Delaware Court of Chancery Limits Application of California Books and Records Statute to Delaware Corporations Under the Internal Affairs Doctrine

Wilson Sonsini Goodrich & Rosati

On August 13, 2020, the Delaware Court of Chancery issued an opinion, JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), holding that a stockholder of a Delaware corporation headquartered in California could not seek books and records pursuant to California's inspection statute. The decision not only provides important clarity to Delaware corporations located in California that they should not be subject to multiple inspection regimes, but also could have broader implications on similar efforts by foreign states to regulate Delaware corporations.

This case arose when Grove, a stockholder in JUUL Labs, demanded inspection of JUUL's books and records pursuant to Section 1601 of the California Corporations Code, which purports to grant inspection rights to certain stockholders of a corporation that has its principal executive office in California, regardless of the corporation's state of incorporation. JUUL filed suit in Delaware seeking, among other things, an order declaring that Delaware—rather than California—law governed Grove's right to inspect books and records. Grove subsequently filed a corresponding action in California seeking inspection of corporate books and records pursuant to the California statute.

After dispensing with JUUL's arguments that Grove waived California law-based inspection rights under the specific language of certain option and stockholder agreements, the Court addressed whether a stockholder of a Delaware corporation could pursue inspection under the California statute. The Court acknowledged at the outset that "questions about the extent to which a court in a non-chartering jurisdiction can adjudicate a claim to inspect the books and records of a foreign corporation" have yielded "conflicting outcomes." Rather than parsing through the competing authorities, the Court focused instead on analyzing the scope of the internal affairs doctrine. In doing so, the Court relied on the Delaware Supreme Court's recent decision in Salzberg v. Sciabacucchi,1 which reinforced the broad scope of the "internal affairs" doctrine under Delaware law in upholding charter provisions designating the forum for federal securities claims under the Securities Act of 1933.

Consistent with the Delaware Supreme Court, the Court in JUUL emphasized the importance of having one state regulate a corporation's internal affairs and ensuring consistent expectations among, and uniform treatment of, directors, officers, and stockholders across jurisdictions. In this regard, the Court pointed out that the California inspection statute differed from the Delaware statute, including by granting, among other things, a broader right of stockholders to inspect stockholder lists and subsidiary books and records and allowing for fee-shifting in certain instances.

Turning to the claim at issue, the Court observed that the right to inspect corporate books and records was an "important part of the governance landscape." Like the Delaware Supreme Court in Salzberg, the Court distinguished internal affairs—which involve relationships between and among the corporation and its officers, directors, and stockholders—from situations involving rights of third parties external to the corporation that are not governed by the internal affairs doctrine. Because the right to inspect corporate books and records is a "core" matter of internal corporate affairs, the Court held that Delaware, rather than California, law applied to the inspection rights of a stockholder of a Delaware corporation. The decision is consistent with prior Delaware case law from 2005 holding that Section 2115 of the California Corporations Code—often referred to as the "Quasi-California Corporation" statute—was unenforceable against Delaware corporations in imposing cumulative voting for stockholders.2

The Court further found that an exclusive forum selection provision in the Company's charter, providing, among other things, that claims arising pursuant to the Delaware General Corporation Law or "governed by the internal affairs doctrine" must be brought in the Delaware Court of Chancery, obligated Grove to pursue any remedy in that Court because his inspection right implicated the Company's internal affairs. This aspect of the decision is significant as more and more corporations, public and private, adopt such forum selection provisions in their charter or bylaws.

Also, of note, because the Court concluded that the waivers at issue here did not apply to the stockholder's effort to rely on the California inspection statute, the Court expressly noted that it did not reach the question of whether a stockholder could waive his inspection rights under Delaware law as part of a private agreement. The Court observed that prior decisions invalidating restrictions on inspection rights have addressed provisions in the corporation's "constitutive documents," i.e., its bylaws or charter, and "there are arguments for distinguishing between provisions that appear in those documents and waivers in private agreements."

The JUUL opinion provides further evidence that Delaware courts have become increasingly comfortable with taking a broad view of internal affairs and the scope of the Delaware General Corporation Law. The Court's holding should give directors and officers of Delaware corporations greater confidence that stockholder inspection rights may be largely limited to those afforded under Delaware law, at least where the corporation has selected Delaware as the exclusive forum for adjudication of claims governed by the internal affairs doctrine.3 In light of this holding, corporations should continue to evaluate whether it is advisable for them to adopt a Delaware forum selection provision in their governing documents.


[1] 227 A.3d 102 (Del. 2020). See https://www.wsgr.com/en/insights/delaware-supreme-court-upholds-provisions-selecting-forum-for-securities-act-claims.html.

[2] VantagePoint Venture P’rs 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005). 

[3] Despite the widespread adoption of the internal affairs doctrine, because the California Supreme Court has not directly weighed in on these issues, there remains some uncertainty as to whether a California court would follow the Court’s holding here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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