Restatement of the Law Second

Conflict of Laws 2d

Chapter 13. Business Corporations

Topic 5. Interference with Internal Affairs

Copyright (c) 1971 The American Law Institute

s 313. INTERNAL AFFAIRS OF FOREIGN CORPORATION

 A court will exercise jurisdiction over an action involving the internal affairs of a foreign corporation unless it is an inappropriate or an inconvenient forum for the trial of the action.

Comment:

 a. Meaning of "internal affairs." As used in the Restatement of this Subject, a corporation's internal affairs are involved whenever the issue concerns the relations inter se of the corporation, its shareholders, directors, officers or agents (see the Introductory Note to this Topic).

 b. Rationale. A court usually exercises such jurisdiction as it may possess. A suit against a corporation, or one or more of its directors, officers or agents, will usually be entertained if the court has jurisdiction over the corporation or its property under the rules set forth in Chapter 3 of the Restatement of this Subject. On occasion, however, a court may find that it is an inappropriate forum for the trial of an action involving the internal affairs of a foreign corporation. In such a case, the suit will be dismissed. The principal factors which the court will consider in deciding this issue are stated in Comment c.

 c. Factors to be considered. The factor to which the court will attach primary significance in determining whether to entertain the suit is its ability to grant effective and appropriate relief. When such ability does not exist, the case will usually be dismissed (see s 85). So a court will not usually entertain a suit to annul by its decree an election, held outside its territory, of the directors of a foreign corporation, or to enjoin the issue by a foreign corporation in another state of bonds secured by a mortgage on foreign land. Similarly, there will probably be dismissal of a complaint seeking relief which would require the court to exercise detailed and continuing supervision over the activities of a foreign corporation in another state.

 Next in order of importance are (1) the nature of the foreign corporation's relationship to the state of the forum and (2) the issue involved in the suit. When the interest of the state of incorporation in the issue at hand is greater than the interest of the state of the forum, the court may refuse to entertain the suit on the ground that it should properly be brought in the former state. Indeed, the suit may be dismissed even in a situation where the court, if it were to hear the case, would apply the local law of the state of incorporation in reaching its decision. This is because uniformity of result, as well as the giving of proper attention to local custom that is not reflected in law books, can best be assured by having the action tried in the state of incorporation. The greater the corporation's contacts with the state of incorporation and, especially, the more closely the issue involves the organic structure or internal administration of the corporation, the less likely it is that the suit will be entertained. So a court may refuse to entertain a suit which seeks to compel the declaration of a dividend by the directors of a foreign corporation or which involves the validity of a dividend or of a stock issue. Dismissal may also be the fate of a suit brought by a dissenting shareholder of a foreign corporation to recover the fair value of his shares at the time of the corporation's merger with another corporation on the ground that unless such suits are confined to the state of incorporation there can be no uniformity in the recoveries and hence no equality of treatmentamong the dissenting shareholders.

 Even when the corporation is closely related to the state of incorporation, the court of a second state will entertain a suit to prevent the corporation's directors, officers or agents from doing in the second state an act prohibited to the corporation by the local law of that state, or to set aside such a transaction. Such a suit involves a matter which is of real interest to the second state; furthermore, it does not concern the corporation's organic structure or internal administration. For similar reasons, a court is likely to hear a suit brought against a foreign corporation by a local domiciliary to recover his share of a dividend that has been declared or to compel the transfer of shares on the corporate books and the delivery to him of new certificates. On the other hand, for lack of any direct interest on the part of the state of the forum, the court will usually dismiss an action seeking to prevent the directors, officers or agents of a foreign corporation from acting in another state in excess of the authority given the corporation by the local law of the other state, or to set aside a transaction entered into by the corporation in the other state in excess of such authority, or to wind up the corporation's business in the state of the forum on account of acts done in the other state.

 The closer the corporation's relationship to the state of the forum, the more inclined will the courts of that state be to hear cases involving the corporation's internal affairs. Finally, when the corporation is only technically a foreign corporation, since all, or the great majority, of its contacts, other than the place of its incorporation, are in the state of the forum, the courts will even entertain actions which call for relief affecting the corporation's organic structure or internal administration. So, when the business of a foreign corporation is carried on entirely or principally in the state of the forum and when the directors of the corporation or a majority of them reside in the state and are accustomed to hold meetings in the state, the court may entertain an action which questions the validity of a stock issue or of a dividend or which seeks to enjoin a proposed reorganization of the corporation or to require the calling of a shareholders' meeting. In such a case, the court may likewise render a decree which interferes with the selection of officers or with the holding of shareholders' or directors' meetings of the foreign corporation.

 The other factors which the court will consider in determining whether to hear the suit may be described as forum non conveniens considerations (see s 84). These include such matters as the convenience of the parties, the pressing need to obtain the relief sought and the expense and delays incident to referring the parties to the courts of the state of incorporation. So the action may be dismissed if necessary parties or witnesses are without the state of the forum, if an action involving the same issue is pending in the state of incorporation, or if the state of incorporation is otherwise a more suitable forum, such as when the constitutionality or interpretation of a hitherto unconstrued statute of the latter state is involved. On the other hand, a court will usually entertain an action brought by a shareholder in behalf of a foreign corporation against its present or past officers, directors or majority shareholders on the ground that they have wrongfully appropriated assets of the corporation, or have benefited improperly in transactions with the corporation. Likewise, a court will usually entertain an action by a shareholder to compel the officers of a foreign corporation to allow him to inspect such of its books or properties as are within the state.

 d. Discretion of trial court. Whether a suit should be entertained or dismissed under the rule of this Section depends upon the exercise by the trial court of a sound discretion, which will rarely be overruled on appeal (see s 84, Comment b).

 e. Applicable law. This Section has to do only with limitations upon the exercise of judicial jurisdiction; it does not involve the question of what law governs the various aspects of a corporation's activities and existence. Even when a court entertains a suit involving the internal affairs of a foreign corporation, it will, in accordance with the rules stated in this Chapter and in the absence of an applicable local statute, usually apply the local law of the state of incorporation in arriving at the ultimate decision of the case.

REPORTER'S NOTE

 Some of the older decisions in which the courts refused to entertain actions involving the internal affairs of foreign corporations are phrased in terms of lack of jurisdiction. See, e.g., North State Copper & Gold Min. Co. v. Field, 64 Md. 151, 20 A. 1039 (1885).

 The trend of the modern cases is toward the view that jurisdiction will be exercised "unless considerations of convenience or of efficiency or of justice point to the courts of the [state of incorporation] as the appropriate tribunals." Travis v. Knox Terpezone Co., 215 N.Y. 259, 109 N.E. 250 (1915).

 The courts have entertained the following types of actions involving foreign corporations:

   Actions to compel transfer of shares on corporate books: Hammond v. Hastings, 134 U.S. 401 (1890); Shaw v. Goebel Brewing Co., 202 F. 408 (6th Cir. 1913); Travis v. Knox Terpezone Co., supra; Evans v. R. W. Evans &   Co., 284 Pa. 126, 130 A. 313 (1925); Fuller v. Ostruske, 48 Wash.2d 802, 296 P.2d 996 (1956).

   Actions to compel officers to permit inspection of corporate books: Wise v. H. M. Byllesby & Co., 285 Ill.App. 40, 1 N.E.2d 536 (1936); Stoopack v. George A. Fuller Company, 18 Misc.2d 977, 190 N.Y.S.2d 596 (1959), aff'd 9 A.D.2d 605, 191 N.Y.S.2d 356 (1st Dep't 1959); Donna v. Abbotts Dairies, Inc., 399 Pa. 497, 161 A.2d 13 (1960); Kahn v. American Cone & Pretzel Co., 365 Pa. 161, 74 A.2d 160 (1950).

   Actions against directors or officers for accounting, mismanagement or misappropriation: Perlman v. Feldmann, 219 F.2d 173 (2d Cir. 1955), cert. den. 349 U.S. 952 (1955); Upson v. Otis, 155 F.2d 606 (2d Cir. 1946); National Lock Co. v. Hogland, 101 F.2d 576 (7th Cir. 1939); Fayes, Inc. v. Kline, 136 F.Supp. 871 (S.D.N.Y.1955); Hirshhorn v. Mine Safety Appliances Co., 106 F.Supp. 594 (W.D.Pa.1952), aff'd 203 F.2d 279 (3d Cir. 1953); Steinberg v. Adams, 90 F.Supp. 604 (S.D.N.Y.1950); Beacon Wool Corp. v. Johnson, 331 Mass. 274, 119 N.E.2d 195 (1954).

   Actions to recover declared or guaranteed dividends: Guttmann v. Illinois Cent. R. Co., 91 F.Supp. 285 (E.D.N.Y.1950); Boardman v. Lake Shore & M. S. R. Co., 84 N.Y. 157 (1881).

 The courts have declined jurisdiction over the following types of actions when they involved foreign corporations:

   Actions to restrain issuance of shares or to cancel issued shares: Rogers v. Guaranty Trust Co., 288 U.S. 123 (1933); Allen v. Montana Refining Co., 71 Mont. 105, 227 P. 582 (1927); Sternfeld v. Toxaway Tanning Co., 290 N.Y. 294, 49 N.E.2d 145 (1943).

   Actions to compel declaration of dividends which are not guaranteed or to annul such declaration: Goldstein v. Lightner, 266 App.Div. 357, 42 N.Y.S.2d 338 (1st Dep't 1943), aff'd 292 N.Y. 670, 56 N.E.2d 98 (1944); Hogue v. American Steel Foundries, 247 Pa. 12, 92 A. 1073 (1915).

   Actions by shareholders objecting to merger or reorganization of the corporation: Langfelder v. Universal Laboratories, 293 N.Y. 200, 56 N.E.2d 550 (1944); Hogue v. American Steel Foundries, supra.

   Actions to remove officers or directors or to annul their election: Wason v. Buzzell, 181 Mass. 338, 63 N.E. 909 (1902); Travis v. Knox Terpezone Co., supra.

 Jurisdiction has been exercised even in actions of the type that are not usually entertained outside the state of incorporation, when the corporation was only technically foreign and had all or the great majority of its contacts with the state of the forum: Harr v. Pioneer Mechanical Corp., 65 F.2d 332 (2d Cir. 1933), cert. den. 290 U.S. 673 (1933) (holding that a suit by a shareholder of a Delaware corporation objecting to a reclassification of shares which would defeat his right to accumulated dividends would be entertained by a federal court in New York); State of Iowa ex rel. Weede v. Bechtel, 239 Iowa 1298, 31 N.W.2d 853 (1948), cert. den. sub nom. Bechtel v. Thatcher, 337 U.S. 918 (1949) (holding invalid, under Iowa law, an issue of stock by a Delaware corporation).

 As to the internal affairs rule, see generally Note, 42 Iowa L.Rev. 90  (1956); Note, 46 Colum.L.Rev. 413 (1946); Note, 33 Colum.L.Rev. 492 (1933); Note, 31 Mich.L.Rev. 682 (1933); Annotation, 72 A.L.R.2d 1211 (1960).

REST 2d CONFL s 313

1971 WL 34685

REST 2d CONFL s 313

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