New York Rejects Extraterritorial Derivative Litigation Against Foreign Issuers

Last week, New York’s highest court reaffirmed the principle that stockholders suing companies derivatively must first satisfy the substantive standing requirements of the jurisdiction in which the company is incorporated. The decisions conclude a campaign, launched by plaintiffs‘ firms in 2020 against several European companies, including Credit Suisse and Novartis, to expose foreign issuers to U.S.-style discovery, settlements, and fees.

The New York Court of Appeals, affirming the orders of dismissal entered by the lower courts, confirmed that the internal affairs doctrine applies. That doctrine, which the court said remains firmly entrenched in New York’s corporate law, provides that, with rare exception, the substantive law of the place of incorporation governs disputes relating to the rights and relationships of corporate shareholders and managers.

In Ezrasons, Inc. v. Rudd, et al. (N.Y. May 20, 2025), one of the cases on appeal, a New York corporation and a beneficial owner of shares in Barclays PLC commenced an action on behalf of Barclays against almost four-dozen current and former Barclays directors and officers and a New York-based affiliate, Barclays Capital Inc. (BCI). The complaint alleged that the individual defendants, aided and abetted by BCI, breached fiduciary duties owed to Barclays under English law, causing significant injuries to the company.

BCI and certain individual defendants moved to dismiss the complaint on various grounds, including that Ezrasons lacked standing under English law to maintain the action because it is not a registered member of Barclays. English law limits the right to maintain a derivative action on behalf of an English corporation to registered members of the corporation and excludes beneficial owners.

Ezrasons conceded that it was not a registered member of Barclays, but argued that New York’s Business Corporation Law (BCL)—namely, sections 626(a) and 1319(a)(2)—authorized it to represent Barclays against its management in New York, regardless of the restrictions imposed by English law. According to Ezrasons, the BCL displaced the internal affairs doctrine and required the application of New York substantive law to standing questions in shareholder derivative litigation brought in New York.

The Court disagreed with Ezrasons. It acknowledged that the legislature may override New York’s internal affairs doctrine, like any other judicially created rule, but affirmed that doing so requires clear and specific legislative intent. After considering the relevant statutory provisions and the 64 years of case law since the BCL was enacted, the Court concluded that the sections of the BCL on which Ezrasons relied do not evince the intent necessary to supersede the internal affairs doctrine.

The doctrine, and its primacy in New York law, ensures that only one jurisdiction has authority to regulate a corporation’s internal affairs, avoiding the confusion and conflicting demands that would otherwise result. The doctrine also creates predictability and respects stakeholders‘ choices by giving effect to the laws of the jurisdiction they have chosen to govern a corporation’s affairs. By upholding the doctrine, the appeals provide comfort to foreign issuers that in New York courts they will be able to rely on the laws of their home jurisdiction. Companies seeking additional comfort may consider including forum selection or arbitration clauses in their articles of association.