Is a shareholder’s right to inspect corporate records unwaivable in California?

In the recent California appellate decision in Salamon v. Orchid Global,  David Salamon, a shareholder of Orchid Global, Inc. (Orchid), filed in the San Francisco Superior Court a petition for a writ of mandate to compel Orchid to allow him to inspect its corporate records pursuant to Corporations Code sections 1600 and 1601.

Orchid moved to stay the proceedings based on a forum selection clause in its bylaws designating Delaware as the exclusive forum for any action asserting a claim against it “governed by the internal affairs doctrine.”

The trial court granted the motion, and Salamon appealed.

He argued the trial court erred in (1) finding the forum selection clause covered his claims under sections 1600 and 1601 and (2) rejecting his assertion that the clause was unenforceable as against public policy.

The appellate court disagreed with the first point, but agreed with the second. Accordingly, it reversed the order granting Orchid’s motion to stay.

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.

Salamon is a California resident, and was a contractor for Orchid from 2017 to 2019. He has held 11.11% of Orchid’s outstanding voting shares since 2019. In December 2024, Orchid offered to purchase all of Salamon’s shares for $1,372.880.

On April 1, 2025, Salamon’s counsel sent a letter to Orchid’s counsel requesting to inspect the documents pursuant to sections 1600 and 1601, including 1. The record of the names and addresses of all shareholders and the number of shares held by each; 2. All minutes of meetings of the shareholders, Board of Directors, and/or committees of the Board for the past five years; 3. All quarterly and annual financial statements of the Company.

Section 1600, subdivision (a) states in relevant part: “A shareholder . . . holding at least 5 percent in the aggregate of the outstanding voting shares of a corporation . . . shall have an absolute right to . . . inspect and copy the record of shareholders’ names and addresses and shareholdings. . . .”

And section 1601, subdivision (a) states in relevant part: “The accounting books, records, and minutes of proceedings of the shareholders and the board and committees of the board of any domestic corporation . . . shall be open to inspection at the corporation’s principal office in California . . . for a purpose reasonably related to the holder’s interests as a shareholder . . . .”

In the letter, Salamon’s counsel explained that Salamon was seeking these records “for the following reasons: (1) to confirm his respective ownership interest in the Company; (2) to determine the current and potential value of such interest; (3) to communicate with other shareholders; and (4) to investigate mismanagement and breaches of fiduciary duties by the Company’s management.”

In a letter dated April 10, Orchid’s counsel rejected Salamon’s request “in its entirety.”

Counsel wrote: “the Company is a Delaware corporation and thus the Salamon Demand is void ab initio as it seeks to inspect and copy the Company’s books and records under an inapplicable California statute.” Counsel further stated: “Separate and apart from the Salamon Demand being invalid under California law, under applicable Delaware law, a shareholder demand to inspect books and records must be for a ‘proper purpose.’ The Salamon Demand appears to be part of Mr. Salamon’s scheme to extort the Company to buy back his Company shares at an inflated price by leveraging bogus ‘illegal gambling’ allegations regarding Orchid’s nonpayment system.”

According to Salamon, for the past five years he has not received any financial documents from Orchid and thus has not been able to evaluate the value of his shares.

In the litigation that followed, Salamon argued that even if the forum selection clause applies, it is unenforceable because it violates public policy. He asserted that a shareholder’s right to inspect corporate records is “unwaivable” under sections 1600 and 1601, and that he would be deprived of such right if the forum selection clause were enforced.

Section 1600, subd. (d) provides that the rights provided in this section may not be limited by the articles or bylaws.

Section 1601, subd. (b) provides that the right of the shareholders to inspect the corporate records may not be limited by the articles or bylaws.

Orchid reasserted that Delaware law, not California law, governed the interpretation of the forum selection clause and, in any event, both Delaware and California law hold that a shareholder’s right to inspect records is an “internal affair.” Thus, Orchid maintained that the forum selection clause covered Salamon’s inspection request.

On appeal, Salamon argued the trial court erred in (1) determining that his claims in this action fell within the scope of the forum selection clause, and (2) rejecting his contention that applying the forum selection clause would be unenforceable as against public policy.

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.

This favorable treatment is attributed to the law’s devotion to the concept of one’s free right to contract, and flows from the important practical effect such contractual rights have on commerce generally.

One exception to this general rule of enforceability is grounded in public policy. California courts have held that a forum selection clause will not be enforced if to do so would bring about a result contrary to the public policy of this state.

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 our state’s public policy.

Generally, the party opposing enforcement of a forum selection clause bears the burden of showing that its enforcement would be in violation of the settled public policy of this state.

If that party makes that showing in a case in which the public policy is based on unwaivable rights created by California statutes, the burden is reversed, and the party seeking to enforce the forum selection clause bears the burden to show litigating the claims in the contractually designated forum will not diminish in any way the substantive rights afforded under California law.

Salamon argued that: (1) his claims are based on statutory rights that the Legislature has declared unwaivable in section 1600, subdivision (d) and section 1601, subdivision (b); (2) these provisions embody California’s public policy to provide California shareholders with the means to verify a corporation’s actions and to ensure that their interests were being protected; and (3) the potential of the forum selection clause in Orchid’s bylaws to impact his unwaivable rights placed the burden on Orchid to prove that enforcing the clause will not diminish in any way the substantive rights afforded him under California law.

Orchid conceded the first two points, and the appellate court accepted those concessions.

First, the appellate court agreed with the parties that a shareholder’s right to inspect corporate records under sections 1600 and 1601 are unwaivable.

Both provisions expressly apply to any foreign corporation having its principal office in California, and thus to Orchid here.

Second, the public policy embodied in sections 1600 and 1601 is to provide California shareholders with the means to verify a corporation’s actions and to ensure that their interests were being protected.

The rationale for shareholder’s inspection rights is that a stockholder has an interest in the assets and business of the corporation and that such inspection of the books of the corporation may be necessary or proper for the protection of his interest or for his information as to the condition of the corporation and the value of his interests therein.

The bill that enacted section 1600 et seq. was aimed at improving the rights of shareholders and enhancing the protections afforded investors in foreign corporations having the principal situs in California.  The bill was enacted based in part on a concern about certain business that have incorporated under foreign law apparently to escape the more rigorous substantive protections afforded under California law.

A cursory review of the two forums’ shareholder inspection statutes supports Salamon’s assertion that Delaware law would not provide the same or greater rights than sections 1600 and 1601.

By its plain terms, section 1600 establishes a broad right of inspection and imposes no requirement on a shareholder to show a proper purpose for the inspection.

Thus, under section 1600 a shareholder need only show that he or she is a shareholder with the requisite percentage of shareholdings and that he or she made a demand for inspection.

Orchid has 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 will not in any way diminish Salamon’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.

In sum and in short, 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.

LESSONS:

1.         Section 1600, subd. (d) provides that the rights provided in this section may not be limited by the articles or bylaws.

2.         Section 1601, subd. (b) provides that the right of the shareholders to inspect the corporate records may not be limited by the articles or bylaws.

3.         California courts have held that a forum selection clause will not be enforced if to do so would bring about a result contrary to the public policy of this state.

4.         A shareholder’s right to inspect corporate records under sections 1600 and 1601 are unwaivable.

5.         The public policy embodied in sections 1600 and 1601 is to provide California shareholders with the means to verify a corporation’s actions and to ensure that their interests were being protected.

6.         By its plain terms, section 1600 establishes a broad right of inspection and imposes no requirement on a shareholder to show a proper purpose for the inspection. Thus, under section 1600 a shareholder need only show that he or she is a shareholder with the requisite percentage of shareholdings and that he or she made a demand for inspection.