Labor Code § 925 Does Not Eat the Internal Affairs Doctrine.

Grove v. Juul Labs, Inc., No. A162276 (D1d3 Apr. 27, 2022)

 A former employee and current Stockholder sued a Company, simultaneously bringing direct and derivative claims as well as a demand for inspection of the Company’s books and records under Corporations Code § 1601, which purports to give California residents the right to inspect the books and records of companies incorporated elsewhere. On the books and records piece, the Company beat him to the punch by filing a declaratory relief action in the Delaware Court of Chancery. Stockholder dropped his substantive claims and the Court stayed his book and record claims based on a forum selection clause in the exercise agreement under which his stock was granted.

The Company prevailed in the Delaware case. The Vice Chancellor found that although Stockholder hadn’t waived his inspection rights under § 1601 in his exercise agreement, the internal affairs doctrine precluded the application of § 1601 to a Delaware corporation. But to the extent that Stockholder sought to enforce his rights, forum selection provisions in the Company’s articles and bylaws required him to do it in Delaware.

Back in California, the company moved to lift the stay and demurred to the § 1601 under res judiciata. Stockholder amended the complaint to add back the direct and derivative claims. Company responded to that with a motion to stay on forum non-conveniens grounds. The trial court granted a stay, finding that the claims on the merits had to be litigated in Delaware and the § 1601 claim had already been litigated to judgment. Stockholder appealed. 

On the substantive claims the Court finds it was reasonable to enforce the various Delaware forum selection clauses in the Company’s foundational documents that to require a Delaware forum. Stockholder’s key counterpoint is to invoke Labor Code § 925. Section 925 is a relatively new law that says you can’t deprive a California employee of a California forum or the protections of California law as a condition of his or her employment. Stockholder says that since he got his stock as a form of compensation while employed by the Company,  § 925 requires the application of California law and a California forum for his claims.

In a ruling that should make every VC fund in the Valley breathe a little easier, the Court of Appeal says no. Stockholder isn’t bringing employment claims in his capacity as a former employee. He’s bringing fiduciary duty claims in his capacity as a Stockholder. The mere fact that Stockholder got his stock incidentally to his employment is not enough to drag his rights as a stockholder under the ambit of California law. As the Court explains, to say otherwise would create an exception to the internal affairs doctrine for California employee/stockholders. That would be a disaster. 

So far as the § 1601 claim goes, that was fully litigated in Delaware. Employee tries to retreat the substance of that claim with the Court here, but it’s not having any of it. The California Court of Appeal isn’t the proper venue from which to take an appeal from a judgment of the Delaware Court of Chancery. And there are no good reasons in this case not to respect the finality of the Delaware ruling, even if it was wrong about § 1601, particularly since Stockholder didn’t appeal it to the Delaware Supreme Court.

Affirmed.

Have at It, Court of Chancery . . .

Bushansky v. Soon-Shiong, No. D072213 (D4d1 May 25, 2018)

Over the past decade, it has become increasingly prevalent for corporations to enact what are called forum-selection bylaws. These require stockholders who sue the company or its directors in stockholder litigation to bring their claims only in the state of incorporation, usually Delaware. Because bylaws are, more or less, a contractual arrangement between the company and its stockholders, the theory is that the bylaws are an enforcible forum selection contract. The Delaware Supreme Court agrees, and has held that they are enforceable. I’m not aware of a reported California appellate decision that’s given a thumbs-up, but the parties in this case seem to agree that the bylaw here is valid and enforceable. They just disagree that it applies.

Founder Fends Off Parol Evidence Challenge to Oral Put

Kanno v. Marwit Capital Partners II, L.P., No G052348 (D4d3 Dec. 22, 2017) 

Founder was selling his company to Buyers, a private equity outfit. He wanted to just cash out and be done. But Buyers—as private equity guys often do—wanted Founder to stick around and keep some skin in the game. So they offered part of the consideration in equity. Founder grudgingly accepted.

No RJT for BFD.

Central Laborers’ Pension Fund v. MacAfee, Inc., No. H039508 (D6 Nov. 15, 2017)

This case—a stockholder suit alleging a breach of fiduciary duty in connection with a merger—is interesting because 90 percent of it is decided under Delaware law, but the court elected to publish it anyway. Having done a number of similar cases in California state courts, that’s pretty useful.

But there’s also an issue about the right to jury trial. In Delaware, there would be no jury trial right for these cases, because they are heard in the Court of Chancery, a court of equity that doesn’t use juries. But, as the court notes, the jury trial issue is a question of California procedure, even when Delaware substantive law applies under the internal affairs doctrine. Under California law, a claim for breach of fiduciary duty is inherently equitable, even if the remedy sought includes damages along with injunctive relief. Plaintiffs thus didn’t have a right to a jury trial in this case and the trial court did not err by striking their jury demand.

Reversed in part.