Section 626 of New York's Business Corporation Law governs standing to sue derivatively in New York. It states that "an action may be brought in the right of a domestic or foreign corporation . . . by a holder of shares or of voting trust certificates . . . or of a beneficial interest in such shares or certificates" (emphasis added).
Section 1319 further provides that BCL 626 "shall apply to a foreign corporation doing business in this state, its directors, officers and shareholders."
Reviewing just those statutes, it's tempting to conclude that in order to sue derivatively on behalf of a foreign corporation doing business in New York, the prospective plaintiff must satisfy the standing requirements of BCL 626, as the language suggests.
But there's a competing force at play: the internal affairs doctrine, by which "matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders" are governed by the law of the state of incorporation. That doctrine can clash with BCL 626; if the state of incorporation has different derivative standing requirements than BCL 626, which law applies?
New York's highest court recently answered that question in Ezrasons, Inc. v Rudd, 2025 NY Slip Op 03008 (Ct App May 20, 2025). In the process, the Court treats us to a thoughtful opinion and a sharp, extremely well-researched dissent, both of which explore the contours of the internal affairs doctrine and derivative standing.
The Internal Affairs Doctrine
The leading authority on the internal affairs doctrine is the Court of Appeals' recent decision in Eccles v Shamrock Capital Advisors, LLC, 42 NY3d 321 (2024), which we blogged about last summer. In Eccles, the Court of Appeals held that "the substantive law of a company's place of incorporation presumptively applies to causes of action arising from its internal affairs." And to overcome that presumption, a party must demonstrate "both that (1) the interest of the place of incorporation is minimal—i.e., that the company has virtually no contact with the place of incorporation other than the fact of its incorporation, and (2) New York has a dominant interest in applying its own substantive law."
The Question
The Plaintiff in Ezrasons is a New York corporation that is the beneficial owner of shares in Barclays PLC, a bank holding company incorporated in England and Wales and headquartered in London. Plaintiff commenced a derivative action in New York on behalf of Barclays against more than 40 current and former Barclays directors and officers, alleging that they breached their fiduciary duty to Barclays under English law.
But unlike New York law, which allows derivative suits to be maintained by beneficial owners, applicable English law states that only the registered members of Barclays have standing to sue derivatively.
Plaintiff conceded that it was not a registered member of Barclays, but nonetheless argued that BCL 626 and 1319 provide it with standing to sue derivatively in New York.
Do BCL 626 and 1319 provide a beneficial owner of shares in a foreign corporation standing to sue derivatively? Or does the internal affairs doctrine mandate that the courts look to the substantive law of the state of incorporation for questions of derivative standing?
Mixed Precedent, Lower Courts' Opinions
Frank McRoberts' post on the First Department's decision in Ezrasons describes the almost perfect storm of conflicting—or at least, confusing—precedent on the internal affairs doctrine and its relationship to derivative standing leading up to the Ezrasons appeal.
Both the Trial Court and the First Department found in favor of Barclays: the "Business Corporation Law 1319 merely confers jurisdiction upon New York courts over derivative suits on behalf of a foreign corporation," but "does not override the internal affairs doctrine" (quotations omitted).
The Internal Affairs Doctrine Requires that English Substantive Law Govern
Writing for the Majority, Judge Cannataro wasted no time finding that BCL 626/1319 do not displace the internal affairs doctrine: "Few principles are more firmly entrenched in corporate law than the internal affairs doctrine."
Charting its evolution from an 1866 reference to "the law of the State granting the charter" (Merrick v Van Santvoord, 34 NY 208 [1866]) to last year's Eccles decision, the Majority concluded that the internal affairs doctrine was a fixture of modern corporate law. It allows for predictability (shareholders and corporations know which law applies), consistency (shareholders and corporations should not be subject to different standards in different jurisdictions), and autonomy (the chosen state of incorporation should mean something).
If the legislature intended BCL 626 and 1319 to override a doctrine as well-entrenched and fundamental as the internal affairs doctrine, reasoned the Majority, it would have done so with "a clear manifestation in the statutory language."
And, held the Majority, BCL 626 and 1319 do not contain such a clear expression of such legislative intent. BCL 626 "simply establishes minimum predicates for a New York court to entertain an action brought derivatively on behalf of a corporation, without displacing the internal affairs doctrine or precluding application of foreign substantive limitations on a particular plaintiff's standing." And BCL 1319 expressly states that BCL 626 applies to foreign corporations "to the extent provided therein"—i.e., it provides no greater applicably to foreign corporations than BCL 626 itself.
The Majority concluded that:
[S]ections 626(a) and 1319(a)(2) do not clearly manifest legislative intent to override the internal affairs doctrine on shareholder derivative standing questions. . . . This Court will not overrule a painstakingly developed body of law and decades worth of settled expectations based on one vague statutory sentence and equivocal legislative history."
Counterpoints: A Meaty Dissent from Chief Judge Wilson
Chief Judge Wilson penned a sharp, must-read dissent chock-full of legislative history surrounding the drafting and enactment of New York's Business Corporation Law. He identified three flaws in the Majority's reasoning:
First, Judge Wilson insisted that the Majority's analysis was chronologically flawed. While the internal affairs doctrine is a fundamental and rigid limitation on courts' jurisdiction today, it was not so fundamental in 1961, when the legislature enacted BCL 626 and 1391. Pre-1961, the internal affairs doctrine was simply a discretionary way for courts to decline cases that would be better resolved elsewhere. So, argues Judge Wilson, looking for a "clear manifestation of intent" in 1961 to override today's internal affairs doctrine is a fundamentally flawed analysis: "it would be Kafkaesque to require the legislature to manifest a clear intent to displace something nonexistent."
Second, argued Judge Wilson, the plain text and legislative history of BCL 626 and 1319 apply those provisions to foreign corporations doing business in New York. Section 626 means what it says: "in the right of a domestic or foreign corporation." And that's acutely true when considering the context of its enactment. By 1961, the New York legislature understood the state's role at "the top of the international hierarchy of financial centres," and in enacting the BCL it undertook to "dictate the liability and rights of foreign corporations."
Third, Judge Wilson found several cases, including the Second Circuit's decision in Norlin Corp. v Rooney, Pace Inc., 744 F2d 255, 261 (2d Cir 1984) and the Appellate Division's decision in Culligan Soft Water Co. v Clayton Dubilier & Rice, LLC, 118 AD3d 422 (1st Dept 2014), suggesting that BCL 626 and 1319 are choice of law provisions.
In sum, argued Judge Wilson:
[T]he majority's view boils down to this: today, the internal affairs doctrine is important, and we should not disturb it. That is not an answer to the question before us. We are asked to interpret what our legislature did when it enacted Business Corporation Law 626 and 1319, against the backdrop of a long period when New York's financial dominance was unparalleled. The text of those provisions applies to domestic and foreign corporations alike. In the context in which they were enacted, it is clear that they were intended to function as choice of law provisions, subjecting foreign corporations to the same standards as domestic ones."
More Hurdles to Foreign Intra-Company Lawsuits
Discussing the Eccles decision last year, I highlighted the not-so-subtle tension between New York's position as the frequently-preferred jurisdiction for litigation of shareholder disputes and the Court of Appeals' bolstering the internal affairs doctrine. Shareholders of foreign corporations with a substantial, but not exclusive, presence in New York may, to their frustration, find themselves less able to avail themselves of New York's shareholder laws.
More frustration abounds. There's little doubt that the Court's decision in Ezrasons reflects an increased skepticism to intra-owner disputes concerning foreign corporations. Those considering a New York derivative suit may be directed elsewhere.
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