August 20, 2019

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August 19, 2019

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Court: Internal Affairs Yields To Choice Of Law

"Whereof what's past is prologue, what to come"

Youngevity Int'l v. Smith, 2019 U.S. Dist. LEXIS 31526 involved cross motions to dismiss a claim for breach of fiduciary duty.  The plaintiff, a Delaware corporation, argued for the application of California law based on choice of law provisions in an equity purchase agreement and employment agreement with the defendant.  The defendant argued for Delaware law based on the internal affairs doctrine.  

This is an issue that flagged four years ago in this post:

"I want to test the notion that the duties of officers are governed by the law of the state of incorporation.  First, [Corporations Code] Section 2116 mentions only directors . . . .  The failure to specify officers in the statute creates the question, if not the negative implication (expressio unius est exclusio alterius) that officers are not covered by this so-called codification of the internal affairs doctrine.  (Interestingly, the statute by its terms also doesn't address the liability of directors of foreign corporations that are not transacting intrastate business.)

Second, officers, unlike directors, are corporate agents.  (For an explanation of why directors are not agents, see this recent post by UCLA Professor Stephen Bainbridge.)  Under Section 291 of the Restatement (Second) Conflict of Laws, the rights and duties of a principal and agent toward each other are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the parties and the transaction under the principles stated in Section 6 of the Restatement.  Under Section 6, a court should follow the statutory directive of its own state on choice of law.  As noted above, however, Section 2116 is silent as to officers.  In the absence of any such directive, Section 6 lists seven factors ("Hanc marginis exiguitas non caperet”).

Finally, the officer and the corporation may have entered into an employment agreement that includes an explicit choice of law."

Judge Barry Ted Moskowitz sided with the contractual choice of law:

"Though case law concerning a conflict between an internal affairs doctrine and a contractual choice-of-law provision is scarce, it appears that the Ninth Circuit and California Supreme Court both have deferred to choice-of-law provisions before the internal affairs doctrine.  Johnson v. Myers, No. CV-11-00092-JF-PSG, 2011 U.S. Dist. LEXIS 112897, 2011 WL 4533198, at * 8-9 (N.D. Cal. Sept. 30, 2011) (analyzing the Ninth Circuit's and California Supreme Court's approach to conflicting choice-of-law provisions and internal affairs doctrine arguments). Here, Defendant has provided no reason why the Court should set aside the choice-of-law provision. There is a strong presumption in favor of enforcing contractual choice-of-law. Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 464-71, 11 Cal. Rptr. 2d 330, 834 P.2d 1148 (1992) (recognizing strong policy considerations favoring the enforcement of freely negotiated choice-of-law clauses). Additionally, because California is Youngevity's principal place of business, it has a substantial relationship to the parties and their disputes. As such, the Court will enforce the EPA's contractual choice-of-law provision and apply California law."

I discuss Johnson v. Myers in this post from 2011.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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