WHAT LAW GOVERNS DERIVATIVE STANDING FOR CLAIMS AGAINST BOARDS OF FOREIGN CORPORATIONS?

In April 2025, the New York Court of Appeals will hear two appeals that have the potential to reshape derivative standing in New York courts for foreign corporations. In both cases, the trial court and intermediate appellate court dismissed the cases on a number of grounds, including for lack of derivative standing.

But in a rare development, New York’s highest court, which hears only a limited number of appeals, agreed to hear the cases. Both cases test the internal affairs doctrine – the longstanding principle that, as the New York Court of Appeals just affirmed last year in Eccles, “the substantive law of a company’s place of incorporation presumptively applies to causes of action arising from its internal affairs”, which includes derivative suits brought on behalf of the company against its officers and directors for breach of their fiduciary duties.

The plaintiffs in Barclays and Bayer brought derivative claims on behalf of an English and German corporation, respectively, in New York seeking to avail themselves of New York’s rules on derivative standing, which are less onerous than the corresponding requirements of England and Germany.

Plaintiffs argue that they do not need to comply with those requirements under English or German law because the New York legislature had displaced the common law internal affairs doctrine back in 1961 when it enacted the Business Corporation Law (BCL), and so the BCL governs derivative standing as to foreign corporations too, and they have satisfied those BCL standing requirements.

Plaintiffs alternatively argue that even under the internal affairs doctrine, the relevant foreign law requirements for derivative standing are procedural and do not apply in New York courts. These two appeals, therefore, squarely ask the Court of Appeals to reject the application of the internal affairs doctrine to foreign corporations or at least provide further guidance on when New York courts should apply foreign statutes governing derivative standing.

Apr-Jun 2025 issue

Cleary Gottlieb Steen & Hamilton LLP