The internal affairs doctrine, sometimes called the internal affairs rule, is a rule that specifies that the corporate law that applies to the "internal affairs" of a corporation or other business association is the law of the state where the corporation or other association was organized. As the Supreme Court put it, the doctrine "is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands." Edgar v. Mite Corp., 457 US 624, 645 (1982).
The internal affiars doctrine means that only one state has the authority to regulate the relationships among the officers, directors, and shareholders of a corporation. The doctrine prevents the potentially confusing situation that would otherwise confront publicly traded companies with shareholders in many states, where the corporate law rules could otherwise vary from state to state. The doctrine also creates the possibility of jurisdictional "competition" among the states to attract corporate charters. The results of the purported competition are sometimes described as a "race to the top" and sometimes described as a "race to the bottom," depending primarily on what one thinks of the winner, Delaware.
The internal affairs doctrine does not mean that all legal rules affecting the incorporation are determined by the state of incorporation--only that the internal affairs are governed by that state's law. If a person is injured in California through the negligence of a corporate employee of a Delaware corporation, for example, Delaware law would not normally apply to the tort suit the injured person could bring.