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Stockholder Inspections of Delaware Corporations in California

When foreign corporations do business in California they need to comply with California laws governing such corporations. However, California’s law is not the only law that applies to a foreign corporation. Such corporations also have to consider laws in their native states, as a recent case from Delaware demonstrates. This is why it is important for any such business to consult with an experienced business law attorney.

Delaware Rules its Courts Have Authority to Impose Specific Condition on Books and Records Inspection

In United Technologies Corp. v. Treppel, the Delaware Supreme Court held that a Delaware court has the authority to impose a specific condition on a books and records inspection under the Delaware General Corporation Law (DGCL). The condition in question in that case was one that would have said that “any claim, dispute, controversy or causes of action . . . arising out of, relating to, involving or in connection with” the inspection be brought in a Delaware court.

Why Should California Care About this Delaware Decision?

Businesses in California may question why this Delaware decision matters? The answer is that under California law stockholders may have inspection rights even if the corporation is incorporated in a different state. According to section 1601(a) of the California Corporations Code, stockholders have the right to inspect a foreign corporation’s books, records, and minutes if those records are kept in California or the corporation’s principal executive offices are in California. The California law goes even further. It says that the rights provided for in the law to inspect and copy these records may not be limited by the articles or bylaws.

An Apparent Conflict

This seems to create a conflict with what the Delaware high court just held. Delaware held that stockholders’ rights to an inspection can be limited under its laws. Meanwhile, if that Delaware corporation were to keep those books or records in the state of California, it seems that California gives stockholders an unlimited right to examine the books.

A Potential Attack on the California Law

Interpreting California’s law to grant stockholders more rights than the state of incorporation’s law may violate the “internal affairs doctrine.” This doctrine provides that the internal affairs of a corporation will be governed by the law of the state in which the corporation is incorporated. That would mean that in the case of a Delaware corporation doing business in California, Delaware law should govern the corporation’s internal affairs. California embraced this doctrine in relation to the inspection statute in Valta v. Penta Investment Corp., when the Court of Appeals held that this particular California law “is a right incidental to the ownership of stock, affects the relationship between corporation and shareholder, and is thus subject to regulation by statute where the corporation does business.”

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