Delaware Court of Chancery Tells California To Get Off Its Lawn

Troutman Pepper

In a recent decision, the Delaware Court of Chancery ruled that disputes regarding the internal affairs of a Delaware corporation, including stockholder inspection rights, are to be governed exclusively by Delaware law, even where another state’s law purports to govern the subject-matter of the internal affairs dispute at issue. 

Specifically, in JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Vice Chancellor Laster concluded that a stockholder seeking inspection of the books and records of a Delaware corporation with its principal place of business in California is required to pursue such inspection exclusively under Section 220 of the Delaware General Corporation Law (DGCL). The stockholder cannot, the court held, proceed under Section 1601 of the California Corporations Code, even though Section 1601 purports to grant inspection rights to stockholders in a corporation with its principal executive office in California, regardless of the corporation’s state of incorporation. 

While it is unclear whether the court’s decision will be respected by other state courts, including California courts, the ruling is a positive development for Delaware corporations and their directors and officers, in that it helps avoid subjecting them to numerous and potentially inconsistent laws of different states regarding issues of internal corporate affairs.

Background and Analysis

The court’s decision in JUUL arises out of a stockholder’s attempt to seek inspection of the books and records of a privately held Delaware corporation with its principal place of business in San Francisco (the Company). 

Despite the fact that the Company is incorporated in Delaware, the stockholder sought to inspect its books and records under California law, specifically Section 1601 of the California Corporations Code. The California statute purports to grant inspection rights to any stockholder in a corporation with its principal place of business in California, regardless of the corporation’s state of incorporation. [1]

In his demand, the stockholder stated that if the Company refused his demand, then he “may apply to the [California state court] for an order compelling inspection” under California law. In response, the Company filed suit in Delaware seeking a declaration that the stockholder could not seek inspection under California law because of the internal affairs doctrine, and alternatively, that the stockholder waived his rights to seek inspection. [2] 

The court ruled in favor of the Company, holding that Delaware law governs disputes regarding the internal affairs of a Delaware corporation, including disputes regarding stockholder inspection rights, to the exclusion of other states’ laws. [3] That is so, the court held, even where another state’s law purports to govern the internal affairs dispute in question.

In reaching that conclusion, the court relied on U.S. Supreme Court and Delaware Supreme Court precedent providing that only one state—the state of incorporation—should have the authority to regulate a corporation’s internal affairs. Because the court also found that “[s]tockholder inspection rights are a core matter of internal corporate affairs,” the court concluded that the stockholder in this case was required to seek inspection solely under Section 220 of the DGCL, and could not proceed under California law. 

Takeaway

The court’s JUUL decision is a positive development for Delaware corporations and their directors and officers, in that the ruling helps avoid subjecting them to numerous and potentially inconsistent laws of different states regarding issues of internal corporate affairs.

The near-term impact of the ruling may be limited, however, if courts of other states ignore the court’s ruling and continue to attempt to regulate the internal affairs of Delaware corporations. If that happens, it may take individual lawsuits filed in federal court challenging the state laws that seek to regulate the internal corporate affairs of corporations incorporated in other states for the full force and effect of the JUUL ruling to be realized.


[1] Section 1601(a) of the California Corporations Code states:

The accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board of any domestic corporation, and of any foreign corporation keeping any such records in this state or having its principal executive office in this state, shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder s interests as a shareholder or as the holder of such voting trust certificate. . . .

See Cal. Corp. Code § 1601 (emphasis added).

[2] The day after the Company filed suit in Delaware, the stockholder filed an action in the Superior Court of California for the County of San Francisco. In the California action, the stockholder seeks to inspect the Company’s books and records under Section 1601. 

[3] The Court reserved judgment about whether the stockholder could enforce his inspection rights to access the Company’s books and records despite the fact that he agreed in various contracts to “unconditionally and irrevocably waive[]” his inspection rights under Section 220 of the DGCL. While not deciding the issue, the Court noted that “[h]istorically, Delaware decisions have rejected efforts by corporations to limit or eliminate inspection rights,” but that there are also “strong countervailing considerations, including Delaware’s broad recognition of parties’ ability to waive other important rights, whether constitutional or statutory.” Specifically, the court noted the possible differences between a waiver of information rights located in a corporation’s certificate of incorporation, which would be unenforceable, and a waiver of information rights located in a private agreement, which would be a closer call. We note that the National Venture Capital Association’s recently updated model documents include such an information rights waiver by private agreement.

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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