Insider trading and the internal affairs rule

Christine Hurt writes about Friese v. Superior Court, in which a California appellate court allowed an insider trading suit to proceed against insiders of a Delaware corporation under California law. The defendants have now filed a cert petition, raising commerce clause and due process issues. Christine notes that she and I blogged about similar issues in connection with an Oracle derivative suit against Larry Ellison.

The question is whether insider trading claims should be covered by the corporate "internal affairs" rule or by the choice of law rule that applies to state securities claims.  Christine wonders what makes "the line between corporate governance and corporate securities so distinguishable?"

Good question.  In fact, there's no good reason for distinguishing the two categories of claims. I think a better approach would be to apply the internal affairs rule to both types of claims.  Under the internal affairs rule, state corporation laws compete in the market for law, which forces states to consider both plaintiffs' and defendants' interests.  By contrast, the securities law rule effectively allows the plaintiff to unilaterally choose the forum, and thereby encourages plaintiff-favoring law.

This is, in fact, what I advocate in my most recent article, Dabit, Preemption and Choice of Law, discussed here. Specifically, I argue for extending SLUSA’s "Delaware carve-out" to all claims based on state corporation law. This would effectively preempt state securities fraud class actions except to the extent that they are based on a law that is subject to the internal affairs rule. In other words, I'm suggesting using preemption to get to the right choice of law rule.