August.21.2020
On August 13, 2020, the Delaware Court of Chancery held that stockholders’ rights to inspect the books and records of Delaware companies are exclusively governed by the Delaware inspection statute, 8 Del. C. § 220, regardless of whether the company is headquartered in another state with a different inspection rights statute. See JUUL Labs, Inc. v. Grove, No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020).
JUUL is a privately held Delaware corporation headquartered in San Francisco, California. On December 27, 2019, a JUUL stockholder (who was also a former employee) demanded to inspect the company’s books and records under Section 1601 of the California Corporations Code, which, as Vice Chancellor Laster explained, “grants inspection rights to any stockholder in a corporation with its principal executive office in California, regardless of [the] corporation’s state of incorporation.” JUUL challenged the inspection demand on the ground that, among other things, the demand was invalid because JUUL is a Delaware company and therefore the stockholder’s inspection rights were exclusively governed by Delaware law.
The Court of Chancery agreed with JUUL. Vice Chancellor Laster explained that “[s]tockholder inspection rights are a core matter of internal corporate affairs” and, with limited exceptions, Delaware law governs the internal affairs of Delaware corporations. The Vice Chancellor further noted that “[a]n important public policy served by the internal affairs doctrine is to ensure the uniform treatment of directors, officers, and stockholders across jurisdictions, . . . ‘which can only be attained by having the rights and liabilities of those persons with respect to the corporation governed by a single law.’” “If other states could define the terms by which stockholders can inspect books and records,” the court explained, “then a Delaware corporation could be subjected to different provisions and standards in jurisdictions around the country.” Thus, because inspection rights with respect to Delaware companies are a matter of internal affairs and therefore governed by Delaware law, the court held that the JUUL stockholder could not seek inspection under Section 1601 of the California Corporations Code.
The JUUL Labs ruling is important because stockholders may strategically seek inspection under other states’ laws that provide broader inspection rights than those afforded under Delaware law. For example, Section 1600 of the California Corporations Code provides stockholders who meet certain ownership thresholds an “absolute right” to inspect the company’s stockholder list, whereas, under Delaware law, stockholders are not entitled to inspect a stockholder list if the company has demonstrated the demand is not for a “proper purpose.” As another example, Section 1604 of the California Corporations Code authorizes courts to award attorneys’ fees to the stockholder if it determines the company’s failure to comply with a proper inspection demand was "without justification,” whereas the Delaware statute contains no such fee-shifting provision.
JUUL Labs therefore provides Delaware companies an important tool to resist onerous or suspect inspection demands made under other states’ laws. Of course, it remains to be seen whether courts in other jurisdictions adhere to the JUUL Labs decision when evaluating inspection demands on Delaware companies that have been made under the law of the court’s home jurisdiction. For example, the result may have been different in JUUL Labs had the stockholder’s demand under California law been challenged in a California court. The reason it wasn’t is because JUUL initiated its challenge in Delaware, pursuant to the company’s exclusive forum provision in its certificate of incorporation, which provided that all actions governed by the internal affairs doctrine were subject to the exclusive jurisdiction of the Delaware Court of Chancery. Vice Chancellor Laster enforced the provision as applied to the California stockholders’ inspection demand, given that inspection demands involve the “internal affairs” of the corporation. To secure the benefits of the JUUL Labs decision, Delaware companies would be wise to include exclusive Delaware forum provisions in their corporate charters.