McDermott International, Inc. was incorporated in Panama and operated worldwide from executive offices in New Orleans. It had no offices, assets, employees, business operations, or other contacts in Delaware. In a 1982 reorganization intended principally to permit foreign earnings to be retained and reinvested without immediate United States income-tax consequences, McDermott Incorporated, a Delaware corporation, became a 92%-owned subsidiary of International. McDermott Delaware received roughly 10% of International's common stock, and International's prospectus disclosed that this voting block could be used to oppose a takeover bid that management believed was contrary to stockholders' interests. About 89.59% of McDermott Delaware shares were tendered in support of the exchange offer.
Stockholders Lewis and Altman sued in the Delaware Court of Chancery to enjoin or rescind the reorganization. They argued that McDermott Delaware, as International's majority-owned subsidiary, could not vote International shares. The Court of Chancery granted partial summary judgment for the plaintiffs, reasoning that Panama would not apply its own law and that Delaware or Louisiana law, both of which prohibit this form of parent-subsidiary cross-voting, should control.
After argument on appeal, International registered with Panama's National Securities Commission. That registration made the Panamanian voting prohibition applicable prospectively, so McDermott Delaware could no longer vote its International shares. The Delaware Supreme Court nevertheless decided the appeal on the factual record before the trial court because the question was important to Delaware corporate law and likely to recur.
Issue #1
Whether the Court should decide the appeal even though International's later registration in Panama made the immediate dispute technically moot.
Holding
Yes. The Court applied the public-importance exception to mootness and decided the legal questions on the facts that existed before the Court of Chancery.
Reasoning
International's postargument registration with Panama's National Securities Commission made the statutory voting restriction applicable and ended McDermott Delaware's present ability to vote International shares. Ordinarily, that change would make the appeal moot.
The Court nevertheless held that the internal-affairs and choice-of-law issues presented were of substantial public importance and had a real effect on Delaware corporate law. Leaving the Chancery ruling unresolved would create uncertainty, so the Court reached the merits based on the record made below.
Issue #2
Whether Panamanian law, as it applied when the Court of Chancery ruled, permitted McDermott Delaware to vote the International shares it held.
Holding
Yes. The uncontroverted evidence established that Panamanian law permitted the subsidiary to vote the parent's shares under the circumstances then presented.
Reasoning
Article 35 of Panama's Cabinet Decree No. 247 barred a majority-owned subsidiary from voting a Panamanian parent's stock, but Article 37 limited that prohibition to corporations registered with Panama's National Securities Commission or whose shares were sold on the Panamanian market. International was neither registered nor publicly marketed in Panama at the relevant time.
Three Panamanian-law experts agreed that no other Panamanian statute prohibited the voting arrangement. Their evidence reflected the private-law principle that conduct is allowed unless prohibited, rather than the plaintiffs' proposed rule that corporate conduct requires an affirmative statutory authorization.
The Court rejected the Chancery court's reliance on Norlin Corp. v. Rooney, Pace Inc. Norlin had treated Panama as effectively declining to regulate corporations outside Article 37, but the Delaware Supreme Court found no textual or evidentiary basis for that conclusion. Article 37 limited only the reach of Articles 34 through 36; it did not disclaim Panama's jurisdiction over International's internal affairs.
Issue #3
Whether Delaware or Louisiana law could displace Panamanian law in deciding the voting rights attached to stock of a Panamanian corporation.
Holding
No. Voting rights in this setting were an internal-affairs question governed by the law of International's place of incorporation, Panama.
Reasoning
Internal corporate affairs are matters peculiar to the relationships among a corporation, its directors, officers, and stockholders. The voting rights of shares in International, including whether a majority-owned subsidiary may vote the parent's shares, concern precisely that internal relationship rather than an ordinary commercial transaction or tort.
Delaware's established conflicts rule applies the law of the jurisdiction of incorporation to a corporation's internal affairs. The rule provides one stable body of governing law for ongoing relationships among the corporation and its participants, enabling planning and avoiding inconsistent obligations and unequal treatment across multiple jurisdictions.
International had no nexus with Delaware: it had no Delaware offices, meetings, operations, agents, employees, or assets. The plaintiffs also conceded that the dispute did not concern the internal affairs of McDermott Delaware. Delaware therefore lacked a basis to impose its own corporate-voting rule on International.
Norlin did not justify a different result. That case involved substantial New York contacts, a hostile-takeover setting, and a transfer intended to place 49% of voting power in management-friendly hands. It also failed to reconcile its approach with Hausman v. Buckley, which recognized the well-established rule that incorporation law governs shareholder-corporation relations. Here, the reorganization placed only about 10% of International's voting power in McDermott Delaware.
Issue #4
Whether constitutional principles independently barred Delaware from applying 8 Del. C. § 160(c) to International's voting arrangement.
Holding
Yes. On these facts, applying Delaware's cross-voting prohibition to International would be inconsistent with due process and the Commerce Clause, as well as Delaware conflicts law.
Reasoning
Due process supports the internal affairs doctrine because directors, officers, and stockholders need fair notice of the law governing their corporate relationships. After full disclosure, an overwhelming majority of McDermott Delaware stockholders tendered into the exchange offer and became holders of International shares; they thereby accepted Panama as the jurisdiction governing International's internal affairs.
The Commerce Clause also protects against subjecting a corporation's internal governance to inconsistent rules in multiple states. If Delaware could regulate International's voting rights despite International's lack of Delaware contacts, other states could likewise impose their divergent internal-governance laws, creating an undue burden on interstate commerce.
The Court read Edgar v. MITE Corp. and CTS Corp. v. Dynamics Corp. of America to confirm that a state generally has no legitimate interest in regulating the internal affairs of a foreign corporation, while each incorporating jurisdiction may regulate the corporations it creates. Delaware had no countervailing local interest sufficient to justify the burden created by applying Section 160(c) to this Panamanian corporation.
The Court also viewed full faith and credit principles as reinforcing the need for a single governing law in internal-affairs disputes, although it recognized that International, as a Panamanian rather than sister-state corporation, did not itself derive rights from the Full Faith and Credit Clause.
Issue #5
Whether Delaware's public policy against parent-subsidiary cross-voting justified overriding Panama law because the arrangement could entrench International's management.
Holding
No. The record did not show an entrenchment scheme or an exceptional public-policy basis for disregarding the internal affairs doctrine.
Reasoning
Delaware law does prohibit a Delaware corporation's majority-owned subsidiary from voting the parent's shares, in part to prevent management from perpetuating itself through cross-ownership. But enforcing that policy against a foreign corporation with no Delaware contacts would improperly alter the law governing that corporation's internal affairs.
The transaction was principally structured for tax reasons, placed only approximately 10% of International's voting power with McDermott Delaware, and was not adopted in response to a takeover threat. Those facts did not establish a Draconian defensive measure or the kind of management-entrenchment conduct addressed in Unocal.
The Court did not foreclose scrutiny of a future takeover-related use of the voting block. It held only that this record did not present a sufficient basis to override Panama law and the internal affairs doctrine.