Delaware Law Applied to Pre-Incorporation Agreement

Delaware Law Applied to Pre-Incorporation Agreement

      Recently, the Business Law Court of North Carolina addressed the question of choice-of-law as to an agreement to issue shares in a Delaware corporation.  Notwithstanding that the contract was entered into in North Carolina, the corporation, incorporated in Delaware, having its principal place of business North Carolina and the plaintiff’s residency in North Carolina, it was held that Delaware law would apply.  Mancinelli v. Momentum Research, Inc., 2012 NCBC 28 (May 17, 2012). 

      Mancinelli was recruited from her existing employment in North Carolina to join Momentum Research on terms including the issuance to her of 15% of the company’s stock (or at least she so alleged).  She asserted as well that she signed a shareholder agreement, but the company was unable to produce a copy of that document and disputed its existence; she had no copy.  There was, however, other evidence of an agreement to issue the stock to Mancinelli.  The question arose as to whether Delaware law or that of North Carolina should be applied in assessing the claims for breach of the agreement to issue the stock.

      The court relied primarily upon principles set forth in the Restatement of Conflicts as to the internal affairs doctrine (Restatement (2^nd) of Conflict of Laws, § 302 (1971)), it providing that the law of the state of incorporation governs a number of matters particular to the relationship of the shareholders and the corporation, including the issuance of shares.  The fact of the defendant’s principal place of business, the plaintiff’s residency and that the contract was entered into in North Carolina were held not sufficient to override these principles on the basis that “North Carolina has the most significant relationship to the contracts and parties at issue.”  Slip op. ¶ 16.

      Applying Delaware law, which does not enforce an oral agreement to issue shares, the plaintiff’s complaint was, to the extent of that count, dismissed.  However, to the extent her complaint was based upon the breach of the alleged written shareholder agreement, it was allowed to proceed.