Internal affairs doctrine
Encyclopedia
The internal affairs doctrine is a choice of law
rule in corporations law
. Simply stated, it provides that the "internal affairs" of a corporation
(e.g. conflicts between shareholder
s and management
figures such as the board of directors
and corporate officers) will be governed by the corporate statute
s and case law
of the state in which the corporation is incorporated
, sometimes referred to as the lex incorporationis.
s and corporate property
, and the fiduciary obligations of management are all determined in accordance with the law of the state in which the company is incorporated. On the other hand, the "external affairs" of a corporation, such as labor and employment issues and tax liability
, are typically governed by the law of the state in which the corporation is doing business. Some issues and activities, such as contract
s, mergers and acquisitions
, and sales of securities
to third parties, may be governed both by the laws of the state of incorporation and by the laws of the state in which the transaction takes place, and in some cases, by federal law
as well (for example, United States securities law and antitrust law).
, each state
has the power to set its own corporate law. Because of this, and the fact that the internal affairs doctrine has been used by courts to allow application of the lex incorporationis, this has created a competitive market for incorporations among the states. Several states have taken advantage of this situation by becoming corporate haven
s, particularly Delaware
and Nevada
. Likewise, many jurisdictions apply the internal affairs doctrine internationally, which has permitted offshore financial centre
s to flourish.
Choice of law
Choice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states , or provinces...
rule in corporations law
Corporations law
Companies law is the field of law concerning companies and other business organizations. This includes corporations, partnerships and other associations which usually carry on some form of economic or charitable activity. The most prominent kind of company, usually referred to as a "corporation",...
. Simply stated, it provides that the "internal affairs" of a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
(e.g. conflicts between shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s and management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
figures such as the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and corporate officers) will be governed by the corporate statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
s and case law
Case law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
of the state in which the corporation is incorporated
Incorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
, sometimes referred to as the lex incorporationis.
Practical effects of the doctrine
The internal affairs doctrine ensures that such issues as voting rights of shareholders, distributions of dividendDividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s and corporate property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
, and the fiduciary obligations of management are all determined in accordance with the law of the state in which the company is incorporated. On the other hand, the "external affairs" of a corporation, such as labor and employment issues and tax liability
Tax law
Tax law is the codified system of laws that describes government levies on economic transactions, commonly called taxes.-Major issues:Primary taxation issues facing the governments world over include;* taxes on income and wealth...
, are typically governed by the law of the state in which the corporation is doing business. Some issues and activities, such as contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s, mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
, and sales of securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
to third parties, may be governed both by the laws of the state of incorporation and by the laws of the state in which the transaction takes place, and in some cases, by federal law
Federal law
Federal law is the body of law created by the federal government of a country. A federal government is formed when a group of political units, such as states or provinces join together in a federation, surrendering their individual sovereignty and many powers to the central government while...
as well (for example, United States securities law and antitrust law).
Relation to federalism
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, each state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
has the power to set its own corporate law. Because of this, and the fact that the internal affairs doctrine has been used by courts to allow application of the lex incorporationis, this has created a competitive market for incorporations among the states. Several states have taken advantage of this situation by becoming corporate haven
Corporate haven
A corporate haven is a jurisdiction with laws friendly to corporationsthereby encouraging them to choose that jurisdiction as a legal domicile.- History :...
s, particularly Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
and Nevada
Nevada
Nevada is a state in the western, mountain west, and southwestern regions of the United States. With an area of and a population of about 2.7 million, it is the 7th-largest and 35th-most populous state. Over two-thirds of Nevada's people live in the Las Vegas metropolitan area, which contains its...
. Likewise, many jurisdictions apply the internal affairs doctrine internationally, which has permitted offshore financial centre
Offshore financial centre
An offshore financial centre , though not precisely defined, is usually a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds....
s to flourish.
Further reading
- Bauman, Jeffrey D.; Weiss, Elliott J.; and Palmiter, Alan R. Corporations, Law and Policy, Fifth Edition. Thomson-West, 2005. ISBN 0-314-25966-X