The Massachusetts Supreme Judicial Court found in favor of a party supported by NELF, holding that the law of the state of incorporation governs internal corporate affairs. NetCentric is a company incorporated under Delaware law with headquarters in Massachusetts. Plaintiff Kevin Harrison, a minority shareholder and former NetCentric employee, sued to recover the value of non-vested stock options. Harrison had signed a Stock Restriction Agreement (the “Agreement”) that detailed how and when his stock in NetCentric would vest. Harrison claimed that the Agreement violated his rights as a minority shareholder/employee under Massachusetts law. NetCentric moved for summary judgment, arguing that under Delaware law the Agreement was fully enforceable. Harrison argued that Massachusetts law (which favors employees in similar circumstances) should govern since the corporation was headquartered in Massachusetts. The trial court agreed with NetCentric and Harrison appealed. The Supreme Judicial Court took the case sua sponte. Historically Massachusetts followed the traditional rule that issues regarding internal corporate governance or obligations were determined by the law of the state of incorporation. However, in a previous decision, Demoulas v. Demoulas Super Markets, Inc., the SJC had applied Massachusetts law to the internal affairs of a dissolved Delaware corporation that had been succeeded by a Massachusetts corporation. Harrison argued Demoulas meant Massachusetts would adopt the “functional approach” to corporate governance issues set forth in the Restatement (Second) of Conflict of Laws. Under that approach, he argued, Massachusetts law should govern because NetCentric was founded and headquartered in Massachusetts.
NELF, on behalf of Associated Industries of Massachusetts, supported NetCentric’s contention that Demoulas did not change prior law. In its decision affirming the trial court, the Court confined Demoulas to its unique facts and explicitly held that Massachusetts adheres to the rule that the state of incorporation dictates the choice of law regarding the internal affairs of a corporation. Consistent with NELF’s policy arguments, the Court explained that this rule best preserves the expectations of the parties and achieves uniform and predictable treatment.