Lead Opinion
delivered the opinion of the court:
Dеfendants, Allen D. Petersen, William E Wright, Robert W Brady, Charles D. Feebler, Jr., American Tool Companies, Inc., and Petersen Manufacturing Company, Inc., appeal from an order of the circuit court denying their motion to dismiss the second amended complaint of plaintiff, Newell Company. On this interlocutory appeal, the supreme court has directed us to answer two certified questions.
The first certified question is as follows:
“Whether the Illinois borrowing statute for limitations periods, 735 ILCS 5/13 — 210 [(West 1994)], is inapplicable where none of the parties to a cause of action was an Illinois resident at the time the action accrued, but where one of the parties later becomes an Illinois resident within the foreign limitations period.”
We hold that our borrowing statute is applicable in the above situation.
The second certified question is as follows:
“Whether section 218(c) of the Delaware Corporate Code [(Del. Code Ann. tit. 8, § 218(c) (1985))] mandated, pursuant to the internal affairs doctrine, a maximum ten year term for Section 5(a) — (c) of the Shareholder Agreement entered into by the parties regardless of whether the parties actually agreed upon or intended a longer term.”
We hold that the 10-year time limit in section 218(c) of the Delaware corporate code applied to section 5(a) — (c) of the shareholder agreement. We remand.
BACKGROUND
On August 22, 1997, plaintiff filed a nine-count complaint against defendants Allen D. Petersen (Petersen), William E Wright, Robert W. Brady (Brady), American Tool Companies, Inc. (ATC), and Petersen Manufacturing Co., Inc. (PMC). On January 25, 1999, plaintiff filed a second amended complaint (complaint) adding Charles D. Peebler, Jr., as a defendant.
In relevant part, the complaint alleges that in 1985 Petеrsen, Brady, plaintiff, and others who are not parties to this appeal acquired the stock of PMC from other Petersen family members during a leveraged buyout. To effectuate the buyout, ATC was created as a holding company for all outstanding PMC common stock. ATC is a Delaware corporation with its principal place of business in Illinois. Petersen is chairman and chief executive officer of ATC and currently resides in Illinois. Since the buyout PMC has béen a wholly owned subsidiary of ATC. Plaintiff also is a Delaware corporation with its principal place of business in Illinois. PMC is a Nebraska corporation with its principal place of business in Nebraska.
In connection with the buyout, a shareholders’ agreement and irrevocable proxy were executed on June 21, 1985. Plaintiff attached a copy of the agreement to its complaint. The parties to the agreement include plaintiff, Petersen, Brady and others not relevant to this appeal. The agreement refers to all shareholders other than plaintiff as “Management Shareholders.” The agreement provides that all Management Shareholders have the right to transfer shares among themselves. Section 5 of the agreement contains a voting agreement pursuant to which the parties pledged that each of them would vote their ATC stock so as to elect a board of directors for ATC composed of four directors designated by Petersen and three designated by plaintiff.
A provision in the shareholders’ agreement entitled “Governing Law” provides:
“This agreement shall be governed by, and construed and enforced with the laws of Nebrаska without giving effect to the provisions, policies or principles thereof respecting conflict or choice of laws.”
Following the buyout of PMC stock, plaintiff owned 3,500 shares, or about 39%, of the 9,000 outstanding shares of ATC’s class A voting stock. Petersen owned 3,972, or about 44%, of the class A shares. Subsequently, plaintiff acquired an additional 1,000 class A shares for a total of 4,500, or 45%, of the outstanding shares.
In June 1992 and November 1994 Petersen purchased stock from other Management Shareholders and thereby obtained a total of 5,530, or 55%, of the class A shares. Plaintiff continued to own the remaining 4,400 class A shares comprising 45% of the total shares. When the June 1992 stock purchases occurred by which Petersen obtained 50.44% of the class A stock, no parties to this action were residents of Illinois. In 1994, Petersen became a resident of Illinois, where he resides today. In December 1996 Petersen removed two of the ATC directors that plaintiff had designated and reduced the board of directors from seven members to five members.
In counts I through IX of its complaint plaintiff alleged, respectively, breach of fiduciary duty, breach of a shareholders’ agreement, breach of an employment agreement, breach of covenants of good faith and fair dealing, fraud and fraudulent concealment, oppression of a minority shareholder, civil conspiracy, tortious interference with a shareholders’ agreement, and tortious interference with an employment agreement. Each count alleged numerous acts of wrongdoing by defendants.
Counts I, II, IV V VT, VII, and VIII of the complaint are all premised partly on Petersen’s purchase of the class A voting stock of ATC from other Management Shareholders. Plaintiff asserted that these purchases were coerced by Petersen, who threatened to fire the other Management Shareholders if they refused to sell him their stock. Counts I, II, IV VI, VII, and VIII are all premised partly on Petersen’s removal of the directors plaintiff had designated, which, plaintiff asserted, contravened the voting agreement in section 5 of the shareholders’ agreement.
Defendants moved to dismiss the complaint pursuant to sections 2 — 603(b), 2 — 615, and 2 — 619(a)(5) of the Code of Civil Procedure (735 ILCS 5/2 — 603(b), 2 — 615, 2 — 619(a)(5) (West 1998)). They contended, inter alia, that plaintiffs causes of action based on Petersen’s June 1992 purchases of the class A voting stock of ATC arose in Nebraska while none of the parties were Illinois residents. Therefore, defendants argued, section 13 — 210 of the Code of Civil Procedure (735 ILCS 5/13 — 210 (West 1994)) requires that the limitations law of Nebraska, not Illinois, be applied to plaintiffs’ contract and tort claims based on Petersen’s 1992 stock purchases. Those claims, defendants observe, are barred under Nebraska law.
Defendants also argued that, because the voting agreement contained in section 5 of the shareholders’ agreement concerned the internal operations of ATC, the “internal affairs doctrine” mandated that the agreement be deemed controlled by the law of the state of ATC’s incorporation, that is, Delaware. Defendants asserted that, by operation of section 218(c) of the Delaware corporate code, which then imposed a 10-year limit on shareholder voting agreements, the voting agreement expired on June 21, 1995, well before Petersen removed the directors plaintiff had designated.
Plaintiff replied that Petersen’s establishment of Illinois residency before the Nebraska limitations period expired triggered an exception to section 13 — 210 as set forth in McGuigan v. Rolfe,
The trial court, holding that section 13 — 210 did not apply to plaintiffs claims and that Nebraska law governed the shareholders’ agreement, denied defendants’ motion to dismiss but granted their subsequent motion under Supreme Court Rule 308 (155 Ill. 2d R. 308) to certify the questions indicated above for interlocutory appeal. We initially denied defendants’ application for leave to file an interlocutory appeal under Rule 308. The supreme court denied defendants’ petition for leave to appeal but, exercising its supervisory power, ordered this court to grant the application for interlocutory appeal and answer the two certified questions.
Concerning the first certified question, defendants first argue that no Illinois case has authoritatively announced that section 13 — 210 applies only if all parties to the action remain non-Illinois residents until the expiration of the limitations period of the state in which the cause of action accrued. Defendants acknowledge that this “continuous non-Illinois residency requirement” has been recited in many Illinois cases. Nonetheless, defendants assert, the requirement was first announced in the dicta of very early supreme court cases such as Hyman v. Bayne,
Defendants next argue that the continuous non-Illinois residency requirement contravenes the legislature’s purpose in enacting section 13 — 210 of promoting uniformity of limitations periods and discouraging forum shopping. Defendants maintain that the requirement encourages forum shopping by permitting a plaintiff to gain the benefit of Illinois limitations law simply by taking up residence in Illinois prior to the expiration of the applicable foreign limitations period. Defendants also urge that the requirement permits a plaintiff to seize upon the fact that any party to the suit happens to establish Illinois residency before the expiration of the foreign limitations period. The requirement also destroys uniformity, defendants submit, by making the controlling limitations period change with the residencies of the parties.
Plaintiff responds that the Illinois courts’ construction of section 13 — 210 as containing a continuous non-Illinois residency requirement enjoys the force of law because it has been stated unequivocally in Illinois cases for over a 100 years. Plaintiff contends that Hurlbut is consistent with the requirement, as was later recognized by the First District itself in Orschel v. Rоthschild,
Concerning the second certified question, defendants argue that Illinois, Nebraska, and Delaware all follow the “internal affairs” doctrine, according to which a state should not regulate the internal operations of a foreign corporation but leave such governance to the state of incorporation. Relying primarily on the Delaware cases of Rosenmiller v. Bordes,
In response, plaintiff argues that it is the internal affairs of PMC, not ATC, that plaintiffs claims concern because ATC was a mere “shell” company for PMC when the wrongful acts plaintiff alleges occurred. As PMC is incorporated in Nebraska, whose law the parties chose to govern the shareholders’ agreement, there is no conflict between the choice of law provision and the internal affairs doctrine. Plaintiff alternatively argues that this case falls within an exception to the internal affairs doctrine because ATC’s only contact with Delaware is the fact that it was incorporated there.
ANALYSIS
I. The First Certified Question
Because they only fix the time within which the remedy for a particular wrong may be sought and are not designed to alter substantive rights, statutes of limitations generally are considered procedural in nature. Fredman Brothers Furniture Co. v. Department of Revenue,
“Foreign limitation. When a cause of action has arisen in a state or territory out of this State, or in a foreign country, and, by the laws thereof, an action thereon cannot be maintained by reasons of the lapse of time, an action thereon shall not be maintained in this State.” 735 ILCS 5/13 — 210 (West 1994).
The borrowing provision is identical to its former embodiment in section 20 of the Limitations Act (Ill. Rev. Stat. 1969, ch. 83, par. 21). We use section 13 — 210 and section 20 interchangeably in what follows.
According to the most recent published Illinois case construing section 13 — 210, the section applies where (1) the cause of action accrued in another jurisdiction; (2) the limitations period of that jurisdiction has expired; and (3) all parties were non-Illinois residents at the time the action accrued and remained so until the foreign limitations period expired. Ehlco,
Relevant to the discussion that follows is the interplay of section 13 — 210 with section 13 — 208(a) of the Code of Civil Procedure (735 ILCS 5/13 — 208(a) (West 1994)), which provides:
“Absence from State, (a) If, when the cause of action accrues against a person, he or she is out of the state, the action may be commenced within the times herein limited, after his or her coming into or return to the state; and if, after the cause of action accrues, he or she departs from and resides out of the state, the time of his or her absence is no part of the time limited for the commencement of the action.” 735 ILCS 5/13 — 208(a) (West 1994).
Section 13 — 208(a) formerly was section 18 of the Limitations Act (Ill. Rev. Stat. 1969, ch. 83, par. 19) (section 18). Section 18 included a provision that immediately followed the above text:
“But the foregoing provisions of this section shall not apply to any case, when, at the time the cause of action accrued or shall accrue, neither the party against nor in favor of whom the same accrued or shall accrue, were or are residents of this state.” Ill. Rev. Stat. 1969, ch. 83, par. 19.
In Haughton v. Haughton,
After close review of the relevant cases, we conclude that the continuous non-Illinois residency requirement is the product of a misinterpretation of our supreme court’s analysis and holding in Bayne,
We explain our holding by tracing the development of the continuous non-Illinois residency' requirement. As authority for its recitation of the requirement, Ehlco relies on Miller v. Lockett,
The continuous non-Illinois residency requirement is in its nascency in Wooley. In Wooley, the plaintiffs cause of action accrued in Illinois while she and the defendant were residents of Illinois. The defendant subsequently left Illinois and established residence first in Massachusetts and then in New Hampshire, where he remained when plaintiff filed suit. Citing section 20 (then Ill. Rev. Stat. 1874, ch. 83, § 20) defendant argued that the suit was barred under the New Hampshire statute of limitations. The court construed section 20 as providing:
“Where the maker of a promissory note, and the payee, reside out of this State when the note becomes due, and the cause of action accrues in another State, and the maker continues to reside out of the State and in another State, until, by the laws of such State, an action on the note is barred, [section 18], when pleaded to an action brought on such note in this State, may constitute a bar to such action.” Wooley,142 Ill. at 449 .
The court remarked that this was “the doctrine” of Bayne and McVeigh. Wooley,
This early formulation of the continuous non-Illinois residency requirement is similar to the current version in Ehlco in that it conditions the application of section 20 on the maker of the promissory note having resided outside Illinois when the cause of action accrued and until the expiration of the limitations period of the state in which the cause of action accrued. However, unlike the Ehlco formulation, this formulation does not require the payee as well as the maker of the note to continuously reside outside Illinois; i.e., it does not require all parties, rather than just one, to reside continuously outside Illinois.
Proceeding to explain the origin of the requirement, the Wooley court observed that, in both Bayne and McVeigh, “the maker and payee both resided out of this State at the maturity of the cause of action sued on and when the cause of action accrued, and so remained until an action was barred in and by the laws of the foreign State where the domicil existed.” Wooley,
A close review of Bayne and McVeigh is needed to understand how the Wooley court gleaned from them its version of the continuous non-Illinois residency requirement. In Bayne, the plaintiff sued defendant to recover money plaintiff had lent defendant. The plaintiff and the defendant were non-Illinois residents when plaintiffs cause of action accrued in Maryland, and they remained so until after the Illinois statute of limitations had run. The plaintiff sued in Illinois and the defendant, then a resident of New York, argued that the suit was untimely under the limitations laws of both Illinois and Maryland. The court framed the issue on appeal as “whether, under our limitations laws ***, when both parties have, at all times, resided continuously beyond the limits of this State for the statutory period, a bar to recovery is created.” Bayne,
“If any person or persons against whom there is or shall be any cause of action, as is specified in the preceding sections of this chapter, except real or possessory actions, shall be out of this State at the time of the cause of such action accruing, or any time during which a suit might be sustained on such cause of action, then the person or persons who shall be entitled to such action[ ] shall be at liberty to bring the same against such person or persons after his, her or their return to this State, and the time of such person’s absence shall not be accounted as part of the time limited by this chapter.” Ill. Rev. Stat. 1845, ch. 66, § 13.
Interpreting “return to this State” as presupposing that the individual previously had been in the State and noting that there was no allegation that defendant ever was a resident of Illinois, the court affirmed the trial court’s holding that section 13’s tolling provision did not apply and that the plaintiffs suit was barred. Bayne,
The court, however, disagreed with the trial court that section 20 did not apply. The plaintiff explained that his cause of action, which arose in Maryland, was barred under Maryland’s statute of limitations when section 20 was passed in 1872. The plaintiff argued that section 20 did not apply to actions already barred by the relevant foreign statute of limitations when the section was passed. The court disagreed, holding that section 20, by its plain language, applied to actions already barred by the relevant foreign statute of limitations. The court then observed that this application of section 20 did not deprive plaintiff of a “fixed or vested right.” Bayne,
Lastly, the court rejected the plaintiffs аrgument that the defendant did not properly plead Maryland’s statute of limitations as a defense because the defendant did not allege that the Maryland limitations period was not tolled by the defendant’s leaving Maryland for New York. The court reasoned that it was sufficient that the defendant pleaded the Maryland statute of limitations as a defense; the defendant need not have pleaded that Maryland did not have a provision that tolled the limitations period while he was outside Maryland. Bayne,
Nowhere in Bayne did the supreme court state that a prerequisite to section 20’s application was the non-Illinois residency of all parties, let alone the continuous non-Illinois residency of all parties. The court did mention that the defendant had remained outside Illinois until the expiration of the limitations period, but the limitations period referenced was the Illinois limitations period, not a foreign limitations period, and, moreover, the court’s remarks about the defendant’s non-Illinois residency concerned only the applicability of section 13’s tolling provision. The sole issue the Bayne court addressed with respect to the borrowing provision in section 20 was its retroactive application; the court neither explicitly nor implicitly construed section 20 as containing an exception based on residency. We can only conclude that Bayne’s analysis of section 13, including its comments about the continuous non-Illinois residency of the defendant, have been appropriated by later cases and applied to section 20.
Also, the following remarks by the Bayne court abоut section 13 easily could have been misinterpreted:
“It is urged that a person can not [szc] return to the State unless he had previously been in the State, and hence the saving clause of [section 13] has no application where the statutory period has expired, and the debtor has never been within the State, and that when the debtor resides out of the State, and the creditor is a nonresident, that statute creates a bar to the action. This is the language of the statute. A person can not [szc] return to a place until he has previously been at that place. This proposition is self-evident. It can not [szc] be rendered plainer by illustration or by reasoning.” Bayne,83 Ill. at 259-60 .
Here the court is recapitulating the defendant’s argument that the tolling provision in section 13 did not apply. The factual situation described in that argument is, of course, the factual situation before the court in Bayne. But the factual situation described by the court contains more facts than necessary to establish that section 13 does not apply. Specifically, there is a statement concerning the residency of the creditor, i.e., the plaintiff. Section 13, however, is concerned only with the residency of the party against whom a cause of action has arisen. Section 13 is not concerned with the fact that the plaintiff was a nonresident of Illinois. We conclude that, combined with the court’s comments about the continuous non-Illinois residency of the defendant, these comments about the non-Illinois residency of the plaintiff may have misled later courts into believing that section 20 requires continuous non-Illinois residency of both parties.
McVeigh appears to be a companion case to Bayne although the procedural connection between the two is not clear from either opinion. In McVeigh, the court noted that the issues before it were “determined in the main” by the decision in Bayne. McVeigh,
“The words ‘when a cause of action has arisen,’ as they occur in [section 20], should be construed as meaning, when jurisdiction exists in the courts of a state to adjudicate between the parties upon the particular cause of action, if properly invoked; or, in other words, when the plaintiff has the right to sue the defendant in the courts of the state upon the particular cause of action, without regard to the place where the cause of action had its origin. This was the view taken in [Baynel *** although not discussed at length in the opinion, and we do not conceive that the question need be discussed now.” McVeigh,87 Ill. 708 .
Unfortunately, the court says nothing more about the issue. Teasing out the unstated premises, we seе the court as reasoning that, although plaintiffs cause of action did not “originate” in New York, the cause of action “arose” in New York for purposes of section 20 because New York had, at least at one time, jurisdiction to adjudicate plaintiffs cause of action.
The court’s adoption of what it regarded as Bayne’s construction of section 20 is confusing. Nowhere in Bayne did the court construe section 20 in this fashion. Bayne announced its definition of when a cause of action has arisen only to rebut the argument that the plaintiff in that case would lose a vested right if section 20 were applied to a cause of action whose limitations period had already expired when section 20 was enacted. See Bayne,
The next relevant supreme court case in the history of the continuous non-Illinois residency requirement is Strong v. Lewis,
“We are of the opinion *** that when [the plaintiff] permitted [the defendant] to go into the State of New York and permitted the bar of the statutes of that State to become complete, he lost all right, under the laws of Illinois, thereafter to maintain suit against him, and that when he came into the State of Illinois he came clothed with all the privileges that the law of the State of New York conferred upon him. This question we have decided in the case of [McVeigh] ***.” Strong,204 Ill. at 37 , citing McVeigh,87 Ill. 708 .
The court stated with approval McVeigh’s interpretation of section 20 and added that the interpretation was followed in Wooley. Strong,
The Strong court, then, concluded that the plaintiffs cause of action arose in New York for purposes of section 20. Presumably, based on what can be inferred from McVeigh, the court held as such because the defendant resided in New York and thus plaintiff could have sued him there. Why, however, the court found it significant that the defendant remained in New York until the expiration of New York’s limitations period is uncertain. According to McVeigh’s interpretation of section 20, it would seem that the defendant’s presence in New York alone would have triggered section 20.
In any event, Davis, the next important supreme court case for our purposes, severely curtailеd the McVeigh!Strong interpretation of section 20. Reexamining Bayne, the court held that Bayne’s definition of when a cause of action arises was relevant only to Bayne’s discussion of whether section 20 applied to causes of action already barred when it was passed. Davis,
Davis also is important for its assertion that Bayne, McVeigh and Lewis all held:
“[W]here the maker and payee of a promissory note both resided out of this State at the time of its maturity, a cause of action arose in the State where the payee resided and in any other to which he removed, and if he resided in any State long enough to be entitled to the protection of the Statute of Limitations of such State, such statute would be treated as a bar in this State under section 20 of our Limitations act; but if the defendant resided in this State at the date of the maturity of his note and afterward removed to another State and resided there during the full period of limitation as provided by the statute of such other State, while a cause of action would have arisen against him in such other State he would not bе entitled to the benefit of section 20 of our Limitation act because of the provision of section 16 which saves to the plaintiff, during the defendant’s residence out of the State, the benefit of the cause of action which had accrued before his departure.” Davis,235 Ill. at 623 .
Davis propagates Wooley’s erroneous interpretation of Bayne. Bayne, as explained above, did not rule that the application of section 20 hinges on whether the person against whom a cause of action has arisen retained continuous non-Illinois residency until the expiration of the limitations period of the state in which the cause of action accrued. The above passage also shows that the continuous non-Illinois residency requirement is still in development in Davis. Davis mentions nothing about the residency of the plaintiff and, thus, is not itself authority for the requirement that all parties retain non-Illinois residency until the expiration of the foreign limitations period.
In the 1899 First District case of McGuigan v. Rolfe,
Another problem with the McGuigan holding is that it is based on an interpretation of section 20 that the supreme court would later reject in Davis. Davis, as we noted, held that Bayne’s definition of when a cause of action arises was relevant only to the question of whether section 20 could be applied to causes of action already barred when it was passed. Davis,
Citing Bayne, McVeigh, Wooley, Strong, and McGuigan, cases since McGuigan continue to recite and apply the continuous non-Illinois residency requirement. See, e.g., Orschel,
We disagree with plaintiff that the result reached in Hurlbut,
We recognize that Hurlbut was an isolated deviation from a string of appellate court cases decided early in the twentieth century that consistently reiterated the continuous non-Illinois residency requirement. To us, however, Hurlbut indicates some instability in the appellate courts’ interpretation of section 20 and also foreshadows the seeming abandonment of the continuous non-Illinois residency requirement by the supreme court within the last 30 years.
Miller and Coan, both decided within the last 30 years, can be construed as signaling a change in the court’s construction of section 20. We disagree with plaintiff that Miller and Coan are indisputable authority for a continuous non-Illinois residency requirement in section 20.
In Coan, the court observed that sectiоn 20 “was intended to apply only to cases involving nonresident parties.” Coan,
The Coan court reversed the trial court’s order granting the defendants’ motion to dismiss plaintiffs suit under the Kentucky statute of limitations. The court held that the trial court erred in reading section 20 to apply even where one of the parties was a resident of Illinois. Coan,
The court attributed this error to the trial court’s failure to read section 20 together with section 18’s tolling provision. Unlike section 18, the court explained, section 20 does not exclude from the limitations period the length of time a party against whom a cause of action accrues is absent from Illinois. Thus, the court observed, where a cause of action that, having accrued outside Illinois while the parties thereto were Illinois residents, expires under the foreign limitations statute while the defendant is absent from Illinois, section 20 would automatically bar suit but section 18 would exclude from the limitations period the time the defendant was absent from Illinois. Coan,
529. The court supplemented its reasoning by incorporating a passage from Orschel:
“ Tn such a case, that is of diverse residence, it has been held that section 20 does not apрly, and that section 20 only applies to cases where both debtor and creditor are nonresidents of this State when the cause of action accrues. The interrelationship of sections 18 and 20 are [sic] well set forth by Mr. Justice Wall in the Berry case, supra [Berry v. Krone,46 Ill. App. 82 (1892)]. He there says: “It will be seen by the second paragraph of section 18, it is provided the preceding provisions are not to apply to any case where neither debtor nor creditor resides in the State when the cause of action accrues. Section 20 then applies to the cases not covered by section 18; that is, to cases where both debtor and creditor are nonresidents when the cause of action accrues. It cannot be supposed that the legislature intended by section 20 to nullify and sweep away the provision contained in section 18, and yet this is what has been done unless section 20 is construed to apply only to those cases which are, by the latter clause of section 18, carved out and excepted from its operation.” ’ ” Coan,53 Ill. 2d at 529-30 , quoting Orschel,238 Ill. App. at 358 , quoting Berry,46 Ill. App. at 84-85 .
Coan raises a concern because the court uses Orschel’s rationale to reach a different conclusion than Orschel did. As the above passage indicates, Orschel holds that, in light of section 18, section 20 must be interpreted to apply only to cases involving parties who were non-Illinois residents when the cause of action accrued. Orschel,
Nor, moreover, was it a concern for the court whether or not the parties maintained non-Illinois residency until the Kentucky limitations period expired. Plaintiff and the one defendant might have remained non-Illinois residents until the Kentucky limitations period expired, in which case they would have fulfilled the continuous non-Illinois residency requirement, and, consequently, the Kentucky limitations period would have applied under section 20 as interpreted in Ehlco. Silent on when the plaintiffs and the one defendant became Illinois residents, the court declined to apply section 20.
In Miller, the supreme court reaffirmed the holding in Coan and held that section 20 did not apply to the action before it because the plaintiffs were Illinois residents. Miller,
The question in Miller was whether the supreme court’s invalidation in Haughton of section 18’s exception for cases in which all parties were non-Illinois residents when the cause of action accrued implicitly overruled Coan’s holding that section 20 сontained a non-Illinois residency requirement. The court first observed that Haughton did not mention Coan nor did it address section 20. Coan’s interpretation of section 20 became part of section 20 itself, the court explained, and has not been undone by legislative modification. Further, the court reasoned, a statute need not be valid and existing to be interpreted in pari materia with another statute. Miller,
We do not regard Miller as authority for the continuous non-Illinois residency requirement. Nowhere in Miller did the court recite the continuous non-Illinois residency requirement. While the court cited cases that do state the requirement (see Miller,
We reject plaintiffs argument that thе continuous non-Illinois residency requirement is necessitated by the conflict between the plain text of section 18 and section 20 that the supreme court addressed in Orschel and Miller. Before it was amended, section 18 created an exception to the tolling of the Illinois limitations period for cases in which neither party was an Illinois resident when the cause of action accrued. See Ill. Rev. Stat. 1969, ch. 83, par. 19. As explained above, Orschel and Coan recognized that section 18 and section 20 could be harmonized only if section 20 was interpreted as applying where section 18 did not, that is, to cases where neither party was an Illinois resident when the cause of action accrued. See Coan,
The supreme court’s construction of section 20 as stated in Coan and Miller has been followed by the appellate courts. See, e.g., Ko v. Eljer Industries, Inc.,
We conclude, then, that the continuous non-Illinois residency requirement was conceived in the misconstruction of a case from 1876, that subsequent cases have perpetuated the requirement without reexamining its foundation in case law, and, finally, that the most recent supreme court cases to apply section 20 have ignored the requirement.
We find no Illinois case that has offered a colorable policy justification for the continuous non-Illinois residency requirement. Miller and Panchinsin v. Enterprise Cos.,
In Panchinsin, the court reiterated Coan’s holding that “ ‘[section 20] was intended to apply only to cases involving nonresident parties,’ ” and held that section 20 did not apply to the plaintiffs tort action because the defendants were Illinois residents. Panchinsin,
“(1) Illinois residents who commit torts are more likely to injure other Illinois residents, and (2) refusing to permit Illinois residents to take advantage of a shorter than generally available limitations period (through application of the borrowing statute) would promote the health, safety, and welfare of our citizens by encouraging Illinois residents to maintain higher safety standards.” Panchinsin,117 Ill. App. 3d at 447 .
Whatever its accuracy, the prediction that Illinois residents who commit torts are more likely to injure other Illinois residents is a prediction concerning the parties’ residency at the time the tortious conduct occurs or, roughly, when the cause of action in tort accrues. Hence it would seem to justify a rule that the borrowing statute does not apply when a defendant (or perhaps, any party) is an Illinois resident when the cause of action accrues. The prediction, however, is irrelevant to a party’s establishment of Illinois residency after a cause of action in tort accrues. In any event, Panchinsin apparently was not attempting to rationalize the continuous non-Illinois residency requirement because, like Coan before it, and Miller after it, Panchinsin held that section 20 applies only to cases involving nonresident parties. See Panchinsin,
The state of the law regarding section 20 being so unsettled, we find a reevaluation appropriate. In our view, the continuous non-Illinois residency requirement has fatal flaws. First, it draws an arbitrary distinction. As interpreted in Ehlco and earlier cases, section 20 applies the relevant foreign limitations period to an action if all parties maintain non-Illinois residency until that limitations period expires. See, e.g., Ehlco,
Even if the distinction is rational as applied to the interstate movement of some plaintiffs, we still do not see how the mere fact that any one party — whether plaintiff or defendant, whether intimately or tangentially connected to a controversy — who establishes residency in our state after the cause of action accrues in another jurisdiction gives our state a sufficient interest in that controversy to justify our imposing upon it our statute of limitations. Rather than promoting uniformity and discouraging forum shopping, the continuous non-Illinois residency requirement invites a plaintiff to extend the limitations period on his foreign cause of action simply by establishing Illinois residency before that period expires or by taking advantage of the fact that any other party to the suit became an Illinois resident within that time. Likewise, a defendant can gain the benefit of a shorter limitations period in Illinois simply by leaving the state in which the cause of action accrued and establishing residency in Illinois before the longer foreign limitations period expires or by taking advantage of the fact that any other party to the suit became an Illinois resident within that time.
Plaintiff suggests that the holdings of Miller and Coan became part of the borrowing statute when it was subsequently reenacted without any alteration to its text. See 735 ILCS 5/13 — 210 (West 1992) (amending Ill. Rev. Stat. 1991, ch. 110, par. 13 — 210). Plaintiff relies on the rule that the legislature is presumed to know the judicial construction that a statute has been given and, by reenacting the statute without modification, is assumed to have intended the statute to have effect as previously construed in the courts. Nevious v. Bauer,
Our holding that the Miller/Coan construction of section 20 is codified in section 13 — 210 would not give us the answer to the certified question because, as we made quite clear above, we cannot discern with any reasonable degree of assurance just how Miller and Coan construed section 20. In citing cases that reiterated the continuous non-Illinois residency requirement, Miller and Coan said nothing more about section 20 than that it applies only where none of the parties is an Illinois resident. See Miller,
In a significant number of states with borrowing statutes, the application of a foreign statue of limitations has been held to depend on the residency of the parties at the time the cause of action accrues, not on their residency at a later time. See, e.g., Biewend v. Biewend,
The dissent accuses us of laboring to avoid an “obvious” answer to the certified question.
The dissent would have us consider the Illinois courts’ construction of section 13 — 210 as part of the statute itself but does not specify which of the divergent court holdings concerning the statute we should pay heed to.
The dissent agrees it is arbitrary to condition the application of section 13 — 210 on whether the foreign jurisdiction’s limitations period had expired when a party — any party — established Illinois residency. Nonetheless, the dissent labors to posit policy justifications for this admittedly and, we might add, “obviously” arbitrary distinction.
Having determined that the continuous non-Illinois residency requirement has no foundation in our cases or in sound policy and appears to have been rejected sub silentio, or at least held in disfavor, by our supreme court in recent cases, we hold that section 13 — 210 is applicable where none of the parties to a cause of action was an Illinois resident when the cause of action accrued, even if one of the parties later becomes an Illinois resident before the expiration of the limitations period of the jurisdiction in which the cause of action accrued. Accordingly, we need not address defendants’ argument that the continuous non-Illinois residency requirement is unconstitutional.
II. The Second Certified Question
We first address plaintiff’s argument that. Nebraska law indisputably applies to Newell’s claims because they concern the internal affairs of PMC, a Nebraska corporation, rather than ATC, a Delaware corporation. We cannot reconcile this claim with the shareholders’ agreement, which expressly designates ATC, not PMC, as the corporate party. Indeed, plaintiff refers in its complaint to Petersen’s allegedly wrongful removal of ATC’s directors. Accordingly, we consider plaintiffs claims as relating to the internal affairs of ATC.
In 1985, when the parties executed the shareholders’ agreement, including the provision selecting Nebraska law to govern the agreement, Nebraska corporations law did not impose a limit on the duration of shareholder voting agreements. See Neb. Rev. Stat. § 21 — 2034 (1985). Delaware, however, limited shareholder voting agreements to a duration of 10 years. See Del. Code Ann. tit. 8, § 218(c) (1985). The time limit was removed in 1994 (see Del. Code Ann. tit. 8, § 218(c) (Supp. 1994)), and presently Delaware does nоt limit the duration of shareholder voting agreements (see Del. Code Ann. tit. 8, § 218(c) (Supp. 1998)). However, the former time limit applies to voting agreements entered into prior to July 1, 1994. See 69 Del. Laws 263 (1994).
We agree with defendants that Delaware law as it existed in 1985 governs the voting agreement in section 5 of the shareholders’ agreement. We begin our analysis by looking to the conflicts law of Illinois, the forum state, to determine the substantive law that applies to plaintiffs claims concerning the shareholders’ agreement. See Esser v. McIntyre,
“(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188 [Restatement (Second) of Conflict of Laws § 188 (1971)], would be the state of the applicable law in the absence of the effective choice of law by the parties.” Restatement (Second) of Conflict of Laws § 187 (1971).
Section (a) does not concern us here because defendants, acknowledging that ATC is engaged in the worldwide manufacture and distribution of handheld tools and was once headquartered in Nebraska, do
O not dispute that Nebraska bears a substantial relationship to this controversy. Defendants’ claim, rather, is that the fundamental public policy of Delaware, the state of ATC’s incorporation, militates against application of Nebraska law to plaintiffs claims.
Applying, then, subsection (b) of section 187, we note that Delaware law would apply to the shareholders’ agreement in the absence of the parties’ choice of law provision. Section 188 of the Restatement provides that a corporation’s place of incorporation is a relevant factor in determining the law applicable to a claim. Restatement (Second) of Conflict of Laws § 188 (1971). However, section 302 of the Restatement goes further, providing that issues involving the rights and liabilities of a corporation generally are determined by the law of the state of incorporation. Restatement (Second) of Conflict of Laws § 302 (1971). According to comment a, the section applies to the election or appointment of directors and officers. Restatement (Second) of Conflict of Laws § 302, Comment a (1971). As plaintiffs claims concern the voting rights of a shareholder, we conclude that Delaware’s law would apply under the Restatement in the absence of the parties’ choice of law provision.
Of course, Delaware law applies under section 187 only if Delaware has a materially greater interest in this controversy than dоes Nebraska and if honoring the parties’ choice of Nebraska law would violate a fundamental public policy of Delaware. In our view, Delaware’s adherence to the internal affairs doctrine (see Rosenmiller,
The internal affairs doctrine is a conflict of laws principle that prescribes that matters relating to a corporation’s internal governance should be controlled exclusively by the state of incorporation. Edgar v. MITE Corp.,
We are convinced that the internal affairs doctrine is a fundamental public policy. The need for the inner workings of a
corporation to be governed by a single body of laws has been frequently emphasized by state and federal courts alike. The internal affairs doctrine “serves the vital need for a single, constant and equal law to avoid the fragmentation of continuing, interdependent internal relationships.” McDermott Inc. v. Lewis,
“A single rule for each corporation’s internal affairs reduces unсertainty and the prospect of inconsistent obligations; it also enables the corporate venturers to adjust the many variables of the corporate life ***, confident that they can predict the legal effect of these choices.” Nagy v. Riblet Products Corp.,79 F.3d 572 , 576 (7th Cir. 1996).
Taking a broader economic perspective, the Supreme Court has observed:
“Large corporations that are listed on national exchanges, or even regional exchanges, will have shareholders in many States and shares that are traded frequently. The markets that facilitate this national and international participation in ownership of corporations are essential for providing capital not only for new enterprises but also for established companies that need to expand their businesses. This beneficial free market system depends at its core upon the fact that a corporation — except in the rarest situations — is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its corporation.” CTS,481 U.S. at 90 ,95 L. Ed. 2d at 85-86 ,107 S. Ct. at 1650 .
The compelling policy arguments for the internal affairs doctrine convince us that Delaware, as the state of ATC’s incorporation, has an overriding interest in regulating the internal affairs of ATC, including the voting of shareholders.
Plaintiff claims that the predictability argument undergirding the internal affairs doctrine has no force in this case because predictability and uniformity were insured by the ATC shareholders’ selection of a single state’s (Nebraska’s) laws to govern their shareholders’ agreement. Applying the law of Delaware will dеfeat, not protect, the expectations of ATC’s shareholders, plaintiff submits. The Missouri Court of Appeals has employed this line of reasoning in giving effect to a choice of law clause selecting Missouri law to govern an agreement to purchase the stock of a Delaware corporation. See Yates v. Bridge Trading Co.,
We disagree with the suggestion that our following the parties’ choice of law would advance the same interests to the same degree as would following the internal affairs doctrine. Yates is poor authority for the notion. There, the court gave effect to the choice of law clause only after finding that the corporation’s only tie to Delaware was the fact that it was incorporated there. See Yates,
Our refusal to apply a balancing test to this issue does not compel us to conclude that we can adequately protect the expectations of parties to corporate agreements by always giving effect to their choice of law provisions. We might defer to the parties’ choice of law in the case before us and at least avoid spoiling plaintiffs alleged expectation that Nebraska law would apply to the shareholders’ agreement, but we could not be confident that the next court to adjudicate the agreement would apply Nebraska law. The corporate codes of at least 26 states contain an exception for the internal affairs of a foreign corporation doing business within the state. See 4 Model Business Corporation Act Annotated § 15.05 (3d ed. 1984 & 1997 Supp.) (collecting state statutes and noting that the internal affairs doctrine is “widely accepted”). The internal affairs doctrine is a pervasive rule. See Resolution Trust Corp. v. Chapman,
Independent of the foregoing is the fact, devastating to plaintiffs position, that in 1985 the internal affairs doctrine was embodied in the very statutes that the parties selected to govern the stock purchase agreement and remains so today. See Neb. Rev. Stat. § 21 — 20,105 (1985) (nothing in the corporate code “shall be construed to authorize this state to regulate the organization or the internal affairs of [a foreign] corporation”); Neb. Rev. Stat. § 21 — 20,172 (1995) (same). Plaintiff does not even mention these provisions of Nebraska law in its brief, and its responses to questions concerning them at oral argument were not persuasive.
We acknowledge that the parties to the shareholders’ agreement expressly disavowed an intention to adopt the conflicts law of Nebraska. In our view, a state’s conflicts rules are properly conceived of as general rules that determine the procedural question of whether that state’s substantive law should be applied to a controversy brought in its courts. Cf. Mech v. Pullman Standard,
Plaintiff urges us to apply Delaware law as it presently exists, that is, without the time limit on voting agreements. The only case plaintiff cites for this position concerns the issue of whether an amendment that takes effect during the pendency of a suit applies to that suit. See First of America Trust Co. v. Armstead,
Plaintiffs remaining arguments concern whether the voting agreement falls within section 218(c) of the Delaware corporate code. As the certified question put to us simply was whether the internal affairs doctrine mandates the application of section 218(c) to the voting agreement, we decline to address these arguments. Since we find that the internal affairs doctrine is sufficiently justified with respect to public policy alone, we also decline to address defendants’ argument that the doctrine is constitutionally mandated.
For the foregoing reasons, we hold that the limit on the duration of shareholder voting agreements provided in section 218(c) of the Delaware corporate code as it existed in 1985 applies to the 1985 shareholders’ agreement.
Certified questions answered. Cause remanded.
BOWMAN, J., concurs.
Concurrence Opinion
specially concurring in part and dissenting in part:
Although I agree with the majority’s decision regarding the second certified question, I respectfully dissent from its answer to the first certified question.
In Illinois the statute of limitations generally applicable to claims based upon the rights and liabilities of stockholders is the residual five-year period under section 13 — 205 of the Code of Civil Procedure (the Code) (735 ILCS 5/13 — 205 (West 2000)). However, on occasion, we must also consider the applicability of other limitations provisions. On this occasion, our supreme court has directed us to consider the applicability of the Illinois “borrowing statute” to the circumstances before us in the present case. See 735 ILCS 5/13 — 210 (West 1994). The borrowing statute provides:
“When a cause of action has arisen in a state *** out of this State *** and, by the laws thereof, an action thereon cannot be maintained by reason of the lapse of time, an action thereon shall not be maintained in this State.” 735 ILCS 5/13 — 210 (West 1994).
The borrowing statute has three conditions, two of which are apparent from the face of the statute: the cause of action must arise outside Illinois, and the cause of action must be barred by the law of the state where the cause of action arose. See 735 ILCS 5/12 — 210 (West 1994); Employers Insurance of Wausau v. Ehlco Liquidating Trust,
One requirement remains for consideration: as a matter of judicial construction, all parties must have been non-Illinois residents at the time the cause of action accrued and all parties must have remained non-Illinois residents until the foreign limitations period expired. Ehlco,
In an effort to avoid the obvious, however, the majority concludes that both the appellate court and our supreme court have been misinterpreting Hyman v. Bayne,
Judicial construction, left undisturbed by the legislature, fairly can be said to reflect legislative intent in that respect. See Miller v. Lockett,
The continuous non-Illinois residency requirement promotes uniformity by treating all parties from every state in the same fashion. The residency requirement does not compel us to determine in each circumstance whether a particular forum state has a tolling statute and whether it applies to any particular defendant. The residency requirement prevents a potential defendant from taking advantage of the forum state’s tolling statute. In Nebraska, absence from the state generally does not toll the limitations period. See Neb. Rev. Stat. § 25 — 213 (1994). The residency requirement discourages forum shopping by not allowing parties with unclean hands to flee the forum state in an effort to elude a potential plaintiff, making their whereabouts known only after the limitations period has run, thereby allowing an automatic affirmative defense based upon their own deceit. Plaintiffs are therefore required to diligently pursue their claims against their wrongful party. The result is that potential defendants must avail themselves in their forum state to potential plaintiffs for the requisite period of time. The potential defendants may relocate; however, they are then subject to the laws of this forum. In this case the applicable law has been in existence since 1876 and remains good law.
I believe the courts’ interpretation throughout the years of the continuous non-Illinois residency requirement of the Illinois borrowing statute balances a nonresident plaintiffs interest in pursuing its claim with the defendant’s interest in being amenable to suit for a finite period of time.
The majority notes that the continuous non-Illinois residency requirement draws an arbitrary distinction between parties who move to Illinois on a Monday rather than a Tuesday. I agree. But that is the nature of the beast with respect to statutes of limitation. Statutes of limitation are simple on their face because the time period that the legislature affixes to an action can be measured by the clock. See 735 ILCS 5/13 — 101 et seq. (West 2000). Courts are therefore left with the choice of watching the clock or inquiring into the purpose of the statute. In many cases courts follow the letter of the statute and bar a cause of action if it was not timely filed. To alleviate the hardship in some cases, parties may find relief by applying the tolling statute enacted by our legislature. See 735 ILCS 5/13 — 208 (West 2000).
The majority recognizes that the state of the law regarding the Illinois borrowing statute is unsettled. Unless and until the legislature amends it contrary to our interpretation, the courts’ construction of the Illinois borrowing statute is considered a part of the statute itself. See Kroger Co. v. Department of Revenue,
In the present case, I would hold that the Illinois borrowing statute for limitations periods is inapplicable even though no party to the cause of action was an Illinois resident at the time the action accrued but because one of the parties later became an Illinois resident within the foreign limitations period.
Therefore, for the foregoing reasons, I would answer the first certified question in the affirmative.