Section 220 of the Delaware General Corporation Law permits a stockholder or director to make a books and records against a corporation incorporated in Delaware, regardless of where the corporation conducts its business. Yet many jurisdictions have their own inspection statutes, some of which govern not only entities incorporated or formed in that state, but also foreign entities that have a principal place of business in the state, even if incorporated elsewhere, such as Delaware.
The question therefore becomes, which state's law governs a books and records demand, the state of incorporation or the state in which the company's principal place of business is located? This precise question was addressed in the recent decision of JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020). There, defendant Daniel Grove made a demand to inspect the books and records of plaintiff JUUL Labs, Inc. ("JUUL") in California under Cal. Corp. Code § 1601. JUUL is a Delaware corporation with its principal place of business in California.
Under Section 1601 of the California Corporations Code, a stockholder of a company whose principal place of business is located in California may demand inspection of the corporate books and records of such entity, even if the entity is a foreign corporation.
In response to the demand, JUUL filed a declaratory judgment action in Delaware, asserting that Section 220 of the DGCL governed the demand, not Section 1601 of the California Corporations Code. JUUL argued: (i) that Grove could only make a demand under Section 220 of the DGCL, (ii) that a forum selection clause in the corporation's certificate of incorporation prohibited Grove from bringing a books and records action outside of Delaware, and (iii) Grove waived his rights to inspection under various agreements entered into between the parties.
Vice Chancellor Laster held that Grove's inspection demand was governed by Section 220 of the DGCL, not Section 1601 of the California Corporations Code. This is so because the Court determined that inspection rights are governed by the internal affairs doctrine, under which Delaware law applies. "The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders." Slip op. at 15-16 (citing VantagePoint Venture P'rs 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005)). The Court stated that "[s]tockholder inspection rights are a core matter of internal corporate affairs", and noted that the Delaware Supreme Court has described the ability of stockholders to access books and records as "an important part of the corporate governance landscape." Id. at 17 (citing Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 120 (Del. 2006) (internal quotation marks omitted)).
Given the application of the internal affairs doctrine, the Court of Chancery found that Section 1601 of the California Corporation Code did not apply to a books and records demand made upon a Delaware corporation, even if that entity has its principal place of business in the state of California. Rather, a books and records demand made upon a Delaware corporation would be governed by Delaware law, notwithstanding the fact that Section 1601 permits inspection rights against corporations doing business in California, even if incorporated elsewhere.
Finally, the Court did not reach the issue of whether a stockholder can waive inspection rights under Delaware law. In this regard, the Court noted that "Delaware decisions have rejected efforts by corporations to limit or eliminate inspection rights", however, "there are strong countervailing considerations, including Delaware's broad recognition of parties' ability to waive other important rights, whether constitutional or statutory." Slip op., at 24. Because Grove did not make a demand under Section 220 of the DGCL, the Court did not address this issue.
Key Takeaway and Open Question
This decision is significant as it clarifies that a Delaware court will apply Delaware's books and records statute to an inspection demand made upon a Delaware corporation, even if another jurisdiction provides statutory inspection rights. But an open question remains: how will a California court, which is not bound by Delaware precedent, react to an inspection demand made upon a foreign company doing business in California? Will it follow the lead of the Delaware judiciary and apply the law of the state in which the company was formed, or instead nonetheless enforce the demand based upon the statutory power conferred upon it under Section 1601 of the California Corporations Code? This is certainly an issue to keep an eye on moving forward.
Originally published August 16, 2020
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