Corporate Governance

Circumventing the Interal Affairs Doctrine

By J Robert Brown Jr.

TR Investors v. Genger, a recently decided Chancery Court opinion, is a workman like decision that resolves issues mostly under a stockholder agreement. 

The most interesting thing in the opinion is the treatment, in the stockholder agreement, of the choice of law provision.  Although the company at issue was incorporated in Delaware, the agreement provided in the choice of law provision that New York would control. 

As part of the decision, the court had to analyze the validity of a proxy.  In deciding to apply New York law to the proxy, the court reasoned:

• Although our law relating to the voting of corporate shares is of paramount interest to Delaware, there is no offense to Delaware of allowing parties to subject agreements about irrevocable proxies to a law that places different strictures on such proxies than does Delaware law, absent some reason that those strictures offend a fundamental protection by the DGCL. Section 609 of the N.Y. Bus. Corp. Law does not conflict with any fundamental Delaware corporate law policies or doctrines. Therefore, I find no reason to apply Delaware law in a situation where the parties have made a clear choice of law in favor of a sister state.

The approach includes none of the deference to the internal affairs doctrine contained in VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108  (Del. 2005), a case that also involved voting rights.  The case turned mostly on the need to avoid "inconsistent legal standards."  The case did not arise out of an agreement of the parties but from the potential application of a statute in California.

This case, therefore, suggests that courts in Delaware will exercise greater deference where the internal affairs doctrine is sidestepped by agreement.  Of course, the agreement doesn't implicate the board or the fiduciary obligations of directors.  Nonetheless, it does suggest that agreements may accomplish what a legislature cannot.   

Full post as published by The Race to the Bottom on August 17, 2010 (boomark / email).