The case of McDermott Incorporated, a Delaware Corporation, Defendant Below, Appellant, v. Harry Lewis and Nina Altman, Plaintiffs Below, Appellees (531 A.2d 206) adjudicated by the Supreme Court of Delaware on September 16, 1987, presents a pivotal examination of the application of the internal affairs doctrine to foreign corporate entities. This case marks an important legal milestone by addressing whether a subsidiary incorporated abroad can vote the shares it holds in its parent company under the parent’s jurisdiction, particularly when the foreign jurisdiction’s laws permit such actions even if the parent’s state law does not.

The plaintiffs, Harry Lewis and Nina Altman, shareholders of McDermott Delaware, contested the 1982 corporate reorganization that transformed McDermott Delaware into a 92%-owned subsidiary of McDermott International, a Panamanian corporation. The key issue revolved around McDermott Delaware's right to vote its 10% stake in McDermott International—a practice permissible under Panamanian law but prohibited under Delaware law.

The Delaware Supreme Court reversed the Court of Chancery's partial summary judgment, which had previously barred McDermott Delaware from voting its shares in the parent Panamanian corporation. The Supreme Court held that Delaware courts must apply Panamanian law to the internal affairs of McDermott International, as there was no significant nexus between International and the State of Delaware. Consequently, the prohibition under Delaware law did not extend to International, allowing McDermott Delaware to exercise its voting rights in International.

Precedents Cited

The judgment references several key precedents to substantiate its stance:

• NORLIN CORP. v. ROONEY, PACE INC. (2d Cir. 1984): This case prohibited a subsidiary from voting shares in its Panamanian parent, which the Court of Chancery had erroneously applied to the McDermott case.
• HAUSMAN v. BUCKLEY (2d Cir. 1962): Established the internal affairs doctrine, emphasizing that a corporation's internal matters are governed by the laws of its state of incorporation.
• EDGAR v. MITE CORP. (457 U.S. 624, 1982): Reinforced that states lack jurisdiction to regulate the internal affairs of foreign corporations under the commerce clause.
• CTS CORP. v. DYNAMICS CORP. OF AMERICA (1987): Affirmed that states may regulate only their own corporations without infringing on the internal affairs of foreign entities.

The Court of Chancery had relied on Norlin Corp. to support its decision; however, the Supreme Court of Delaware found Norlin inapplicable due to differing factual contexts and insufficient analysis of Panamanian law constraints.

Legal Reasoning

The Court's reasoning hinged on the "internal affairs doctrine," a conflict of laws principle dictating that the internal corporate affairs of a corporation are governed by the law of its state of incorporation. In this case, since McDermott International was incorporated in Panama and had no substantial ties to Delaware, Panamanian law should prevail over Delaware's statutes.

The Court underscored that applying Delaware's Section 160(c), which prohibits a majority-owned subsidiary from voting its parent’s shares, to a Panamanian corporation would infringe upon constitutional principles such as due process and the commerce clause. These constitutional provisions protect corporations from being subjected to multiple states' laws, which could lead to regulatory conflicts and uncertainty.

Furthermore, the Court highlighted that Panamanian law, specifically Articles 35 and 37 of the Panamanian Cabinet Decree No. 247, permitted a subsidiary to vote its shares in the parent corporation provided certain conditions were met—conditions that were fulfilled by McDermott International.

Additionally, the Court criticized the lower court's failure to adequately consider directly relevant Panamanian legal opinions and emphasized that Norlin did not provide a sufficient rationale for overriding the internal affairs doctrine in this context.

Impact

This judgment reaffirms the sanctity of the internal affairs doctrine, especially concerning multinational corporations. By upholding the application of the parent company's home jurisdiction's laws over the internal affairs of foreign subsidiaries, Delaware law ensures predictability and respects international legal boundaries.

The decision sets a clear precedent that Delaware courts will not impose their corporate statutes on foreign entities without a significant nexus to the state. This protects Delaware's reputation as a corporate haven by assuring international corporations that their internal governance will not be meddled with unless they have substantial connections to Delaware.

Future cases involving cross-border corporate structures will reference this decision to determine jurisdictional boundaries and the applicability of state laws to multinational corporate governance.

Internal Affairs Doctrine

The internal affairs doctrine is a legal principle that dictates that a corporation's internal matters—such as management structure, shareholder rights, and fiduciary duties—are governed exclusively by the laws of the state in which the corporation is incorporated. This ensures consistency and predictability in corporate governance, especially for businesses operating across multiple jurisdictions.

Full Faith and Credit Clause

Found in Article IV, Section 1 of the U.S. Constitution, the Full Faith and Credit Clause requires that states recognize and honor the public acts, records, and judicial decisions of other states. However, its application has limitations, especially concerning the internal affairs of corporations incorporated overseas.

Due Process Clause

Embedded in the Fourteenth Amendment of the U.S. Constitution, the Due Process Clause ensures that individuals and entities are not deprived of life, liberty, or property without appropriate legal procedures. In this context, it protects corporations from being unfairly subjected to foreign state laws without proper jurisdictional ties.

Commerce Clause

Also part of the U.S. Constitution, the Commerce Clause grants Congress the power to regulate commerce among the states. It serves as a constitutional barrier against states passing laws that could impede interstate or international trade. In this case, applying Delaware's corporate laws to a Panamanian corporation could disrupt international business operations, violating the Commerce Clause.

The Delaware Supreme Court's decision in McDermott Inc. v. Lewis and Altman firmly upholds the internal affairs doctrine, emphasizing that a state's corporate laws do not extend to foreign corporations without significant ties. By applying Panamanian law to the internal affairs of McDermott International, the Court ensures respect for international corporate governance and protects Delaware's own legal framework from overreach.

This judgment reinforces the importance of jurisdictional boundaries in corporate law and affirms the necessity of adhering to the legal principles that govern multinational business operations. Corporations can thus operate with greater certainty, knowing that their internal governance will be subject to a consistent and predictable legal environment based on their place of incorporation.