to a dispute between shareholders of a Florida corporation without any discussion of choice of law issues. The likely explanation is that the parties failed to seek the application of foreign law.16
In a recent decision, Ex parte Bentley,17 the Alabama...
To continue reading
Request your trial