McDermott Inc. v. Lewis

Supreme Court of Delaware · Corporations

CorporationsInternal affairs doctrineChoice of lawForeign corporationsVoting rightsPanamanian corporationsubsidiary voting parent shareschoice of law

Facts

After a 1982 reorganization, McDermott Delaware, a Delaware corporation, became a 92%-owned subsidiary of McDermott International, a Panamanian corporation, and McDermott Delaware held about 10% of International's common stock. International had executive offices in New Orleans but no offices, operations, employees, agents, meetings, assets, or business in Delaware. Uncontroverted expert evidence on Panamanian law showed that, on the facts before the trial court, Panama permitted McDermott Delaware to vote its shares in International because the relevant Panamanian voting prohibition did not apply to International. The Court of Chancery nevertheless held that McDermott Delaware could not vote those shares.

Issue

Whether Delaware could apply its own prohibition on subsidiary voting of parent shares to prevent a Delaware subsidiary from voting stock it held in its Panamanian parent, when Panamanian law permitted the practice on the facts before the trial court. More specifically, the court had to decide whether the matter was governed by Panama law under the internal affairs doctrine.

Rule

Issues involving a corporation's internal affairs are governed by the law of the state or nation of incorporation. Under Delaware conflict-of-laws principles, and subject only to the rarest situations, constitutional principles of due process and the commerce clause require application of the incorporating jurisdiction's law to matters concerning the relationships inter se of the corporation, its directors, officers, and shareholders.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Shore Fabrication, Inc., a Nevada corporation, owns 88% of Harbor Ridge Tools, Inc., a Delaware subsidiary. Harbor Ridge holds 12% of North Shore's voting stock. North Shore has executive offices in Houston, no offices or employees in Delaware, and undisputed expert affidavits state that Nevada law permits Harbor Ridge to vote those shares.

In a Delaware action by Harbor Ridge stockholders seeking to block the vote, which law should the court apply to decide whether Harbor Ridge may vote North Shore shares?

Explanation. The majority required a two-step inquiry: first determine whether the incorporating jurisdiction's law permits the practice; if it does, then apply the internal affairs doctrine if the matter concerns relationships inter se of the corporation, directors, officers, and shareholders. Subsidiary voting of parent shares is an internal governance issue of the parent corporation, so the law of the parent's place of incorporation governs. Delaware may not substitute its own statute merely because the subsidiary is a Delaware corporation. (Derived from McDermott Inc. v. Lewis (n.d.).)