Transnational Corporate Law Litigation

William J. Moon is Professor of Law at the University of Maryland School of Law. This post is based on his recent article forthcoming in the Duke Law Journal. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.

By now, corporate law scholars and practitioners in the United States widely appreciate the importance of Delaware’s legal compliance jurisprudence. While directors and officers are vested with almost unlimited discretion to make business decisions, that discretion does not extend to corporate lawbreaking. As a matter of black letter law, directors and officers are betraying shareholders when they knowingly enabling the corporation to violate “positive law.”

In my recent paper, titled “Transnational Corporate Law Litigation” (forthcoming in the Duke Law Journal), I explain how Delaware’s legal compliance jurisprudence can be activated to deter corporate lawbreaking in foreign nations. It presents a doctrinal blueprint explaining why violations of foreign law can trigger powerful fiduciary duty claims in the United States against directors and officers of American corporations.

These suits, which rely on shareholders—and the pecuniary motive of plaintiffs’ lawyers—can constitute an important paradigm shift in how corporate lawbreaking with catastrophic societal consequences committed outside of the territory of the United States can be held accountable in U.S. courts. To date, deterring corporate lawbreaking abroad has been pursued perhaps most prominently as a matter of a legal theory recognizing the extraterritorial application of American tort law for violations of international law alleged to have been committed or aided by corporations abroad. Relying on a federal statute colloquially known as the Alien Tort Statute, litigators have brought hundreds of lawsuits in federal court over the past several decades with varying degrees of success. For better or worse, recent cases in the Supreme Court restricting the territorial scope of federal statutes have delivered a near-death knell to these cases going forward. In the latest Alien Tort Statute case decided in 2021, the Supreme Court held in Nestlé USA, Inc. v. Doe that plaintiffs, who were allegedly trafficked as children to engage in slave labor on cocoa plantations in the Ivory Coast, could not sue American corporations that supported those plantations because most of the relevant conduct occurred abroad.

In presenting a blueprint for litigators to bring suits that can be conceptualized as transnational corporate law litigation, the paper draws on the factual record from well-known Alien Tort Statute cases to illustrate how corporate lawbreaking abroad can trigger viable corporate governance claims in the United States. Unlike Alien Tort Statute cases, shareholder suits would frame the illegal activities abroad not as torts in violation of international law actionable under a federal statute, but as fiduciary duty claims against directors and officers for enabling American corporations to violate foreign domestic laws.

While not without their own share of well-documented problems, shareholder suits carry with them several distinct advantages when it comes to deterring corporate lawbreaking abroad. First, fiduciary duty claims brought by shareholders under applicable state law are not bound by the restrictive canon of statutory interpretation limiting the territorial reach of federal statutes. Instead, American corporate law applies extraterritorially due to a choice of law rule called the internal affairs doctrine that mandate the application of the corporate law of the firm’s state of incorporation regardless of the location of corporate activity. Second, unlike other civil suits pleading the extraterritorial application of American law that often do not survive jurisdictional challenges in American courts, courts of the firm’s place of incorporation—most prominently Delaware in the United States—typically adjudicate shareholder claims even for corporations that maintain no operations in the United States. Fiduciary duty suits against directors and officers are bread and butter corporate governance matters that Delaware courts have repeatedly claimed stake over adjudicating, even when involving predominantly foreign facts. These shareholder suits can powerfully impact the behavior of directors and officers by shaping the social norms governing loyal fiduciary behavior when it comes to transnational business operations.

Of course, it may appear at first blush that foreign law may be beyond the competency of what directors and officers of modern American corporations ought to be concerned about. But the concept of transnational corporate law litigation should not be understood as requiring the corporate leadership to be versed in the laws of every country. It is, rather, a call that the management of firms that maintain significant operations in foreign nations put in good faith efforts to comply with local law. It is a framework designed to better recognize the range of external laws that bind American corporations in an increasingly globalizing economy.

In some respects, transnational corporate law litigation is necessitated by the nature of American corporate law. While the territorial reach of corporate law in the United States remained local up until the twentieth century, state corporate law began to cross over state boundary lines during the twentieth century due to the surge in interstate economic activity. Today, America’s largest corporations today operate not within the confines of the territorial borders of the United States but maintain a truly global footprint. Time has come to recognize the reality that American corporate law transcends national boundaries due to the surge in transnational business activity.

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