Two years ago, I published a paper challenging the internal affairs doctrine and arguing that it should be relaxed in various ways. I didn’t exactly intend that to play out as it has with respect to Texas – as I blogged here and here – and now there’s a new lawsuit against United Airlines to add to the mix.

United Airlines is incorporated in Delaware, but it is headquartered in Illinois.  The National Center for Public Policy Research, 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. The 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.

It seems that almost immediately after the lawsuit was filed, United reversed course and resumed Tel Aviv flights, but as far as I know, the lawsuit is still pending so it won’t stop me from blogging.

So, first, leaving aside the issue of state law, has NCPPR stated a proper purpose for seeking inspection?  In general, it has identified two potential breaches of fiduciary duty to investigate: first, that United may have bowed to the “ideological and political pressure” exerted by “internal labor unions” who have organized a campaign against Israel; and second, United may have misled shareholders, or at least withheld information from them, in its public statements regarding the reasons for retrenchment, attributing them to safety concerns rather than political pressure.

Taking the second point first, state law – by which I mean Delaware law – absolutely does prohibit United from misleading shareholders. See Malone v. Brincat.

As to the first point, though – the substantive decision to reduce Tel Aviv flights – NCPPR’s objections read a lot like the (failed) claims in Simeone v. The Walt Disney Company.  There, a shareholder also sought inspection on the grounds that the board may have objected to Florida’s “Don’t Say Gay” law on ideological grounds.  In that context, a Delaware court explicitly held that taking a political stance in response to labor demands is an appropriate exercise of business judgment.  As Vice Chancellor Will put it, “A board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders—such as the workforce that drives a company’s profits—is ‘rationally related’ to building long-term value.”  After all, maintaining good relations with labor is a critical aspect of profit-seeking.  Boards may seek to do so via pay raises, or improved working conditions, or any number of additional actions.  So, in United, NCPPR’s complaint lays out a plausible case that United was responding to labor’s ideological demands, but it’s not obvious to me why the board’s choice to appease labor in an employment dispute would not be well within its discretion under the business judgment rule.  (For the same reason, NCPPR’s claim that United was trying to please the ideological commitments of its partner Turkish Airlines does not, on its face, establish that United had abandoned shareholder welfare; there are lots of reasons one can imagine for trying to maintain good relations with business partners, even if the business partners themselves have non-profit-seeking motives.)

But that brings me to the internal affairs question.  Is this Delaware’s to decide?  In fact, inspection rights are something of a grey area.  A Delaware court recently held that they are subject to the internal affairs doctrine, but also noted disagreement on the issue.  Now, an Illinois court is going to have to make that call (unless the case is abandoned due to United’s change of heart, or United runs to Delaware to seek declaratory judgment, which frequently occurs in these kinds of conflicts).  I think it will be very difficult for Illinois to decide this issue without considering the obviously political context in which the question arises.  A court entertaining the complaint may either want to inject itself into a political controversy – in which case it will hold Illinois law controls – or it will want to offload political responsibility to Delaware – in which case it will hold this is an internal affairs issue (as I warned in my paper, “states all too often acquiesce in [the internal affairs doctrine], perhaps because it allows them to evade responsibility for difficult political choices.”).  In other words, this is such a highly charged issue, I worry that it is not an ideal vehicle for setting rules for the mine run of cases.  Or maybe it just proves my original point, i.e., the internal affairs doctrine, as currently constituted, cedes too much power to Delaware to decide profound issues of public policy.

And another thing: New Shareholder Primacy podcast! Mike Levin interviews Brian Highsmith on his article about company towns – including Elon Musk’s Starbase. Here at Youtube, here at Apple, and here at Spotify.

Update: Should have known Steve Bainbridge was on this. He has a series of detailed posts about the United case, including Illinois vs. Delaware law. Here, here, here, and here.