On August 13, 2020, the Delaware Court of Chancery issued an opinion in JUUL Labs, Inc. v. Grove, holding that a stockholder could not use Section 1601 of the California Corporations Code to inspect the books and records of a Delaware corporation because the “internal affairs doctrine” dictated that Delaware law must apply.
The case arose when Daniel Grove, a former employee of JUUL, was awarded and later exercised stock options. As part of the grant and exercise of the options, Grove entered into several agreements which purported to limit his inspection rights. Despite those agreements, on December 27, 2019, Grove demanded to inspect JUUL’s books and records under Section 1601 of the California Corporations Code. Ten days later, the company filed suit in the Delaware Court of Chancery seeking a declaratory judgment that Delaware law governs Grove’s inspection rights, if any existed, and he waived his right to inspection when he entered into the contracts with the company. JUUL also sought an order enjoining Grove from pursuing inspection in the California courts. The next day, Grove filed suit in California state court.
In ruling on cross motions for judgment on the pleadings, the Delaware court rejected the company’s argument that Grove waived his right to inspection under Section 1601 of the California Corporations Code because the stock grant and exercise agreements only spoke to Section 220 of the Delaware General Corporation Law, and were not sufficiently broad to encompass Section 1601. The court did, however, find that the investor agreements were broad enough to encompass a waiver of Section 1601, but there was a question as to whether Grove was even covered by those agreements.
On the central question of application of the internal affairs doctrine, the court quoted the U.S. Supreme Court, which had previously explained that:
The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs – matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders – because otherwise a corporation could be faced with conflicting demands.
(Edgar v. MITE Corp., 457 U.S. 624, 645 (1982).)
In interpreting the doctrine, the Delaware court held that stockholder inspection rights are a core matter of internal corporate affairs, and the doctrine serves an important public policy of ensuring the uniform treatment of directors, officers, and stockholders across jurisdictions. The court found that, while the two sections of law were similar, Section 1601, and related information rights provisions, balance the relative interests of stockholders and the corporation differently than Section 220.
After recognizing that many states, including California, provide inspection rights for books and records of foreign corporations, the court reasoned that a Delaware corporation could be subject to different provisions and standards in jurisdictions around the country if the internal affairs doctrine did not apply Delaware law to such inspection rights. The court held that under both U.S. and Delaware Supreme Court precedent stockholder inspection rights are a matter of internal affairs, and because Mr. Grove’s rights as a stockholder are governed by Delaware law, he cannot seek an inspection under Section 1601. Applying the Delaware forum selection provision contained in JUUL’s Certificate of Incorporation, the court also held that Mr. Grove must pursue his case in Delaware rather than California.
Takeaways
The decision demonstrates the power of the internal affairs doctrine and its implications for the enforceability of other jurisdiction’s laws, including California law, on Delaware corporations.
The case also shows the importance of Delaware forum selection provisions in a contract.
The facts of the case demonstrate the importance of good corporate record keeping and procedures related to options grants and investor agreements.
While the case does not answer the question of whether a stockholder can waive his rights to inspect books and records under Section 220, it does summarize the competing arguments and policy considerations for and against waiver.
The ultimate resolution of whether a corporation can modify or eliminate mandatory inspection rights expressly set forth in the Delaware General Corporation Law by restricting or eliminating those rights in a contract operating independently and outside the charter or bylaws is still to be decided, but its resolution will be of tremendous importance to corporate practitioners everywhere.