Legislative changes made earlier this year in Delaware’s venerable corporate law (which include amendments to the laws governing conflicting interest transactions and books and record requests that were the subject of one of our annual Business Law Forum sessions this spring) have begun to affect business law practice and client behaviors. A recently filed complaint, as some of you may have heard, has generated interest in the bar for its creative approach. That approach, however, raises questions about the internal affairs doctrine applicable to business entity cases and controversies.

The internal affairs doctrine essentially provides that matters involving the internal affairs of a legal business entity are governed by the law of the state of organization. So, for a Delaware corporation, Delaware corporate law would govern disputes relating to its internal affairs. But there always have been questions as to the boundaries of internal affairs. For example, are third-party liability claims, which are expressly addressed in business entity law through the codification of agency law principles (and sometimes related liability and litigation rules) in statutes and decisional law, internal affairs matters?

In Juul Labs, Inc. v. Grove, 238 A.3d 904 (2020), the Delaware Court of Chancery ruled that a Delaware corporation with its principal place of business in California could not demand corporate books and records under California’s corporate books and records law. In that opinion, Vice Chancellor Laster simply concluded: “The Company is a Delaware corporation. 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.”

A recent cause of action brought by the National Center for Public Policy Research (NCPPR) against United Airlines in an Illinois court, National Center for Public Policy Research v. United Airlines Holdings, Inc., raises the same issue. My co-blogger at the Business Law Prof Blog, Ann Lipton, describes the case succinctly in a recent post.

United Airlines is incorporated in Delaware, but it is headquartered in Illinois. NCPPR, as the owner of 123 United Airlines shares, has sued the company in Illinois, alleging that under Illinois’s inspection statute, it is entitled to internal records regarding United’s decision to limit flights to Tel Aviv. NCPPR is explicitly choosing not to seek inspection under Delaware law, on the ground that the changes to Delaware’s inspection statute wrought by SB 21 would make such a demand futile. Instead, NCPPR argues that inspection rights are outside the scope of the internal affairs doctrine, and therefore United is subject to Illinois’s inspection statute.

I urge you to read Ann’s post for a fulsome analysis. She is an insightful lawyer with a strong litigation background and scholarly record.

One might wonder why, given the Court of Chancery’s ruling in Juul, NCPPR would bring this action. Several important facts (other than distinctions in the substantive motivations for the plaintiffs’ claims in the two cases) make the United case interesting and potentially important, even in the wake of Juul. As I noted above, the Delaware corporate law on books and records demands was recently amended to narrow its scope. See, e.g., law firm posts here and here. Among other things, the revised statute narrows the scope of books and records that may be the subject of a demand and establishes new procedural requirements for stockholder litigants seeking books and records under the statute. The United complaint was filed in Illinois asserting the application of Illinois law to give NCPPR the best chances to argue for Illinois as the governing law considering both Juul and the recent Delaware law changes. As Ann has noted, the decision of the Illinois trial court is fraught with peril.  Others also have blogged about the case, including notably Stephen Bainbridge. If you are on Substack and have a paid subscription, you can find his most recent post (citing to earlier posts) here.

This is a case to watch. The Illinois court’s ruling is of importance to the application of the internal affairs doctrine in Delaware. But the case ultimately may also shed light on the new Delaware law governing corporate books and records requests and impact the interpretation of the corporate laws of other states, including Tennessee.

This article was contributed by Joan Heminway. She is the Rick Rose Distinguished Professor of Law at the University of Tennessee Winston College of Law, a corporate finance lawyer, and a past chair of the TBA Business Law Section.