A panel of the California Court of Appeal recently reversed a trial court order that stayed a minority shareholder’s California books-and-records proceeding in favor of Delaware.
The Court held that despite the fact that the forum selection clause in a corporation’s bylaws stated that Delaware was the exclusive forum for claims “governed by the internal affairs doctrine” applied to shareholder inspection demands, the enforcement of this clause concerning an inspection demand under California Corporations Code sections 1600 and 1601 was barred as against California public policy.
Background
Orchid and its subsidiary, Orchid Labs, Inc., are Delaware corporations with their principal places of business in San Francisco. Orchid Labs, Inc. is a software provider. The plaintiff was a California resident and a contractor for Orchid from 2017 to 2019. He held 11% of Orchid’s outstanding voting shares since 2019. In December 2024, Orchid offered to purchase all of the plaintiff’s shares for $1.3M.
The plaintiff’s asked to inspect corporate documents pursuant to §§ 1600 and 1601. Orchid rejected the plaintiff’s request, and the plaintiff said he hadn’t received any financial documents from Orchid; as a result, he wasn’t able to evaluate the value of his shares. He filed a petition in California Superior Court for a writ of mandate to compel Orchid to allow him to inspect and copy his requested records. Orchid filed a complaint in the Delaware Court of Chancery for declaratory relief to enforce its rights under Section 220 of the Delaware General Corporation Law. Orchid sought a declaration that Delaware law (not California) governs the rights (if any) of minority shareholder the plaintiff to inspect Orchid’s books and records, and that Orchid wasn’t obligated to make its books and records available to the plaintiff for inspection pursuant to California law.
The court rejected the plaintiff’s argument that the court shouldn’t enforce the forum selection clause because it would invalidate his right as a California resident shareholder to inspect Orchid’s books. The court explained that the plaintiff cited two public policies, one of which was his unwaivable right as a shareholder to inspect Orchid’s books under Corporations Code 1601.
Delaware law allows any shareholder inspection of the corporation’s books upon demand, provided the shareholder states a proper purpose. The Delaware Court of Chancery recognized that a shareholder’s desire to inspect corporate books to value his shares is a proper purpose. The court concluded that enforcing the forum-selection clause didn’t offend California public policy. An appeal followed.
Discussion
The plaintiff argued that the trial court erred in determining that his claims in this action fell within the scope of the forum selection clause, and rejecting his contention that applying the forum selection clause would be unenforceable as against public policy.
Judge James A. Richman wrote that a mandatory forum selection clause such as the one in this case is presumed valid and will be enforced unless enforcement would be unreasonable under the circumstances. That said, California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates the state’s public policy. The plaintiff didn’t dispute that the forum selection clause was mandatory, but argued that it didn’t apply to his claims seeking to enforce his shareholder inspection rights under sections 1600 and 1601.
The Trial Court Erred in Enforcing the Forum Selection Clause
After concluding the forum selection clause applied to the plaintiff’s claims, the Court turned to the enforceability of the clause. Judge Richman wrote that mandatory forum selection clauses such as the one in Orchid’s bylaws typically will be enforced, absent a showing that enforcement of the forum selection clause would be unfair or unreasonable. But California courts have held that a forum selection clause won’t be enforced if doing so would produce a result contrary to the public policy of the state.
Quoting an earlier decision, the judge explained that “a defendant seeking to enforce a mandatory forum selection clause bears the burden to show enforcement will not in any way diminish the plaintiff’s unwaivable statutory rights.” This showing requires the defendant to compare the plaintiff’s rights if the clause isn’t enforced and his rights if the clause is enforced. A defendant can meet its burden only by showing the foreign forum provides the same or greater rights than California, or the foreign forum will apply California law on the claims at issue.
Analysis
The Court agreed with the parties that a shareholder’s right to inspect corporate records under sections 1600 and 1601 is unwaivable. Both provisions expressly apply to any foreign corporation with its principal office in California, such as Orchid in this case.
Because the plaintiff’s claims were based on unwaivable statutory rights, Orchid bore the burden to prove that litigating the claims in Delaware wouldn’t diminish in any way the substantive rights afforded under California law. But Judge Richman found that Orchid didn’t even address this, and Orchid bore the burden of proof.
In its order granting Orchid’s motion to stay, the court noted the plaintiff’s argument “that the court should not enforce the forum selection clause because it would vitiate his unwaivable right as a California resident shareholder to inspect Orchid’s books.” However, the trial court concluded that enforcing the forum-selection clause didn’t offend California public policy and didn’t address whether Orchid bore and met that burden. Despite this, the record was unclear whether the court required Orchid to show that litigating in Delaware would not diminish the plaintiff’s rights under California law. The Court of Appeal noted that the record didn’t clearly demonstrate that the trial court failed to consider whether Orchid met its burden to show litigating in Delaware would not diminish the plaintiff’s unwaivable rights under section 1600, et seq. Accordingly, the Court presumed that the trial court considered that question, and it inferred that it impliedly resolved that question in favor of Orchid.
The question was whether the trial court erred in impliedly finding that Orchid met its burden to prove that litigating in a different forum wouldn’t diminish the plaintiff’s rights under California law.
To meet that burden, Orchid was required to show that a Delaware court would either (1) provide the same or greater rights than California or apply California law on the claims at issue. Orchid acknowledged that there was no choice of law provision in the forum selection clause in Orchid’s bylaws and, thus, it wasn’t clear which set of laws the Delaware Chancery Court would apply if that clause were to be enforced in this case. Thus, to meet its burden, Orchid had to establish the first option—that a Delaware court would provide “the same or greater rights than California.”
Here, the Court of Appeal agreed with the plaintiff that Orchid did not, and could not, meet its burden of showing that Delaware would provide the same or greater rights than California. And a review of the two forums’ shareholder inspection statutes supported the plaintiff’s assertion that Delaware law would not “provide the same or greater rights” than sections 1600 and 1601. Thus, Judge Richman found that, while section 1600 would grant a shareholder an inspection of the corporation’s list of shareholders’ names, addresses, and shareholdings, the same wouldn’t necessarily be true under the more restrictive Delaware statute.
Orchid also conceded discrepancies exist between California’s and Delaware’s inspection statutes. The plaintiff observed (and Orchid conceded) the Delaware inspection statute is more restrictive and “far less favorable.” As such, Orchid failed to meet its burden of showing that Delaware law would provide “the same or greater rights than California” and, therefore, that enforcing the forum selection clause wouldn’t in any way diminish the plaintiff’s unwaivable statutory rights. To the contrary, enforcing the forum selection clause would allow Orchid to circumvent the specific inspection rights afforded under sections 1600 and 1601 that the Legislature has declared “may not be limited,” and thus the fundamental public policy embodied in those statutes. Orchid’s counterarguments didn’t convince the Court otherwise.
The Court concluded that the possibility that the trial court could resume proceedings on the plaintiff’s claims fails to establish that enforcing the forum selection clause would not diminish his statutory rights under sections 1600 and 1601. In sum, the trial court abused its discretion in enforcing the forum selection clause in Orchid’s bylaws and in thereby granting Orchid’s motion to stay this proceeding. Salamon v. Orchid Global, Inc. (California Court of Appeal, 1st Dist., 7/31/2026).
Bottom Line
If you’re drafting or reviewing corporate documents, understand that the state of incorporation typically dictates the way in which bylaws are interpreted; as a consequence, make certain that your forum selection and governing-law terms are drafted purposively. Notwithstanding, California’s unwaivable statutory rights for companies based in the state means that a forum selection clause that would eliminate those rights will not be enforced.
If you have any questions or need assistance, contact us at Eanet, PC.
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About the Author
Matthew L. Eanet, Esq.
Matt is managing shareholder at Eanet, PC, a Los Angeles litigation boutique he founded in 2012. He's an expert in complex commercial litigation matters involving real estate, employment, trade secret, trademark and trade dress, data breach, privacy and general business disputes, served as a U.S. Army JAG prosecutor, and has been selected by Super Lawyers (California) every year from 2015-2026.
Reviewed August 2026