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Court Rejects Challenge To Internal Affairs Doctrine

Marvell Technology Group, Ltd. is a publicly traded company that is incorporated in Bermuda.  Marvell's U.S. operating subsidiary is based in California.  A year ago, an institutional stockholder filed a derivative suit against Marvell and several of its officers and directors.  The factual bases for the plaintiff's suit were securities law violations but the plaintiff did not assert a cause of action for violations of the securities law.  Marvell defended the suit on the basis that Bermuda law does not permit derivative suits.  Saratoga Advantage Trust Tech. & Communs. Portfolio v. Marvell Tech. Grp., Ltd., 2016 U.S. Dist. LEXIS 108774 (N.D. Cal. Aug. 16, 2016).

The internal affairs doctrine is a conflict of laws principle holding that only one state should have authority to regulate a corporation's internal affairs.  Edgar v. MITE Corp. 457 U.S. 624, 645 (1982).  In Delaware, the internal affairs doctrine is virtually holy writ; in California, not so much.  It was on California's less than strict fidelity to the internal affairs doctrine that the plaintiff in today's case pinned its hopes.  Judge Ronald M. Whyte, who assumed inactive status on November 1, 2016, disagreed, ruling that case law did not support the position that the internal affairs doctrine is inapplicable to derivative suits for breach of fiduciary duty against officers that happen to relate to securities claims.

I found it interesting that Judge Whyte's ruling made no mention of a California statute governing derivative actions - Corporations Code Section 800.  That statute explicitly applies to foreign corporations.  See Court Applies California Demand Requirement To Scottish Company (Again) and Choice Of Law And Derivative Suits.

Judge Whyte, citing Corporations Code Section 2116, also states that "California has codified the internal affairs doctrine . . .".  This statement is incomplete.  Section 2116 imposes liability on directors under the law of the jurisdiction of incorporation only for specified actions.  The statute makes no mention of the liability of officers.  See Officers And The Internal Affairs Doctrine.  In addition, the California legislature has enacted numerous other statutes, including Section 800, that apply California law to foreign corporations.

California is not the only state with less than absolute fealty to the internal affairs doctrine.  Five years ago, I wrote about Judge Thomas P. Griesa's decision to apply New York law rather than Bermuda law, notwithstanding the internal affairs doctrine.  Tyco Int'l, Ltd. v. Kozlowski, 756 F. Supp. 2d 553 (S.D.N.Y. 2010).  See Another Fissure In The Internal Affairs Doctrine?

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
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