I have long understood (and taught) that shareholder inspection rights are a rare exception to the internal affairs doctrine. In our casebook, for example, we include Crane Co. v. Anaconda Co., 346 N.E.2d 507 (N.Y. 1976), in which the court applied New York law to determine whether a shareholder (that was incorporated in Illinois) was eligible to examine the stockholder list of a company incorporated in Montana. Plaintiff relied on NY BCL sec. 1315, which permits NY courts to order inspection of books and records of companies incorporated in other states.
In Juul Labs, Inc. v. Grove, CV 2020-0005-JTL, 2020 WL 4691916 (Del. Ch. Aug. 13, 2020), however, the Delaware Chancery Court held that "[s]tockholder inspection rights are a core matter of internal corporate affairs."
This is a critical holding, because the internal affairs doctrine has important constitutional implications:
“[T]he internal affairs doctrine raises important Constitutional concerns—namely, under the Fourteenth Amendment Due Process Clause, the Full Faith and Credit Clause, and the Commerce Clause.” Salzberg v. Sciabacucchi, 227 A.3d 102, 136 (Del. 2020). The Due Process Clause of the Fourteenth Amendment is implicated by the need for directors and officers “to know what law will be applied to their actions” and by the stockholders' “right to know by what standards of accountability they may hold those managing the corporation's business and affairs.” McDermott Inc. v. Lewis, 531 A.2d 206, 216–17 (Del. 1987). The Full Faith and Credit Clause “commands application of the internal affairs doctrine except in the rarecircumstance where national policy is outweighed by a significant interest of the forum state in the corporation and its shareholders.” Id. at 218 (emphasis in original) (footnote omitted). Under the Commerce Clause, a non-chartering state “ ‘has no interest in regulating the internal affairs of foreign corporations.’ ” Id. at 217. ...
The statute at issue in Juul was a California law substantially similar to New York's section 1315. As the court explained:
California is not alone in granting rights to access the books and records of foreign corporations that do business in the state. If other states could define the terms by which stockholders can inspect books and records, then a Delaware corporation could be subjected to different provisions and standards in jurisdictions around the country. Under constitutional principles outlined by the Supreme Court of the United States and under Delaware Supreme Court precedent, stockholder inspection rights are a matter of internal affairs. Grove's rights as a stockholder are governed by Delaware law, not by California law.
If widely accepted, Juul’s application of the internal affairs doctrine to shareholder inspection rights thus calls into question the constitutional validity of statutes like those of New York and California that attempt to treat shareholder inspection rights as being an exception to the internal affairs doctrine.
Juul stands in opposition to prior law that treats access to stockholder lists as a well-established exception to the internal affairs doctrine as a matter of both corporate law and conflicts of law. The Restatement (Second) of Conflict of Laws, for example, provides:
The right of a shareholder to inspect the books of a corporation poses special problems. This is an issue which can practicably be determined differently in different states. This is also an issue which, if decided differently in different states, will not seriously undermine the policy favoring uniform treatment for all shareholders of a corporation. For these reasons, a court will apply to a foreign corporation doing substantial business in the state a local statute providing for the inspection of books by a shareholder if in the court’s opinion the statute embodies an important policy.
Restatement (Second) of Conflict of Laws § 304, comment d (1971). See also Annot., 19 A.L.R.3d 869, 889-91 (1968) (noting that states have traditionally exercised authority to require disclosure of stockholder lists of foreign corporations doing business within their borders).
Although the Juul court did not directly speak to the Restatement commentary, it did address the argument that having multiple states regulating shareholder inspection rights of the same corporation would not be problematic:
An important public policy served by the internal affairs doctrine is to ensure the uniform treatment of directors, officers, and stockholders across jurisdictions. “Uniform treatment of directors, officers and shareholders is an important objective which can only be attained by having the rights and liabilities of those persons with respect to the corporation governed by a single law.” Restatement (Second) of Conflict of Laws § 302, cmt. e. “A State has an interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.” CTS Corp., 481 U.S. at 91, 107 S.Ct. 1637. Having the law of the state of incorporation govern a corporation's internal affairs “prevent[s] corporations from being subjected to inconsistent legal standards” and “provide[s] certainty and predictability,” thus “protect[ing] the justified expectations of the parties with interests in the corporation.” VantagePoint, 871 A.2d at 1112–13.
...
California's balancing of the competing interests between stockholders and the corporation differs from Delaware's. And California is not alone in granting rights to access the books and records of foreign corporations that do business in the state. If other states could define the terms by which stockholders can inspect books and records, then a Delaware corporation could be subjected to different provisions and standards in jurisdictions around the country.
Update: Our friend Francis Pileggi has an excellent post discussing the case, including treatment of its analysis of the exclusive forum clause.
