Johnson v. Johnson
720 N.W.2d 20, 2006 Neb. LEXIS 129, 272 Neb. 263 (2006)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under the internal affairs doctrine, the substantive law of the state of incorporation, rather than the state where the corporation conducts its primary business or where the alleged events occurred, governs disputes concerning the internal affairs of a foreign corporation, such as claims of shareholder oppression.
Facts:
- Michael R. Johnson (Michael) is a shareholder of Western Securities, a Delaware corporation, which solely owns Modern Equipment Company, Inc. (Modern Equipment), a Nebraska corporation; both corporations have their principal place of business in Omaha, Nebraska.
- Michael's father, Richard W. 'Dick' Johnson, founded Western Securities and later expressed his intent for Richard W. Johnson, Jr. (Richard), Michael's brother, to succeed him as president of Modern Equipment, for Michael to succeed Richard, and promised to devise his Western Securities stock equally to Michael and Richard.
- Following Dick's death in November 2001, Richard was elected president of Modern Equipment and inherited a significant portion of Dick's Western Securities shares, making him the largest shareholder.
- In August 2002, Richard fired Michael from Modern Equipment, barred him from the premises, and subsequently denied him any participation in the company's operations or share in its earnings.
- Richard unilaterally appointed Modern Equipment’s vice president of manufacturing to fill vacancies on the boards of directors of both Western Securities and Modern Equipment, without consulting other shareholders.
- At shareholder meetings held in April 2003, Richard, acting as personal representative of Dick’s estate, voted all shares then still held in the estate to ratify his prior conduct.
Procedural Posture:
- Michael R. Johnson (Michael) filed suit in Nebraska district court on May 22, 2003, against Richard W. Johnson, Jr. (Richard), Western Securities, and Modern Equipment Company, Inc. (Modern Equipment), alleging shareholder oppression and misapplication of corporate assets.
- Michael sought various remedies, including an accounting, a return of funds by Richard, damages for his exclusion from employment and earnings, an order for Western Securities to cease business in Nebraska, and appointment of a receiver to supervise asset sales and distribute proceeds; alternatively, he sought a finding that Western Securities was the alter ego of Modern Equipment, dissolution of Modern Equipment, or redemption of his interest.
- The defendants (Richard, Western Securities, and Modern Equipment) filed motions to dismiss Michael's complaint, contending the court lacked jurisdiction to dissolve a Delaware corporation or order a buyout, and that such remedies were not permitted by law.
- The Nebraska district court granted the defendants’ motions to dismiss, concluding it lacked jurisdiction to dissolve Western Securities (a Delaware corporation), and that under applicable choice-of-law principles, Delaware law (which did not permit the requested relief) controlled the case as it involved the internal affairs of a foreign corporation.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the substantive law of Nebraska or Delaware apply to a complaint alleging oppression of a shareholder of a Delaware corporation whose sole asset is all the stock of a Nebraska corporation, when the Delaware corporation's principal place of business is in Nebraska?
Opinions:
Majority - Gerrard, J.
Yes, Delaware law controls whether Michael has stated a cause of action, which leads to the dismissal of his complaint. The Supreme Court of Nebraska affirmed the district court's dismissal, holding that the internal affairs doctrine dictates that the substantive law of the state of incorporation (Delaware for Western Securities) applies to disputes concerning the internal affairs of a foreign corporation. The court emphasized that this doctrine, codified in Nebraska law (§ 21-20,172(3)), is a conflict-of-laws principle designed to ensure a single, consistent legal standard for a corporation's internal governance, thereby preventing conflicting demands and protecting the justified expectations of shareholders, directors, and officers. While Nebraska courts retain jurisdiction over a foreign corporation's in-state assets (e.g., to appoint a receiver), this does not permit the application of Nebraska's substantive law to matters of internal corporate affairs. Applying the factors from Restatement (Second) of Conflict of Laws § 6, the court concluded that the need for certainty, predictability, uniformity of result, and protection of justified expectations strongly favored applying Delaware law. The court found that this was not an 'extraordinary case' that would warrant setting aside the internal affairs doctrine, noting that Nebraska's own public policy (expressed in its statutes) is against interfering in the internal affairs of foreign corporations. Furthermore, any alter ego theory Michael proposed would also be governed by Delaware law regarding corporate veil piercing.
Analysis:
This case strongly reaffirms the internal affairs doctrine in Nebraska, underscoring its importance for corporate governance across state lines. It clarifies that while Nebraska courts may assert jurisdiction over the assets of a foreign corporation within the state, the substantive law governing its internal affairs (such as shareholder-director relationships and corporate dissolution) remains that of the state of incorporation. The decision provides predictability for corporations by reducing the risk of being subjected to conflicting legal standards in multiple jurisdictions, which is crucial for interstate and international commerce. Future cases involving internal corporate disputes will likely face an uphill battle in attempting to apply foreign (non-incorporation state) law, unless truly exceptional circumstances, beyond those presented here, can be demonstrated.
