NY Court of Appeals Applies Internal-Affairs Doctrine to Standing in Derivative Actions on Behalf of Foreign Corporations

The New York Court of Appeals confirmed that the internal-affairs doctrine, which generally applies the substantive law of a corporation’s place of incorporation to “disputes relating to the rights and relationships of corporate shareholders and managers,” requires application of English-law standing requirements where a shareholder of an English corporation asserts derivative claims on behalf of that corporation in a New York court.  The decision in Ezrasons, Inc. v. Rudd (N.Y. Ct. App. May 20, 2025) rejected the contention that New York statutory provisions allowing derivative suits on behalf of foreign corporations in New York courts manifested “legislative intent to displace the long-standing internal-affairs doctrine.”

However, the court assumed without deciding that the English-law standing provision at issue here – a “membership” requirement – was substantive, rather than procedural, because the plaintiff had not preserved that point below.  Future litigation will likely focus on the distinction between substantive and procedural provisions of foreign law because the internal-affairs doctrine applies to substantive legal provisions.

Background

Plaintiff, the beneficial owner of shares of Barclays PLC (an English corporation), filed a derivative action in New York on behalf of the company against various current and former corporate directors and officers.  Defendants moved to dismiss the case, contending that English law applied under the internal-affairs doctrine and that plaintiff lacked standing to sue derivatively under English law because plaintiff was not a “registered member” of the corporation.  Under English law, a “member” must be the legal owner of the corporation’s shares and must be recorded as such on the company’s official register of members.  Plaintiff, however, was concededly only a beneficial owner and not a registered member.

Plaintiff nevertheless argued that it could sue derivatively because sections 626(a) and 1319(a)(2) of New York’s Business Corporation Law (the BCL) supposedly displaced the internal-affairs doctrine and mandated application of New York law to shareholder standing in derivative actions.  The New York Supreme Court rejected that contention and dismissed the case.  The Appellate Division unanimously affirmed, and the Court of Appeals – in a 6-1 decision – affirmed as well.

Court of Appeals’ Decision

The majority began by restating New York precedent holding that “New York applies the internal affairs doctrine in litigation implicating internal corporate rights and relationships.”  That doctrine “operates as a choice-of-law rule and mandates that, with rare exception, the substantive law of the place of incorporation applies to disputes involving the internal affairs of a corporation.”

The majority next held that BCL §§ 626(a) and 1319(a)(2) do not clearly manifest legislative intent “to replace the internal affairs doctrine as it applies to shareholder derivative standing.”  Rather, the provisions “simply confirm[] New York courts’ jurisdiction to entertain derivative actions brought on behalf of foreign corporations – an issue that was unsettled in this state until shortly before the BCL was enacted.”

• Section 626)(a) allows a derivative action to be brought “in the right of a domestic or foreign corporation . . . by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.”  The majority construed this provision as establishing “a baseline New York standing rule,” but, under the internal-affairs doctrine, “foreign substantive law controls in the event of any conflict between New York law and the law of a company’s place of incorporation on matters relating to its internal affairs.”  The majority concluded that “[w]hether a particular stakeholder is authorized to represent the company, much less in litigation against its managers, is a question that plainly implicates corporate rights and internal relationships.”  And § 626(a)’s “statutory text does not imply that the legislature intended to allow persons who would otherwise have no legal authorization to nonetheless bring a derivative suit on behalf of a foreign corporation.”  Thus, although New York law would allow a beneficial owner to sue derivatively, English law’s membership requirement – which plaintiff had not contended was merely procedural – would not.

• Section 1319(a) lists a series of BCL provisions, including § 626, and says that each of them, “to the extent provided therein, shall apply to a foreign corporation doing business in this state, its directors, officers, and shareholders.”  The majority held that “[n]owhere in the text of section 1319 is there a directive that section 626(a) controls in the event of conflict with foreign substantive law.”

Accordingly, the majority ruled that the BCL does not override applying the well-established internal-affairs doctrine to standing requirements for shareholder derivative claims.

Chief Judge Wilson’s lone dissenting opinion – which is approximately twice the length of the majority opinion – concluded otherwise.  The Chief Judge opined that §§ 626(a) and 1319(a)(2) together “allow New York beneficial holders to bring a derivative action on behalf of a foreign corporation doing business in New York.”

Implications

New York courts have recently seen a spate of derivative actions on behalf of non-U.S. corporations.  A number of those cases have been dismissed for various reasons, including the internal-affairs doctrine.

The Ezrasons decision appears to reinforce that trend by importing foreign-law standing requirements into New York courts’ analyses of derivative claims.  As noted above, however, the ruling proceeded on the assumption that English law’s “membership” requirement – which denies derivative standing to mere beneficial owners – is a substantive provision.  Had the provision been considered procedural, the court would have needed to evaluate other considerations and might have reached a different result.  For example:

• The New York Court of Appeals held in 2017 (in Davis v. Scottish Re Group Limited) that a Cayman Islands court rule requiring a plaintiff to obtain leave of court to pursue a contested derivative claim was procedural and applied only to Cayman Islands suits, not to a derivative action filed in New York on behalf of a Cayman-incorporated company.

• The New York Appellate Division, Second Department, held in 2018 (in Mason-Mahon v. Flint) that a United Kingdom statute requiring judicial permission to pursue derivative claims was a procedural rule applicable in U.K. courts, but not in New York courts.

• The New York Appellate Division, First Department, held in 2023 (in Haussmann v. Baumann) that a German statute requiring shareholders to seek leave of court to bring derivative claims was substantive law and therefore precluded a New York derivative action on behalf of a German corporation.

Future litigation probably will continue to explore the differences between substantive and procedural provisions of foreign law, distinctions that could prove dispositive.

Of course, another issue that frequently arises in derivative actions in U.S. courts on behalf of non-U.S. corporations is forum non conveniens:  even if a plaintiff has standing to sue in a U.S. court, the court might not wish to entangle itself in interpreting non-U.S. substantive law, which, under the internal-affairs doctrine, likely will govern the merits of the claims asserted.  Moreover, in derivative actions on behalf of non-U.S. corporations, much of the relevant evidence (documents, witnesses, etc.) might be outside the United States.  Those important considerations, however, were not involved in the Ezrasons decision.