New York Appellate Court Dismisses Breach Of Fiduciary Duty Claims Under Foreign Law, Clarifying That The Internal Affairs Doctrine Applies To Directors And Officers Even If They Are No Longer Serving At The Time Of Suit
On October 13, 2022, a five-judge panel of the Appellate Division of the New York State Supreme Court, First Department, unanimously reversed a trial court decision and dismissed a breach of fiduciary duty action brought by former shareholders of an online fantasy sports company (the “Company”) against its directors and officers following a merger. Eccles v. Shamrock Cap. Advisors, LLC, Case No. 2022-00866 (N.Y. App. Div. Oct. 13, 2022). The Company was incorporated in Scotland and headquartered in New York. The trial court had upheld the claims under New York law, declining to apply the internal affairs doctrine to former directors and officers. Applying Scots law, the Appellate Division reversed, explaining: “To the extent our past decisions could be interpreted as suggesting otherwise we clarify that the internal affairs doctrine applies to an officer or director at the time of the conduct at issue.”
Plaintiffs were common shareholders, including the founders, former employees, and early investors of the Company. Plaintiffs contended that the directors and preferred shareholders—affiliates of private equity firms that were “late-stage investors”—allegedly orchestrated the transaction process in a manner that enabled preferred shareholders to benefit from the merger and retain an ownership stake while plaintiffs received nothing.
As the Appellate Division noted, under the internal affairs doctrine, “relationships between a company and its directors and shareholders are generally governed by the substantive law of the jurisdiction of incorporation.” Rejecting plaintiffs’ argument that the doctrine only applies to current officers and directors at the time of the lawsuit, the court explained: “Application of the doctrine to former directors protects the parties’ justified expectations, promotes uniformity and predictability of outcome, and prevents different laws from applying to different directors who all engaged in the same challenged transaction simply because of the date on which plaintiff chose to sue.”
The Court, therefore, dismissed for failure to state a claim reasoning that, under Scots law, directors “generally owe fiduciary duties only to their company” and not directly to shareholders (except in certain “special circumstances . . . not present here”). The Court also dismissed aiding and abetting claims because “there is no underlying breach of fiduciary duty.”