Delaware Court Of Chancery Holds Stockholder Inspection Rights For Delaware Corporations Are Governed Exclusively By Delaware Law And Are Subject To A Delaware Forum Selection Provision Addressing Internal Affairs
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  • Delaware Court Of Chancery Holds Stockholder Inspection Rights For Delaware Corporations Are Governed Exclusively By Delaware Law And Are Subject To A Delaware Forum Selection Provision Addressing Internal Affairs
     
    08/18/2020
    On August 13, 2020, Vice Chancellor J. Travis Laster held that defendant, a stockholder of plaintiff JUUL Labs, Inc., did not have the right to seek inspection of books and records of the Delaware corporation under any state statutory law other than that of Delaware.  JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020).  Therefore, because defendant had only sought inspection under a California statutory provision, the Court rejected the demand and granted judgment on the pleadings in favor of plaintiff.  The Court also held that a forum selection provision in the certificate of incorporation, providing that the Delaware Court of Chancery is the exclusive forum for actions arising pursuant to the Delaware General Corporation Law (“DGCL”) or asserting claims against the corporation “governed by the internal affairs doctrine,” applies to actions to inspect books and records.

    According to the decision, JUUL is a privately held Delaware corporation with its principal place of business in California.  After defendant issued a demand to inspect the company’s books and records pursuant to Section 1601 of the California Corporations Code and threatened to sue in California state court, JUUL initiated this declaratory judgment action in the Delaware Court of Chancery.  Plaintiff asserted that defendant had waived his rights to seek inspection under various stockholder agreements and, in any event, could only possess statutory inspection rights under Delaware law.  Defendant separately filed suit in California.

    Preliminarily, the Court found that the plain language of certain agreements to which defendant was a party purported to waive defendant’s inspection rights only under Section 220 of the DGCL (the Delaware statutory provision on books and records inspection) and did not extend beyond Section 220 or reach “other potential sources of information rights,” such as a California statutory provision.  As to certain other agreements, the Court found that the inspection rights limitations expressly only applied to other specified parties, and not to defendant.

    Nevertheless, the Court held that “[t]he scope of [defendant’s] inspection rights is a matter of internal affairs, so Delaware law applies” and defendant, therefore, “cannot rely” on a California statutory provision to obtain books and records.  The Court explained that inspection rights are a “core matter of internal corporate affairs,” and “if other states could define the terms by which stockholders can inspect books and records, then a Delaware corporation could be subjected to different provisions and standards in jurisdictions around the country.”

    Likewise, the Court further held that the Delaware forum selection provision for claims governed by the internal affairs doctrine applies to an action against the company to inspect books and records.  Therefore, defendant “must pursue any remedy” with respect to inspection rights in the Delaware Court of Chancery.

    Significantly, however, the Court expressly declined to address the issue of whether a stockholder can waive inspection rights under Delaware law because defendant had not yet made any demand for inspection under Delaware law.
    CATEGORIES: Books and Records, Charters & Bylaws

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