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Shareholder Takeaways From NY Internal Affairs Doctrine Suit
By Douglas Hirsch and James Ancone (June 24, 2025, 5:25 PM EDT)
In an important ruling for shareholders, directors and officers of foreign corporations, the Court of Appeals of the State of New York in Ezrasons Inc. v. Rudd held on May 20 that the beneficial owner of shares of Barclays PLC a bank holding company incorporated under the laws of England and Wales lacked standing to file derivative claims against Barclays directors and officers in New York court.
In reaching that conclusion, the court in a 6-1 decision applied what the opinion called New York's "firmly entrenched" internal affairs doctrine and rejected the plaintiff's argument that, even though it had no standing to sue derivatively under English law, New York's Business Corporation Law granted it the right to file derivative claims in New York court against Barclays directors and officers.[1]
The internal affairs doctrine is a "choice-of-law rule providing that, with rare exception, the substantive law of the place of incorporation governs disputes relating to the rights and relationships of corporate shareholders and managers," according to the decision.[2]
The court's decision is a win for all corporate stakeholders seeking stability and predictability in resolving disputes between a corporation's shareholders and its directors and officers.
The Ezrasons Decision
The lawsuit was filed in the Commercial Division of the Supreme Court of the State of New York, County of New York, by Ezrasons Inc. The complaint asserted derivative claims against current and former Barclays directors and officers, alleging that they breached fiduciary duties owed to Barclays under English law and that those breaches damaged the company.
Significantly, the plaintiff admitted that it was a beneficial owner not a registered owner of Barclays shares.
Based on this, the defendants moved to dismiss the complaint for lack of standing, arguing that under New York's internal affairs doctrine and substantive English law, the right to maintain a derivative claim on behalf of an English corporation is limited to registered members of the corporation whose names are recorded on the company's official register of members.
Douglas Hirsch
James Ancone
The plaintiff countered that the internal affairs doctrine did not apply. Its principal argument was that Section 626(a) of New York's Business Corporation Law displaced the internal affairs doctrine and granted certain classes of persons and entities standing to sue derivatively on behalf of a foreign corporation in New York court despite conflicting foreign substantive law.
The court concluded that Section 626(a) of the Business Corporation Law did not unambiguously override the well-established internal affairs doctrine as it applies to shareholder derivative standing.
Importantly, the court emphasized that "[u]nder the internal affairs doctrine … foreign substantive law controls in the event of any conflict between New York law and the law of a company's place of incorporation on matters relating to its internal affairs."[3]
Key Takeaways
One key takeaway from the Ezrasons ruling is that New York litigants involved in derivative actions will focus on the threshold legal issue of whether a foreign rule whether that rule governs a shareholder's right to sue on behalf of the company or provides a standard of conduct with which a director or officer must comply is "substantive" or "procedural."
If it is substantive, then, under the logic of the Ezrasons decision, a New York court will, with rare exception, apply that rule to the New York case under the internal affairs doctrine.
If the rule is deemed procedural, then the foreign rule will not apply in the New York case. The court in Ezrasons did not conduct this threshold analysis because the plaintiff had not preserved the argument for appeal.[4]
One example of the substantive versus procedural analysis and its significant impact on the derivative claims at issue — is the Court of Appeals' prior 2017 decision in Davis v. Scottish Re Group Ltd., which also addressed an issue of derivative standing.[5]
In that case, the court held that a minority shareholder of a company incorporated in the Cayman Islands was not required to comply with a Cayman Islands rule relating to derivative actions because that rule was procedural and not substantive.[6] Whether the Cayman Islands rule was substantive or procedural was critical.
If the Cayman Islands rule had been substantive, it likely would have required the shareholder to have obtained the permission of the Grand Court in the Cayman Islands to bring the derivative claims before proceeding with his derivative claims in New York state court.[7]
In the wake of the Ezrasons decision, shareholders and managers of foreign-incorporated companies will no doubt seek to invoke foreign rules that they believe are substantive and helpful to their legal positions in New York.
For example, the British Virgin Islands Business Companies Act mandates that any shareholder attempting to file derivative claims on behalf of a British Virgin Islands-incorporated company must first obtain leave from a British Virgin Islands court.[8]
That type of foreign rule will provide fertile ground for corporate stakeholders to argue over whether it
should be applied in a New York lawsuit that involves derivative claims on behalf of the British Virgin Islands-incorporated entity.
The Ezrasons decision is clear that, if such a rule is determined to be substantive, then it will apply in a New York lawsuit. So, one of the next legal battles in derivative litigation that likely will play out in the New York courts will be over the substantive versus procedural designation of certain foreign rules.
The Ezrasons decision also provides important practical guidance. For shareholders in foreign corporations, the decision is a strong reminder that New York courts will, with rare exception, apply the substantive law where the corporation was organized to determine whether the shareholder has the right to file derivative claims against directors and officers in New York court. If applicable foreign law is not identified and complied with, an otherwise valuable derivative claim could be dismissed at the beginning of the case for lack of standing.
On the opposite side of that coin, if a shareholder files derivative claims against a foreign corporation's directors and officers in New York, those directors and officers can avail themselves of defenses provided by substantive foreign law including a defense of lack of shareholder standing and be reasonably certain that the New York court will apply that applicable foreign law.
In the end, the Ezrasons decision promotes the primary rationales for New York's internal affairs doctrine: predictability and ensuring that a corporation is not "faced with conflicting demands."[9] That is an important goal for all corporate stakeholders and their legal advisers, no matter which side of the "v." they find themselves on.
Douglas R. Hirsch is a partner, founding member and co-head of the litigation department at Sadis & Goldberg LLP
James Ancone is a partner at the firm.
Disclosure: While at a prior firm, Ancone represented defendants in the Davis v. Scottish case mentioned in the article.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Ezrasons, Inc. v. Rudd, __ N.E.3d __, 2025 WL 1436000, at *1 (May 20, 2025).
[2] Id.
[3] Id. at *5.
[4] Id. at *1.
[5] 30 N.Y.3d 247 (2017).
[6] Id. at 250.
[7] Id. at 253.
[8] Section 184C, available at https://www.bvifsc.vg/sites/default/files/bvi_business_companies_act.pdf
[9] Ezrasons, 2025 WL 1436000, at *4.