Corporate Internal Affairs and the Constitution
Many thanks to Dan and the others at Co-Op for inviting me to visit for a few weeks.
Along with most everyone else, I have been waiting for months to see which cases the Supreme Court would review. One I have been watching is Moores v. Friese, No. 05-1590, a matter that has intrigued others, including Christine Hurt and Larry Ribstein.
Well, today the new term begins and . . . petition denied. Fair enough, but there is still a story here.
The case is a suit by a litigation trustee of Peregrine Systems, a Delaware corporation based in California, against various insiders under a California insider trading statute that allows the issuer to sue insiders and potentially recover treble damages. A central issue is whether the California provision applies because, under the “internal affairs doctrine,” the law of the state of incorporation normally governs internal conflicts among a corporation’s shareholders, directors, and officers. The California Court of Appeals, 36 Cal. Rptr. 3d 558 (Ct. App. 2005), reinstated these claims after concluding that this provision does not address internal affairs because it is more akin to blue sky (securities market) regulation. The California Supreme Court denied review.
The contours of the internal affairs doctrine under California law is fascinating stuff, but this is no reason for the U.S. Supreme Court to get involved. That is, of course, unless (1) this insider trading provision necessarily falls within the doctrine, and (2) California’s adherence to it is constitutionally mandated under the dormant commerce clause or due process clause. The cert petition presented this theory, and it was endorsed in an amici curiae brief filed by the U.S. Chamber of Commerce and others.
Much of the support for the proposition that the internal affairs doctrine is not merely a choice-of-law rule but rather a constitutional mandate comes from Delaware Supreme Court decisions, most notably VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005). In VantagePoint, the court declared unconstitutional a California statute, CAL. CORP. CODE § 2115 (2005), which carves out a limited exception to the internal affairs doctrine for closely held foreign firms with a substantial presence in California.
Whatever one thinks of the efficiency of the internal affairs doctrine as a choice-of-law rule, Delaware’s sweeping claims about the doctrine’s constitutional status are dubious. I will spare you the details, but VantagePoint offers little commerce clause or due process analysis, the U.S. Supreme Court decisions it selectively quotes do not support its broad assertions, and all of this might be dicta anyway. Moreover, a primary beneficiary of such a constitutional regime would, in fact, be Delaware, which profits enormously from its domination in the market for entity charters and would welcome a rule that bars other states from acting in ways that might reduce the value of chartering there.
Although the Supreme Court’s denial of review in Friese is a victory for the plaintiffs in that case, it will leave VantagePoint untouched, and the involvement of groups like the Chamber of Commerce may signal that we are entering a period of heightened conflict over regulation of Delaware firms by California and other states. And despite the federalism-related virtue of local experimentation, federal courts do not like prolonged interjurisdictional tussles (e.g., a long series of races to the courthouse, dueling suits proceeding in California and Delaware). Thus, I wonder whether the messier this appears downstream, the more likely it will be that the Supreme Court or lower federal courts will be persuaded to alter or extend some constitutional doctrine to put an end to it.
So, here is my question. Are there recent examples in other areas where actual or potential interjurisdictional conflict akin to what I have described may have contributed to federal courts’ expanding or fashioning “new” constitutional limits on state regulation under the commerce clause or otherwise?
By the way, what is perhaps the next big internal affairs showdown is moving through the pipeline. That case, Grosset v. Wenaas, 35 Cal.Rptr.3d 58 (Ct. App. 2005), review granted and opinion superseded, 127 P.3d 27 (Cal. 2006), is now before the California Supreme Court, and, sure enough, the Chamber of Commerce just filed an amicus brief. More to come.