The First Department of the New York Supreme Court Appellate Division last week upheld the principle that stockholder plaintiffs may pursue derivative litigation in the United States only when they comply with the substantive standing requirements set by the jurisdiction of incorporation. Haussmann, et al. v. Baumann, et al., (1st Dep’t June 22, 2023). The ruling should put to an end a concerted campaign by the plaintiffs’ bar to sidestep such limitations in favor of New York’s more permissive discovery rules and derivative litigation standards.
In 2020, a well-capitalized coalition of stockholder plaintiffs’ firms launched a fusillade of derivative actions in New York state court against blue-chip European companies, including Deutsche Bank, Credit Suisse, Barclays, Novartis, and Volkswagen. The first of these suits was filed against Bayer AG and various of its executives and advisors, alleging breaches of fiduciary duty in connection with the company’s 2018 acquisition of the Monsanto Company. The plaintiff stockholders made no effort to establish a right to sue Bayer derivatively under German law. They instead argued that New York law should control, invoking various provisions of the State’s corporate statute and broad arguments about stockholders’ entitlement to sue. The trial court dismissed the action under German law and plaintiffs appealed to the First Department.
Affirming the trial court ruling, the appellate court ruled that “the internal affairs doctrine mandated dismissal for lack of [derivative] standing.” “[I]n derivative actions,” the court held, courts must apply “foreign law on substantive issues, including those affecting a party’s right to sue.”
The decision leaves no doctrinal room for any of the international derivative actions filed in the recent litigation campaign and should ensure that none survive. The ruling thus rejects the plaintiffs’ bar’s efforts to transform New York into a global clearinghouse for derivative claims against multinational corporations — and reaffirms the State’s long-standing deference to the authority of incorporating jurisdictions to establish the substantive rights of their corporations’ stockholders.