When business owners think about litigation, they often focus on where a lawsuit will be filed.

New York or Delaware? State court or federal court? Commercial Division or another court?

Those are important questions. But there is another issue that can dramatically affect the outcome of a dispute: Which state’s law governs the internal affairs of the company?

The answer is often determined by a long-standing legal principle known as the Internal Affairs Doctrine.

For business owners, investors, directors, and shareholders, understanding this doctrine can be helpful when disputes arise over ownership, control, fiduciary duties, or corporate governance.

What is the Internal Affairs Doctrine?

The Internal Affairs Doctrine is a choice-of-law rule that provides that disputes involving a corporation’s internal governance are generally governed by the law of the state where the corporation was formed—not necessarily the state where it operates or where the lawsuit is filed.

In other words, if your company is incorporated in Delaware but operates primarily in New York, many governance disputes may still be decided under Delaware corporate law.

Likewise, a corporation formed in another state—or even another country—may find that the law of its jurisdiction of incorporation governs important issues even when litigation is pending in a New York court. Recent decisions from New York’s highest court reaffirm this longstanding principle and emphasize that, with limited exceptions, the substantive law of the place of incorporation controls matters involving a corporation’s internal affairs.

What Are “Internal Affairs”?

The doctrine generally applies to disputes involving the relationships among the corporation, its directors, officers, and shareholders.

Examples include:

Alleged breaches of fiduciary duty
Corporate governance disputes
Shareholder derivative actions
Director and officer responsibilities
Voting rights
Shareholder rights
Corporate control disputes
Board decision-making
Business-divorce litigation
Certain merger-and-acquisition disputes

These are fundamentally different from ordinary commercial disputes, such as breach of contract claims between unrelated businesses.

Why Business Owners Should Care

Many businesses are formed in states different from where they conduct most of their operations.

For example:

A Rochester company may be incorporated in Delaware.
A Buffalo business may operate nationwide through a Delaware holding company.
A closely held family business may have owners living in multiple states.
Investors may own interests in companies formed outside New York.

When a dispute develops, business owners often assume New York law will automatically apply because the company does business here. That assumption may be incorrect and can become costly.

The governing law may instead be the law of the company’s state of incorporation, and that state’s rules may differ significantly on issues such as:

Fiduciary duties
Shareholder rights
Derivative actions
Director liability
Corporate-governance standards
Available remedies

Those differences can materially affect litigation strategy, available claims, defenses, and ultimately the outcome of the case.

A Recent Reminder from New York’s Highest Court

In 2025, the New York Court of Appeals reaffirmed the strength of the Internal Affairs Doctrine in two closely watched cases involving foreign corporations.

The Court held that New York’s Business Corporation Law does not generally override the Internal Affairs Doctrine. Instead, when disputes concern a corporation’s internal governance, New York courts ordinarily apply the substantive law of the jurisdiction where the corporation was formed.

For businesses operating across state lines, the decision reinforces an important principle: filing suit in New York does not necessarily mean New York corporate law will govern the dispute.

The Connection to Governance Litigation

At The Glennon Law Firm, we frequently advise clients in complex governance disputes involving closely held businesses, professional practices, partnerships, and family-owned companies.

These matters often involve allegations such as:

Majority owner oppression
Breach of fiduciary duty
Misuse of company assets
Improper self-dealing
Deadlock among owners
Removal of directors or officers
Disputes over ownership interests
Business divorces

One of the earliest strategic questions in these cases is determining which state’s law governs the dispute.

That analysis can influence everything that follows—from the viability of claims to available remedies and overall litigation strategy.

The Takeaway

The Internal Affairs Doctrine rarely makes headlines, but it can have a profound impact on high-stakes business litigation.

For owners, directors, shareholders, and executives, understanding where a company is formed is often just as important as understanding where it operates.

When substantial business interests, ownership rights, or corporate control are at stake, determining the governing law should be one of the first questions addressed—not one discovered after litigation is underway.

If you are involved in a dispute concerning the ownership, management, or governance of a business, experienced litigation counsel can help evaluate the applicable law, identify strategic advantages, and protect your interests from the outset.

With offices in Albany, Buffalo, Rochester, and New York City, we can help you across New York State. 

You may learn more about us and how we operate by visiting these pages: About Us and What Sets Us Apart.   

To learn more about these topics, check out our other related blog posts and our Legalities & Realities® Podcast:    

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This blog post is for informational purposes only and does not constitute legal advice. For specific legal counsel, please contact our office directly.  