On May 23, 2024, the New York Court of Appeals reversed the dismissal of breach of fiduciary duty claims brought by former shareholders of a fantasy sports company (the “Company”) against its directors and other defendants following a merger. Eccles v. Shamrock Capital Advisors, LLC, No. 49 (N.Y. May 23, 2024). The Company was incorporated in Scotland and headquartered in New York. As we reported previously, the New York State Appellate Division had found that the trial court erred in applying New York—rather than Scots—law and dismissed the claims. On appeal, the New York Court of Appeals held that the Appellate Division “correctly concluded” that Scots law applied under the internal affairs doctrine. The Court of Appeals nevertheless reversed the dismissal and found that the complaint adequately pleaded Scots law claims for breach of fiduciary duties.
Under the Company’s ownership structure, preferred shareholders were entitled to be compensated first in the event the Company were to be acquired. Plaintiffs were common shareholders, including founders, former employees, and early investors of the Company, who received nothing in connection with the transaction. Plaintiffs alleged that defendants undervalued the Company and “engaged in a scheme designed to ensure that [the Company’s] preferred shareholders exclusively would benefit from the merger.” Plaintiffs thus asserted that defendants breached their fiduciary duties to the common shareholders.
The Court of Appeals “clarif[ied]” that—under the internal affairs doctrine—“the substantive law of a company’s place of incorporation presumptively applies to causes of action arising from its internal affairs,” including the relationships between directors and shareholders. The Court explained that the internal affairs doctrine represents “important interests,” including “providing consistency to legal obligations” in the corporate context and “protect[ing] the interests and expectations of shareholders by giving effect to their choice as to what jurisdiction’s laws will govern the corporation’s affairs.” The Court thus “decline[d] to create any broad exceptions to that presumption.” Instead, the Court held: “To overcome this presumption and establish the applicability of New York law, a party must demonstrate both that (1) the interest of the place of incorporation is minimal—i.e., that the company has virtually no contact with the place of incorporation other than the fact of its incorporation, and (2) New York has a dominant interest in applying its own substantive law.”
Here, the Court found that plaintiffs’ allegations did not meet either requirement to overcome the presumption of the internal affairs doctrine. As to the interest of Scotland, the Court highlighted, among other factors, that the Company had offices in Scotland and its Articles of Association “expressly referenced the [Scots] Companies Act as the governing law.” The Court also noted that only 10-15% of the Company’s revenue was derived from New York customers and held that the location of the Company’s principal office and board meetings in New York did not give rise to an “overriding interest” in the application of New York law.
Nevertheless, the Court found that plaintiffs’ allegations—“viewed in their most favorable light and according them every possible favorable inference”—were sufficient to state a claim that defendants owed and breached fiduciary duties under Scots law. Accordingly, the Court reversed the dismissal and reinstated the claims.
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