Broida v. Bancroft

• Decision Date: 23 July 1984
• Court: New York Supreme Court — Appellate Division
• Parties: Herbert BROIDA, et al., for themselves and on behalf of all other holders of Dow Jones & Company, Inc. stock similarly situated, and in the right of Dow Jones & Company, Inc., derivatively, Appellants, v. Bettina BANCROFT, et al., Respondents.

Page 333

478 N.Y.S.2d 333

103 A.D.2d 88

Herbert BROIDA, et al., for themselves and on behalf of all other holders of Dow Jones & Company, Inc. stock similarly situated, and in the right of Dow Jones & Company, Inc derivatively, Appellants, v. Bettina BANCROFT, et al., Respondents.

Supreme Court, Appellate Division Second Department.

July 23, 1984.

Wilson, Elser, Edelman & Dicker, New York City (Edward J. Boyle, Steven Kent, New York City, and Mary E. Reisert, Port Chester, of counsel), for appellants.

Patterson, Belknap, Webb & Tyler, New York City (Frederick T. Davis, David E. Moran and Richard J. Tofel, New York City, of counsel), for respondents.

Before TITONE, J.P., and MANGANO, GIBBONS and O'CONNOR, JJ.

TITONE, Justice Presiding.

In this shareholders' derivative action, plaintiffs appeal from two orders of the Supreme Court, Suffolk County. The first order granted defendants' cross motion to dismiss the complaint, the court finding that the litigation concerned the internal affairs of a foreign corporation and "the exercise of discretion * * * refusjurisdiction". The second order was made upon reargument and adhered to the original determination. We conclude that, in light of the substantial nexus of this litigation with New York, it was an improvident exercise of discretion to decline jurisdiction.

In January, 1984, the board of directors of the defendant Dow Jones & Company (hereinafter Dow) announced that a recapitalization stock-split plan would be submitted for ultimate approval at the annual meeting of Dow's stockholders. The plan provided for the issuance of a stock dividend of one share of newly issued class B stock for every two shares of existing common stock. The new class B stock would have 10 voting rights per share, while the existing common stock would continue to retain a single vote per share. In addition to the radical change in voting rights, the plan would also place severe restrictions on the transferability of the new class B common shares.

The stated purpose of the reorganization is to substantially benefit Dow's majority shareholder group, all members of a single family owning 56.2% of Dow stock. If ratified and implemented, the proposal would enable the family to sell more than 50% of their present holdings, thereby obtaining needed personal capital, while simultaneously retaining voting control of the company.

In order to protect their interest from these consequences, the plaintiffs, shareholders of Dow, brought this action on behalf of themselves and all other minority shareholders similarly situated, and on behalf of Dow derivatively, for permanent injunctive relief. By motion, they sought a preliminary injunction and expedited discovery. Defendants opposed plaintiffs' motion and cross-moved to dismiss the action upon the ground that it concerned the "internal affairs" of a foreign corporation, Dow having been incorporated in Delaware.

Following oral argument, Special Term granted the cross motion, thus rendering plaintiffs' motion for a preliminary injunction and other relief moot. We expedited the appeal and temporarily enjoined Dow from putting the recapitalization plan into effect. We now remit the matter to the Supreme Court, Suffolk County, for further proceedings.

At one time, many jurisdictions followed a doctrine to the effect that the courts of one State would not "interfere with or control by injunction or otherwise the management of the internal affairs of a corporation organized under the laws of another State but leave controversies as to such matters to the courts of the State of the domicile" (Rogers v. Guaranty Trust Co., 288 U.S. 123, 130, 53 S.Ct. 295, 297, 77 L.Ed. 652; see Jurisdiction of Actions or Proceedings Involving Internal Affairs of Foreign Corporations, Ann. 155 A.L.R. 1231; 17 Fletcher, Cyclopedia of Corporations § 8425). On this basis, suits brought by domestic shareholders against foreign corporations were often dismissed when the shareholder was affected solely in his capacity as a member of the corporation (Langfelder v. Universal Laboratories, 293 N.Y. 200, 56 N.E.2d 550; Cohn v. Mishkoff Costello Co., 256 N.Y. 102, 175 N.E. 529).

Older cases tended to view the doctrine as jurisdictional, justifying the refusal to entertain such litigation on the premises that it was inadvisable to interpret the law of another State, that the possibility of conflicting decisions should be avoided, and that the court's judgment might not be enforceable elsewhere (see Ann. 155 A.L.R. 1231, 1233-1235; Comment, Forum Non Conveniens as a Substitute for the Internal Affairs Rule, 58 Col.L.Rev. 234, 234-235). The doctrine was nonetheless subject to numerous exceptions, and other decisions tended to view the question as one of discretion, based on considerations of convenience and public policy, not a lack of power (Goldstein v. Lightner, 266 App.Div. 357, 358, 42 N.Y.S. 338, affd. 292 N.Y. 670, 56 N.E.2d 98; Samuelson v. Starr, 28 Misc.2d 479, 480, 213 N.Y.S.2d 889 Levy v. Pacific Eastern Corp., 153 Misc. 488, 489-490, 275 N.Y.S. 291; 17 Fletcher, Cyclopedia of Corporations §§ 8425-8428; Henn & Alexander, Corporations § 86).

The doctrine was questioned by the Supreme Court of the United States in Williams v. Green Bay & Western R.R. Co., 326 U.S. 549, 66 S.Ct. 284, 90 L.Ed. 311 and abrogated entirely in the Federal courts a year later in Koster v. (American) Lumbermens Mut. Cas. Co., 330 U.S. 518, 527, 67 S.Ct. 828, 835, 91 L.Ed. 1067, the court holding, in effect, that the "internal affairs" rule is not entitled to separate status and should be treated as one facet under general principles of forum non conveniens. The Restatement of Conflicts of Laws Second (§ 84, comment d), and numerous commentators, take the same position (Henn & Alexander, Corporations § 86; Weintraub, Conflict of Laws § 4.33, p. 211; Latty, Pseudo-Foreign Corporations, 65 Yale L.J. 137, 144; Comment, Forum Non Conveniens as a Substitute for the Internal Affairs Rule, 58 Col.L.Rev. 234; Comment, Internal Affairs Rule in Federal Courts: The Erie Problem, 155 U.Pa.L.Rev. 973). The Koster case (supra ) has often been utilized as the focal point for analysis by the courts of this State (e.g., Bader & Bader v. Ford, 66 A.D.2d 642, 645, 414 N.Y.S.2d 132, app. dsmd. 48 N.Y.2d 649, 421 N.Y.S.2d 199, 396 N.E.2d 481; Field v. Jordan, 14 A.D.2d 845, 220 N.Y.S.2d 899; 43-49 Chenango St. Corp. v. Metropolitan Life Ins. Co., 6 Misc.2d 788, 162 N.Y.S.2d 802; Novich v. Rojtman, 5 Misc.2d 1029, 161 N.Y.S.2d 817).

"The vague principle that courts will not interfere with the internal affairs of a corporation whose foreignness is at best a metaphysical concept, must fall before the practical necessities of the modern business world" (Note, 44 Harv.L.Rev. 437, 439). We therefore hold that a suit which concerns the internal affairs of a foreign corporation should be entertained unless the same factors that would lead to dismissal under forum non conveniens principles suggest that New York is an inconvenient forum and that litigation in another forum would better accord with the legitimate interests of the litigants and the public (see Royal China, Inc. v. Regal China Corp., 304 N.Y. 309, 312-313, 107 N.E.2d 461; Goldstein v. Lightner, 266 App.Div. 357, 42 N.Y.S. 338, affd. 292 N.Y. 670, 56 N.E.2d 98, supra; Weintraub, Conflict of Laws § 4.33, p. 211). As succinctly put in the Restatement, "court will exercise jurisdiction over an action involving the internal affairs of a foreign corporation unless it is an inappropriate or an inconvenient forum for the trial of the action" (Restatement, Conflict of Laws 2d, § 313).

Consideration of all relevant factors compels the conclusion that plaintiffs should not be deprived of their chosen forum (cf. Westwood Assoc. v. Deluxe Gen., 53 N.Y.2d 618, 438 N.Y.S.2d 774, 420 N.E.2d 966, affg. 73 A.D.2d 572, 422 N.Y.S.2d 1014; Irrigation & Ind. Development Corp. v. Indag S.A., 37 N.Y.2d 522, 375 N.Y.S.2d 296, 337 N.E.2d 749; Fertel v. Resorts Int., 35 N.Y.2d 895, 364 N.Y.S.2d 891, 324 N.E.2d 360; Silver v. Great Amer. Ins. Co., 29 N.Y.2d 356, 328 N.Y.S.2d 398, 278 N.E.2d 619). Defendants have not carried their burden of establishing that litigation in New York would be inconvenient and that the ends of justice and the convenience of the parties would best be served if the litigation were to proceed elsewhere (see Islamic Republic of Iran v. Pahlavi, 62 N.Y.2d 474, --- N.Y.S.2d ----, --- N.E.2d --- Bader & Bader v. Ford, 66 A.D.2d 642, 645, 414 N.Y.S.2d 132, app. dsmd. 48 N.Y.2d 649, 421 N.Y.S.2d 199, 396 N.E.2d 481, supra ).

Plaintiffs, as New York residents, are presumptively entitled to utilize their judicial system for dispute resolution (McLaughlin, Practice Commentaries, McKinney's Cons. Laws of N.Y., Book 7B, CPLR C. 301:4, p. 5; C. 327:1, pp. 238-239, 1983-1984 pocket part; Slaughter v. Waters, 41 A.D.2d 810, 342 N.Y.S.2d 180). In fact, New York has a special responsibility to protect its citizens from questionable corporate acts when a corporation, though having a foreign charter, has substantial contacts with this State (e.g., Western Airlines v. Sobieski, 191 Cal.App.2d 399, 12 Cal.Rptr. 719; Dudley v. Jack Waite Mining Co., 49 Wash.2d 867, 307 P.2d 281; s...