Internal Affairs Doctrine

The internal affairs doctrine is a choice of law rule in corporation's law. , stated, it provides that the corporate statutes will govern the "internal affairs" of a corporation (e.g. conflicts between shareholders and management figures such as the board of directors and corporate officer) and case law of the state in which the corporation is incorporated, sometimes referred to as the lex incorporations. This Doctrine ensures that issues like voting rights of shareholders, distributions of dividends and corporate property, and the relations among a company's investors and managers are all determined following the law of the state in which the company is incorporated. On the other hand, the external affairs of a corporation, like labour and employment issues and tax liability, are typically governed by the law of the state in which the corporation is doing business. For example, if there is a dispute between two shareholders of a Delaware corporation, it should normally be decided using Delaware law, even if the company operates in another state.

Practical effects of Doctrine:

The internal affairs doctrine ensures that such issues as voting rights of shareholders, distributions of dividends and corporate property, and the fiduciary obligations of management are all determined following the law of the state in which the company is incorporated. On the other hand, the "external affairs" of a corporation, such as labour and employment issues and tax liability, are typically governed by the law of the state in which the corporation is doing business. Some issues and activities, such as contracts, mergers and acquisitions, and sales of securities to third parties, may be governed both by the laws of the state of incorporation and by the laws of the state in which the transaction takes place, and in some cases, by federal law as well (for example, United States securities law and antitrust law).

Relation to Federalism:

In the UnitedStates, each state has the power to set its corporate law. Because of this, and the fact that the internal affairs doctrine has been used by courts to allow the application of Relation to the lex incorporations, this has created a competitive market for incorporations among the states. Several states have taken advantage of this situation by becoming corporate havens, particularly Delaware and Nevada. Likewise, many jurisdictions apply the internal affairs doctrine internationally, which has permitted offshore financial centres to flourish.