Process Bylaws and the Internal Affairs Doctrine

There has been a great deal of ink spilled over the recent spate of bylaws coming out of Delaware that regulate process. Some dictate the forum where actions can be brought (specifying Delaware for the most post). Others provide for fee shifting bylaws. To the extent plaintiffs do not "substantially prevail," they may be required to pay the company's fees.

The bylaws are very different from those permitted in the past. These do not regulate the substance of the relationship between managers and owners, they regulate and interfere with the process involved in litigating underlying substantive violations. In theory, for example, they would allow a company to shorten the statute of limitations for filing a complaint or shortening the time period for filing or answering motions.  

A commonly used definition of the internal affairs doctrine is contained in Edgar v. Mite, a 1982 Supreme Court opinion. 457 US 624, 646 (1982) ("The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands."). The doctrine recognizes that only one state should control the internal affairs of a corporation (matters "peculiar" to the relationship between "current" managers and owners) in order to avoid "conflicting demands."

The process oriented bylaws do not address "conflicting demands." The forum selection bylaws do restrict causes of action to a single jurisdiction but they are really designed to ensure that Delaware jurists are the decision maker. Fee shifting bylaws do not in any way implicate "conflicting demands" (particularly when applicable to federal causes of action) nor do they necessarily involve "current" managers and shareholders.

In short, these bylaws arguably do not implicate the "internal affairs" doctrine. To the extent that they do not, courts considering the application of the bylaws will not be obligated to give weight to the state of incorporation but would only be required to apply the law of the state that would otherwise have jurisdiction over the case under traditional choice of law principles.

J Robert Brown Jr.