Saturday, August 15, 2020

The United States of Delaware

In Juul Labs v. Grove, Vice Chancellor Laster held that inspection rights are a matter of internal affairs, and therefore California’s Section 1601, which grants inspection rights to shareholders of California corporations and foreign corporations with headquarters in California, is invalid as applied to Delaware corporations.

There are a lot of policy implications here, because Juul arose in the context of a private company that required shareholders to waive their inspection rights under Delaware law.  Assuming Delaware treats that waiver as valid – and Laster did not reach that question – critical sources of information could be denied to private company investors.  And, as I previously blogged about the Juul dispute, if Delaware finds such contractual waivers valid, the next step is for companies to insert them into their charters and bylaws.  If that’s valid – and after Salzberg v. Sciabacucci, it could be – it would mean that 220 inspection rights could be left a functional dead letter for both private and public companies.

But actually, the interesting part here for me is the procedural aspect.  Now, the exact contours of the internal affairs doctrine have always been unclear – see, e.g., Mohsen Manesh, The Contested Edges of Internal Affairs – but Delaware’s decision on this was … overdetermined.  Delaware has always had a much broader view of the scope of the internal affairs doctrine than other states – particularly California – and this is not the first time Delaware has held that California’s corporate code is invalid as applied to Delaware entities.  See VantagePoint Venture P’rs 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005).  But California never seems to get its own chance to weigh in, because as soon as a Delaware company gets a hint that a shareholder plans to invoke its rights under California law, the company runs to file a declaratory action in Delaware.  That’s what happened in VantagePoint, and when the shareholder filed its own action in a California court, California stayed its own proceedings in favor of the first-filed Delaware action.

Here, a similar scuffle occurred.  The Juul shareholder first had to make a demand for inspection under California law, which put the company on notice that a dispute was in the offing.  The company immediately filed a declaratory judgment action in Delaware – arguing, among other things, that because the company had a forum selection clause in its charter requiring that internal affairs disputes be heard in Delaware, and because inspection rights are governed by the internal affairs doctrine, any California court would be powerless to weigh in.  The shareholder subsequently filed an action in California, but California stayed its ruling in favor of Delaware case.  See Grove v. Adam Bowen, Superior Court of Californa, CGC20582059.  That left the field free for Laster to hold that inspection rights are part of internal affairs, California’s law did not apply, and no suit could be filed in California.  And that holding is now presumably immune from attack in California courts, even though there is California precedent for the idea that Section 1601 does not deal with internal affairs.  See Valtz v. Penta Investment Corp., 139 Cal. App. 3d 803 (Ct. App. 1983).

I suppose if California courts really want to get in the middle of this, they could refuse to stay their own actions and rush to reach a judgment before Delaware does, but for now it seems like only Delaware is going to get a say.  And that’s going to be especially true if forum selection provisions in corporate governance documents extend beyond internal affairs – as the Delaware Supreme Court held they can in Salzberg – so that the forum choice in future cases does not depend on that initial “internal affairs” determination, while simultaneously functioning as a waiver of any challenge to personal jurisdiction over the shareholder in a Delaware court.*

And I, for one, would really like to hear what another state thinks.


*Which, by the way, just highlights the importance of the question whether other states accept Salzberg and agree that forum choices in corporate constitutive documents are binding even for noninternal affairs questions.  Because if a company has a charter provision that says all information disputes must be heard in Delaware, and other states accept that as binding contractually, then even if a California court wants to decide whether Section 1601 governs internal affairs or not, and is theoretically able to reach the question before it becomes res judicata in Delaware, it still won’t be able to hear the case.  So, all eyes on Dropbox.

Ann Lipton | Permalink


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