The First Department of New York’s Appellate Division Applies the Internal Affairs Doctrine to a Shareholder Dispute Brought Against a German Company on Behalf of its Shareholders
By Mark H. Moore
Both state and federal courts have adopted the “internal affairs doctrine” for disputes among or between a corporation and its directors, officers, and shareholders. Under this approach, courts generally apply the substantive law of the state of incorporation to such disputes, because “application of that body of law achieves the need for certainty and predictability of result while generally protecting the justified expectations of parties with interests in the corporation.” NatTel, LLC v. SAC Cap. Advisors LLC, 370 Fed. App’x. 132, 134 (2d Cir. 2006) (summary order). Thus, in NatTel, the U.S. Court of Appeals for the Second Circuit, applying Connecticut law, held that the law of the Bahamas, as the country where the subject corporation was incorporated, governed claims brought in a lawsuit brought by a minority shareholder against a majority and controlling shareholder, claiming that such majority shareholder had breached its fiduciary obligations to minority shareholders, absconded with corporate assets and engaged in various fraudulent activities in the operation of the corporation.
On June 26, 2023, the First Department of the Appellate Division of the New York State Supreme Court affirmed this principle, applying New York law, in a case titled Haussmann as Tr. of Konstantin S. Haussmann, Tr. v. Baumann, 217 A.D.3d 569 (N.Y. App. Div. 2023). In that case, plaintiffs were shareholders of defendant Bayer AG, who commenced a derivative action under section 626 of New York’s Business Corporation Law in the Commercial Division of the New York State Supreme Court (a shareholder action brought on behalf of the corporation, asserting that plaintiffs could better represent the corporation than its directors and officers). Plaintiffs challenged the actions of management in connection with Bayer AG’s June 2018 purchase of Monsanto Inc., for some $66 million. Plaintiffs asserted claims for breach of fiduciary duty under German law against Bayer Corporation and certain current and former members of Bayer AG’s Board of Management and Supervisory Board, all of whom were accused of violating their duties to Bayer AG. Plaintiffs contended that these breaches of duty were aided and abetted by several banking defendants.
Plaintiffs contended that they were entitled to assert jurisdiction over defendants because Bayer AG, a German corporation, operates and conducts business in New York through subsidiaries registered in the state and trades its American Depositary Receipts (a form of shareholding in foreign companies) in the United States over-the-counter market, with thousands of shareholders living in New York. The complaint further alleged that the Monsanto acquisition was negotiated, financed, and closed in New York, with $57 billion in cash transferred to a New York bank account for distribution to Monsanto shareholders.
In the Commercial Division, Justice Andrew Borrok dismissed the complaint on several independent grounds, including the internal affairs doctrine. The First Department affirmed this decision, solely on the basis of the internal affairs doctrine, noting that the New York courts have consistently invoked the doctrine in derivative actions to apply foreign law on substantive issues, including those affecting a party’s right to sue.
Here, the First Department held that German law barred the plaintiffs’ action. Under the German Stock Corporation Act § 148, a plaintiff must seek leave from the German court to bring a derivative action, which the First Department determined was a substantive provision of the law (and not a matter of mere procedure). Plaintiffs conceded their failure to satisfy § 148, and thus, the First Department held that they lacked standing to maintain their lawsuit. In doing so, the First Department acted consistently with well-established principle, in order to meet the reasonable expectations of the shareholders of a company organized under German law.
This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Attorney Mark Moore who counsels clients on employment disputes, disputes in a university setting, securities matters, intellectual property issues, and other commercial matters. Mr. Moore is admitted to practice law in New York, the United States Courts of Appeal for the Second and Third Circuits and the United States District Courts for the Southern and Eastern Districts of New York.