Internal Affairs Doctrine of Corporation Not Applied in Another New Jersey Minority Oppression Case

In previous blog posts, I’ve commented on New Jersey’s flexible approach as to which a state’s laws governs the relationships between the shareholders. Almost every state (with the exception of New York and New Jersey) will apply the State’s law where the corporation was formed or incorporated. The "internal affairs doctrine" provides that when litigation involves the internal affairs of a foreign corporation, the Court will usually apply the law where the corporation was formed. Velasquez v. Franz, 123 N.J. 498, 528 (1991). New Jersey law does not find that the location of incorporation is dispositive. See, O’Connor v. Busch Gardens, 255 N.J. Super. 545, 548 (App. Div. 1992). Rather, New Jersey courts apply a flexible "governmental-interest" standard, which requires application of the law of the state with the greatest interest in resolving the particular issue that is raised in the underlying litigation. Gantes v. Kanson Corp., 145 N.J. 478, 484 (1996).

In determining which law should apply, New Jersey courts have adopted the factors set forth in the Restatement (Second) of Conflicts of Laws §6 (1971). Fu v. Fu, 160 N.J. 108, 122 (1999). These factors include:

1. the needs of the interstate and international systems;
2. the relevant policies of the forum;
3. the relevant polices of other interested states and the relative interests of those states in the determination of the particular issue;
4. the protection of justified expectations;
5. the basic policies underlying the particular field of law;
6. the certainty, predictability and uniformity of result; and
7. the ease in the determination of justice.

In Krzastek v. Global Resources Industrial & Power, Inc., 2008 N.J. Super. Unpub. LEXIS 1360 (App. Div. 2008), the Appellate Division considered the appeal of a trial court decision to apply New Jersey law relating to an oppression claim involving a Massachusetts corporation. In that case, the trial court applied New Jersey law because: (a) the plaintiff, a minority shareholder, was a New Jersey resident; (b) the corporation was involved in a single project in the Garden State; and (c) the corporation maintained offices in New Jersey. The Appellate Division considered those facts and engaged in comparison between New Jersey and Massachusetts laws. In doing so, the Appellate Division determined that Massachusetts offered similar protections to oppressed minority shareholders as are afforded under New Jersey law. The only significant difference between Massachusetts and New Jersey laws was that in New Jersey the Courts may award counsel fees and costs to an oppressed minority shareholder. After considering all of those factors, the Appellate Division affirmed the trial court’s application of New Jersey law.

The Krzastek decision is yet another example of New Jersey’s flexible approach in determining the choice of law with regard to foreign corporations who find themselves litigating in the Garden State.

Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.