McDermott Inc. v. Lewis
531 A.2d 206 (Del.) (1987)
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Rule of Law:
The internal affairs doctrine, which dictates that the law of the jurisdiction of incorporation governs matters of internal corporate governance, is a constitutional principle that requires a court to apply that jurisdiction's law even if it conflicts with the forum state's law and public policy.
Facts:
- McDermott International, Inc. ('International') was a corporation incorporated in Panama with its executive offices in New Orleans, Louisiana.
- International had no operations, offices, assets, agents, or employees in the state of Delaware.
- In 1982, McDermott Incorporated ('McDermott Delaware'), a Delaware corporation, underwent a reorganization and became a 92%-owned subsidiary of International.
- As part of the reorganization, McDermott Delaware acquired and held approximately 10% of International's common stock.
- The stated purpose of the reorganization was to achieve tax advantages, although a prospectus acknowledged the voting power could be used to defend against a hostile takeover.
- At the time of the legal dispute, the laws of Panama permitted a subsidiary to vote the shares it held in its parent corporation if the parent was not registered with Panama's National Securities Commission or its shares were not sold on the market in Panama.
- International was not registered with the Panamanian commission, and its shares were not sold on the market in Panama.
- Delaware law, under 8 Del. C. § 160(c), expressly prohibits a majority-owned subsidiary from voting shares of its parent corporation.
Procedural Posture:
- Harry Lewis and Nina Altman, shareholders of McDermott Delaware, filed consolidated lawsuits against McDermott Inc. in the Delaware Court of Chancery.
- The plaintiffs sought to enjoin or rescind a corporate reorganization, specifically challenging the ability of McDermott Delaware to vote the shares it held in its parent company, International.
- The Court of Chancery, the trial court, granted partial summary judgment in favor of the plaintiffs, Lewis and Altman.
- The Court of Chancery ruled that McDermott Delaware was prohibited from voting its stock in International, applying principles of Delaware and Louisiana law instead of Panamanian law.
- The defendants, McDermott Inc. and McDermott International Inc., appealed the trial court's decision to the Delaware Supreme Court.
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Issue:
Does the internal affairs doctrine require a Delaware court to apply Panamanian law to govern the voting rights of a Panamanian parent corporation, even when Delaware's own corporate law prohibits the conduct that Panamanian law permits?
Opinions:
Majority - Moore, Justice
Yes, the internal affairs doctrine requires the application of Panamanian law. The law of the state of incorporation governs a corporation's internal affairs, a principle mandated by the United States Constitution. The court reasoned that uncontroverted expert testimony established that Panamanian law permitted the subsidiary, McDermott Delaware, to vote its shares in its parent, International, under the existing facts. The court strongly affirmed the internal affairs doctrine, stating it is not merely a conflicts of law principle but is also a constitutional mandate rooted in the Due Process Clause and the Commerce Clause. Due Process requires that directors and shareholders have certainty about which law governs their conduct, and the Commerce Clause prevents the chaos and burden of subjecting a corporation to inconsistent internal governance rules from multiple states. Since International had no connection or nexus to Delaware, applying Delaware law would be an unconstitutional infringement on these principles.
Analysis:
This decision solidifies the internal affairs doctrine as a cornerstone of Delaware corporate law with constitutional weight, ensuring predictability and stability for corporations. It establishes that Delaware courts will defer to the law of the state of incorporation for internal governance matters, even if that law contravenes Delaware's own public policy. The ruling provides significant protection to multinational corporations by limiting the ability of states with which they have minimal contact to impose local corporate governance standards. This creates a high barrier for litigants seeking to apply forum law to a foreign corporation's internal affairs, requiring a showing of significant contacts and a superior state interest that can overcome the powerful constitutional arguments favoring the law of incorporation.
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