Business Law Journal

Summary

A California shareholder asked to inspect his company’s records. The company, though headquartered in San Francisco, was incorporated in Delaware, and its bylaws stated any dispute “governed by the internal affairs doctrine” had to be litigated in Delaware. The company tried to use that clause to push the fight across the country. The Court of Appeal refused to let it. The clause was valid and technically covered the dispute — but enforcing it would have gutted the shareholder’s inspection rights under California law, which the Legislature has declared cannot be taken away. Thus, the Court of Appeal reversed.

Critical Facts

David Salamon is a California resident who owns 11.11% of Orchid Global, Inc. Orchid and its subsidiary are Delaware corporations, but both run their business out of San Francisco. After Orchid offered to buy back Salamon’s shares, he asked to inspect a range of company records — the shareholder list, five years of board minutes and financial statements, audits, tax returns, and loan documents — so he could value his stake and check for mismanagement. He made the request under California Corporations Code sections 1600 and 1601, the statutes that give shareholders the right to inspect corporate records.

Orchid rejected the demand outright, arguing that as a Delaware corporation it answered only to Delaware law. It filed its own action in Delaware and asked the California court to hit pause — to stay the case — based on the forum selection clause in its bylaws. The trial court agreed and stayed the California action. Salamon appealed.

The Two Questions the Court of Appeal Answered

1. Did the forum selection clause even apply? Yes.

The bylaws sent “internal affairs” disputes to Delaware, and the Court of Appeal agreed that a shareholder’s demand to inspect corporate records is exactly that kind of internal matter. On this point, the company won: the inspection demand fell within the clause.

A practical note buried in this part of the ruling matters for anyone drafting bylaws. The Court applied Delaware law to interpret the clause, because the law of the state of incorporation generally governs how a company’s bylaws are read. The shareholder had assumed California law controlled interpretation and never argued otherwise — a misstep that cost him this issue.

2. Could the company actually enforce the clause? No.

This is where the case turned. A forum selection clause is normally enforced. But California courts will not enforce one if doing so would violate the state’s public policy — in particular, by stripping California residents of rights that state law says cannot be waived.

California’s inspection statutes are exactly those kinds of rights. Sections 1600 and 1601 both state a shareholder’s inspection rights “may not be limited by the articles or bylaws,” and — importantly — they apply to any out-of-state corporation that keeps its principal office in California. The Court read that language as voiding any attempt to limit or waive those rights.

Because unwaivable rights were at stake, the burden flipped. It was not Salamon’s job to prove the clause was unfair. It was Orchid’s job to prove that litigating in Delaware “will not diminish in any way” his California inspection rights — and the only way to do that was to show Delaware would give him the same or greater access, or would apply California law.

Orchid could not make that showing. In fact, it never even acknowledged it carried the burden. And the underlying comparison ran decisively against it.

Why California Rights Won: California vs. Delaware Inspection Law
The Court walked through the differences between the two states’ statutes. They are significant:

A recent Delaware amendment made the gap wider, narrowing the records a stockholder can reach and raising the bar for anything beyond a short list of formal documents. Many of the records Salamon sought — five-year lookbacks, tax returns, loan documentation — would likely be off-limits in Delaware. Orchid itself had conceded as much, even telling the Delaware court that “almost all” of Salamon’s requested categories were barred there.

Because Delaware law was “more restrictive and ’far less favorable,” enforcing the forum selection clause would have let Orchid do indirectly what California law forbids directly — limit rights the Legislature said may not be limited. The Court reversed and sent the case back with directions to let the inspection demand proceed in California.

What This Means for You

If you are a California shareholder or investor. Your right to inspect the records of a company headquartered in California is a powerful and protected one — even if the company is incorporated in Delaware. A forum selection clause in the bylaws does not automatically ship your inspection dispute out of state. If you are trying to value your shares, evaluate a buyout, or investigate possible mismanagement, California law gives you broader access than Delaware does, and companies cannot contract that access away.

If you are a company or board member. A Delaware forum selection clause is not a shield against California inspection demands from resident shareholders when your principal office is in California. Sections 1600 and 1601 reach you. Before relying on a forum or choice-of-law provision to resist a records demand, understand that the burden will be on the company to prove the shareholder loses nothing by litigating elsewhere — a burden that is hard to meet given how much broader California’s statutes are.

If you are drafting or reviewing corporate documents. Two lessons. First, the state of incorporation generally governs how bylaws are interpreted, so choose and draft forum selection and governing-law language deliberately. Second, no amount of careful drafting will override California’s unwaivable statutory rights for companies based here — a forum selection clause that would strip those rights will not be enforced.

One Point to Watch

The rule the Court applied — who bears the burden when a forum selection clause threatens unwaivable rights — is currently before the California Supreme Court in a separate case. Until the high court says otherwise, the framework in Salamon controls, but this is an area worth monitoring.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

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