On August 13, 2020, the Delaware Court of Chancery (the “Court”) issued an opinion, JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL, holding that under the “internal affairs doctrine,” a stockholder of a Delaware corporation headquartered in California could not seek to inspect the corporate books and records pursuant to California’s inspection statute.
JUUL Labs, Inc. (“JUUL”) is a Delaware corporation headquartered in San Francisco, California. The case arose when Mr. Grove, a stockholder of (“JUUL”), demanded to exercise his inspection rights under Section 1601 of the California Corporations Code. That statute grants inspection rights to a stockholder of a corporation with its principal executive office in California, regardless of the corporation’s state of incorporation. JUUL filed the suit in Delaware seeking, among other things, that Delaware law, not California law, should govern Mr. Grove’s inspection rights as a stockholder of JUUL.
After rejecting JUUL’s arguments that Mr. Grove has waived his California law-based inspection rights under certain option and stockholder agreements, the Court found that because of the “internal affairs doctrine,” Mr. Grove could not seek to inspect JUUL’s books and records under Section 1601 of the California Corporations Code. As cited in the Court’s opinion, “[T]he 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 and between the corporation and its current officers, directors, and shareholders…” Consistent with numerous Delaware decisions demonstrating the significance of stockholder inspection rights as a matter of the internal affairs of Delaware corporations, the Court further reasoned that the internal affairs doctrine serves to an important public policy of ensuring the uniform treatment of directors, officers and stockholders across jurisdictions. With noting the subtle differences between the California statutory inspection rights and Delaware statutory inspection rights, the Court determined that stockholder inspection rights, as a matter of internal affairs of a Delaware corporation, could not be subjected to different provisions and standards in jurisdictions around the country. As such, Mr. Grove’s inspection rights should be governed by Delaware—rather than California—inspection statute. Please refer to https://courts.delaware.gov/Opinions/Download.aspx?id=309340 for further details of this case.