The NAM and other business groups filed an amicus brief urging the U.S. Supreme Court to review an adverse decision from the California Supreme Court on an issue involving the internal affairs of a corporation. Normally internal affairs, such as the requirements that apply when a shareholder wants to bring a derivative suit on behalf of the corporation against the officers or directors, are governed by the state in which the company is incorporated. In this case, the lower court ruled that a California statute applies to the relationship between the corporation and its directors and officers, including a provision for treble damages liability. The corporation is incorporated in Delaware, which does not allow a treble damages remedy.
The issue on appeal is whether the Commerce Clause and Due Process Clause prohibit one state from substituting its own substantive law for that of the state of incorporation. Our brief argues that only one state should have the authority to regulate a corporation's internal affairs, to avoid conflicting demands. Directors must be able to understand the rules and not have to guess as to which states might assert authority. Our free market system depends on uniform and predictable legal requirements. In addition, due process requires that directors be able to know in advance what law applies to their activities.
This conflict can also arise in cases involving whether a former stockholder has standing to bring suit, whether corporate restructuring must be voted on by shareholders as a single class, whether cumulative voting is allowed, whether shareholders may inspect corporate records, and other internal corporate issues. The issue is important because both California and New York, two of the nation's most important economic powerhouses, purport to regulate out-of-state corporations' internal affairs. Since half of all U.S. publicly traded corporations are incorporated in Delaware, conflicts are bound to arise, and the Supreme Court must resolve this dilemma.
The NAM joined with Technology Network, the Chamber of Commerce, the California Chamber of Commerce, the California Manufacturers and Technology Assn., and the California Business Roundtable in this brief. The Court declined to hear the appeal on October 2, 2006.