Delaware Business Litigation Report

Chancery Holds Statutory Rights to Inspect Books and Records of a Delaware Corporation are Subject to the Internal Affairs Doctrine and Governed Exclusively by Delaware Law

JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020)

Stockholder inspection rights are a core matter of the governance of a corporation. This decision holds that, pursuant to the internal affairs doctrine, inspection rights for a stockholder of a Delaware corporation are governed exclusively by Delaware law, not by laws of other jurisdictions, regardless of where a company’s principal place of business is located.

JUUL Labs is a privately-held Delaware corporation with a principal place of business in California. After a JUUL Labs stockholder based his demand on California state law and threatened to bring suit in California state court to enforce his inspection rights, JUUL Labs sought declaratory relief in the Court of Chancery. JUUL Labs argued that the stockholder waived his inspection rights under certain form agreements; that in any event, Grove’s default statutory inspection rights were governed by Section 220 of the Delaware General Corporation Law (“DGCL”), not under Section 1601 of the California Corporations Code; and that the Court of Chancery had exclusive jurisdiction due to a forum-selection provision in JUUL Labs’ certificate of incorporation. Each side moved for judgment on the pleadings.

The Court first held that JUUL Labs failed to show that the stockholder was a party to an agreement reflecting the clear and affirmative language necessary to waive statutory rights; while some language purported to waive rights under Section 220 of the DGCL, none expressly referenced the California Corporations Code. Accordingly, it was necessary to determine what, if any, inspection rights the stockholder had under California law. 

In this regard, the Court reasoned that stockholders’ statutory inspection rights are a core matter of the internal affairs of a Delaware corporation. Precedent from the U.S. Supreme Court and the Delaware Supreme Court requires that, where the laws of the state of incorporation differ from those of another state, the former govern matters relating to the corporation’s internal affairs. This is necessary as a matter of due process to provide certainty over which state’s laws apply. Reviewing California law in detail, the Court concluded that, while California’s books and records statutes were not “radically different” than Delaware’s, “California’s balancing of the competing interests between stockholders and the corporation differs from Delaware’s.” And California was not alone in granting inspection rights to stockholders of foreign corporations, creating a risk that “a Delaware corporation could be subjected to different provisions and standards in jurisdictions around the country.” Accordingly, under the internal affairs doctrine, Delaware law applied. Relatedly, the terms of a Delaware exclusive forum provision in JUUL Labs’ certificate of incorporation applied, and the stockholder was required to bring any claim to enforce inspection rights in the Court of Chancery. 

The Court accordingly granted JUUL Labs judgment on the pleadings. In doing so, the Court noted it was not deciding whether purported waivers of the stockholder’s statutory inspection rights under Section 220 in JUUL Labs’ form agreements would be enforceable. While some Delaware cases have not respected such waivers when located in a corporation’s constituent documents, waivers in a separate agreement might be viewed differently. Because the stockholder’s demands were not made under Section 220, the Court was not required to decide such issues. 

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