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Does This Ruling By V.C. Laster Decide The Constitutionality Of California's Female Board Quota Legislation?

Michael Corleone's greatest fear was that he would never be able to escape his life as a mafioso ("Just when I thought I was out, they pull me back in!").  California's greatest fear is that it will not be able to dictate corporate governance standards to business organizations that choose to incorporate in other jurisdictions.  Thus, California has long sought to impose its standards on foreign corporations.  The state's most recent endeavor is to require publicly held foreign corporations to adhere to California's female board member quotas.  Cal. Corp. Code § 2115.5.  California uses the principal executive office location as the hook to catch these publicly held corporations.  Cal. Corp. Code § 301.3(a).  See California Enacts Novel Female Board Quota Legislation.

California's shareholder inspection statute, Corporations Code Section 1601, uses the same hook to grant shareholders the right to inspect a foreign corporation's accounting books, records, and minutes.  Last week, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled that a stockholder, Grove, could not avail himself of the rights granted by Section 1601:

"Under principles articulated by the Supreme Court of the United States and applied by the Delaware Supreme Court, Delaware law governs its internal affairs. The scope of Grove's inspection rights is a matter of internal affairs, so Delaware law applies. Grove therefore cannot rely on Section 1601 to obtain books and records. Because Grove's inspection rights implicate the Company's internal affairs, Grove must pursue any remedy in this court under the exclusive forum-selection provision in the Company's certificate of incorporation. Grove has not yet made a demand for inspection under Delaware law, and so this decision does not address whether he validly waived his inspection rights."

Juul Labs, Inc. v. Grove, 2020 Del. Ch. LEXIS 264.  

Notably, the company filed the lawsuit against Mr. Grove in Delaware after Mr. Grove had made a demand for inspection under Section 1601.  We, of course, don't know what would have happened had Mr. Grove sued the Company in California to enforce his rights.

[Update - a reader points out that the ruling states that Grove filed a lawsuit in California the day after Juul filed its action in Delaware.  According to the Superior Court's docket, Judge Ethan P. Schulman on July 1, 2020 granted Juul's motion to stay the proceedings for forum non conveniens.]

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stockholder inspection, Corporate Governance, internal affairs doctrine

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