DELAWARE COURT OF CHANCERY APPLIES ‘INTERNAL AFFAIRS DOCTRINE’ TO STOCKHOLDER INSPECTION RIGHTS

On August 13, 2020, the Delaware Court of Chancery held that the “internal affairs doctrine” precludes a shareholder of a Delaware corporation which maintains its headquarters in a foreign jurisdiction from seeking to inspect corporate books and records under the law of a foreign jurisdiction.  Instead, shareholders are limited to the inspection rights provided in Delaware General Corporation Law, 8 Del. C. § 220.

In late 2019, Daniel Grove (“Grove”), a former Juul Labs, Inc. (“Juul”) employee and current stockholder, demanded to inspect the company’s books and records pursuant to California Corporations Code § 1601.  California’s law permits a shareholder to inspect the books and records of a corporation that maintains its principal executive office in California, irrespective of the state of incorporation. However, Juul’s articles of incorporation designates the Delaware Court of Chancery as the exclusive forum for adjudicating disputes over the internal affairs of the Company.  Juul filed suit in Delaware seeking declaratory and injunctive relief regarding the application of Delaware law, as well as whether Grove waived his inspection rights.

In applying the “internal affairs doctrine” the Chancery Court stated that “inspection rights are a core matter of internal corporate affairs.”  Further, Delaware law was the only applicable law because “[i]f other states could define the terms by which stockholders can inspect books and records, then a Delaware corporation could be subject to different provisions and standards in jurisdictions around the country.”  While the Chancery Court held that only Delaware law is applicable, the Court did not reach a decision regarding Juul’s argument that Grove waived his inspection rights.  Instead, the Court noted that “[h]istorically, Delaware decisions have rejected efforts by corporations to limit or eliminate inspection rights.”