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Corporations Case Analysis

The decision has two potentially signficant ramifications.

First is the rejection of the internal affairs doctrine entirely, and not merely in part, even when it indisputably should be applied.

The doctrine has two aspects — matters that concern only relations between insiders in the corporation (officers, directors, shareholders, etc.) are always governed by the laws of the state of incorporation; but for matters involving outsiders (such as creditors), only a rebuttable presumption exists in favor of the state of incorporation.

The court rejected the second part of the doctrine in this case, but did not discuss the first. Nevertheless, a sound argument can be made that the doctrine is entirely inapplicable in Wisconsin.

The first part of the internal affairs doctrine is expressly written into Wisconsin statutes, but only for limited partnerships, not corporations. Section 179.81 provides, “the laws of the state under which a foreign limited partnership is organized govern its organization and internal affairs and the liability of its limited partners.”

In contrast, the closest that Wisconsin statutes come to adopting the doctrine for corporations is sec. 180.0747, which provides, “In any derivative proceeding in the right of a foreign corporation, the matters covered by secs. 180.0741, 180.0742 and 180.0744 shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation.” The referenced statutes refer to standing, demand, and dismissal, respectively.

By expressly adopting the internal affairs doctrine for foreign limited partnerships, but not foreign corporations, a strong argument exists that the legislature rejects the doctrine in toto for corporations.

Against this argument — based on plain statutory language and now, the decision in the case at bar — any party seeking application of the doctrine for internal disputes has only common sense on which to stand.

Officers, directors, and shareholders — unlike creditors — are wholly voluntary parties. By becoming an officer, director, or shareholder of a Delaware corporation, common sense demands that those parties be deemed to have agreed that any disputes will be governed by Delaware corporate law.

However, in light of the court’s decision, compounded by the legislature’s apparent rejection of the doctrine for corporations, it seems likely that common sense would lose out.

The second ramification of the decision is the distortion of the five factors in Heath v. Zellmer, 35 Wis.2d 578, 596, 151 N.W.2d 664 (Ct.App.1967), and the definition of “officious intermeddling.”

The court concluded that, “application of Delaware law in this case would constitute officious intermeddling with the laws of Wisconsin.”

This statement misunderstands the purpose of the rule, as is apparent by comparing intermeddling in the judicial arena to intermeddling in daily life. A human being can be an officious intermeddler in the affairs of others, but cannot be an intermeddler in his own affairs.

The very term, “intermeddler,” is redundant, for the word, “meddler” means exactly the same thing. If the surplusage inter serves any purpose, it is only to make clearer that one is meddling in others’ affairs. To meddle in one’s own affairs would have to be called, “officious intrameddling,” a ludicrous expression.

Likewise, a court can officiously intermeddle in the affairs of another state, by applying its own laws to a dispute in which the first state has little to no connection. However, a court cannot officiously intermeddle in its own affairs, either by applying the law of another state, or in any other way.

Similar errors are apparent in the court’s application of the five Heath factors for determining whether to apply the laws of Wisconsin or another state: (1) predictability of results; (2) maintenance of interstate and international order; (3) simplification of the judicial task; (4) advancement of the forum’s governmental interests; and (5) application of the better rule of law.

The fourth factor is largely irrelevant — generally, Wisconsin’s interests will always be advanced by applying Wisconsin law. The fifth factor is wholly variable and unpredictable; Wisconsin law may or may not provide the better rule of law. For purposes of this analysis, in the case at bar, it can be conceded that it does so.

However, when it comes to choice of law involving a corporation incorporated in Delaware, the first three factors should actually weigh in favor of applying Delaware law, not just in this case, but in all cases.

The reality is that, when it comes to issues involving corporate law, most judges and attorneys are more familiar with Delaware law than Wisconsin law.

“Corporations” and “Corporate Finance,” as those courses were taught to those judges and attorneys in law school, might just as well be called “Delaware Corporations” and “Dela-ware Corporate Finance.”

It is noteworthy that, of the three attorneys who participated in oral argument in this case, only one is a Wisconsin attorney; the other two are from Chicago and New York, respectively.

To say that it is simpler for Wisconsin judges to apply Wisconsin corporate law than Delaware corporate law is inaccurate.

As Chief Justice Abrahamson noted in dissent in Lane v. Sharp Packaging Systems, Inc., 2002 WI 28, 251 Wis.2d 68, 640 N.W.2d 788, 816 (Abrahamson, dissenting), “Wisconsin courts often look to Delaware law for guidance on matters of corporate law,” citing HMO-W Inc. v. SSM Health Care Sys., 2000 WI 46, pars. 29-31, 38, 234 Wis.2d 707, 611 N.W.2d 250 (following Delaware law in rejecting application of minority discount in determining “fair value” in dissenters’ rights proceeding); Jacobson v. American Tool Companies, 222 Wis.2d 384, 397, 588 N.W.2d 67 (Ct.Ap
p.1998)(looking to Delaware law to define fiduciary duties); Advance Concrete Form, Inc. v. Accuform, Inc., 158 Wis.2d 334, 344, 462 N.W.2d 271 (Ct.App.1990)(citing Delaware cases to determine whether request to inspect corporate documents was for a “proper purpose”); Schweiner v. Hartford Accident & Indem. Co., 120 Wis.2d 344, 351, 354 N.W.2d 767 (Ct.App.1984)(citing Delaware law for effect of statutory merger on liabilities of merger corporation).

As for predictability, one of the many reasons that businesses incorporate in Delaware, despite having their principal place of business elsewhere, is “predictability of results”; there is a well-developed body of case law to govern corporate law issues, which minimizes uncertainty.

For entities doing business with corporations, as well, incorporation in Delaware provides predictability. Any corporate law attorney, anywhere in the nation, knows what Delaware corporate law provides.

Thus, the Supreme Court’s discussion of predictability misses the mark. The court wrote, “Wisconsin Stat. sec. 180.1704 is clear on its face and puts corporations on notice that, if they choose to transact business in this state, they will be subject to Wisconsin law. Thus, … applying Wisconsin law to the present case will enhance predictability of results for corporations doing business in this state.”

The first sentence may be true as to the corporation itself. However, the second sentence is not necessarily true as to outside parties, such as the creditors in this case. Beloit Corp. is an international corporation; there is no evidence that the creditors in this case ever did any business in Wisconsin.

It is highly probable that some of them never did. The creditors comprising the Trust may have done business with Beloit in any state or any nation in the world, knowing that they were dealing with a Delaware corporation, and assuming Delaware law would govern any issue such as this.

Finally, the second factor, “maintenance of interstate and international order,” also does not weigh in favor of applying Wisconsin law.

In practice, this factor is little more than a restatement of the rule against “officious intermeddling” — Wisconsin courts should not step on the toes of other state courts by imposing their laws on disputes only marginally concerning Wisconsin.

More so than any of the other factors, this one best embodies the reason why choice of law rules exist — some state courts would invariably applying their own laws regardless of whether another state’s were more appropriate. Shirley A. Wiegand, Officious Intermeddling, Interloping Chauvenism, Restatement (Second), and Leflar: Wisconsin’s Choice of Law Melting Pot, 81 Marq.L.Rev. 761, 762-764 (1998).

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However, the factor cannot be used to prevent courts from applying other states’ laws. Just as a state cannot intermeddle by applying other jurisdictions’ laws in its own courts, a court also cannot upset interstate or international order by applying the law of another jurisdiction.

The purpose of this factor is to avoid “invit[ing] retaliation from another state,” and preserve “harmonious and equitable” relations between states. Heath, 35 Wis.2d at 596-597.

How then, can this factor weigh against applying Delaware law? Is Delaware is going to retaliate against us by applying our laws in their courts?

Just as the fourth factor will always be either netural or favor applying Wisconsin law, to a lesser or greater degree, this second factor can only be neutral or weigh in favor of not applying Wisconsin law.

Thus, even if one concedes that Wisconsin law provides the better rule of law than Delaware’s, the court’s application of the first three Heath factors distorts choice of law analysis in the corporate law field.

– David Ziemer

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David Ziemer can be reached by email.

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