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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Court Of Chancery Imposes An “Incorporation Condition” On A Stockholder’s Books And Records Inspection
This is a precedent-setting decision in the books and records context. In it, the Court imposes an “Incorporation Condition” on the stockholder’s inspection. That is, a stockholder who establishes a credible basis to inspect corporate records for the purpose of investigating alleged wrongdoing must agree -- as a condition to the inspection -- that all the documents it inspects will be deemed incorporated by reference in any later-filed derivative complaint. More ›
Court Of Chancery Explains Director Right To Information And What Communications Qualify As Corporate Books and Records
This is one of those scarce cases dealing with director access to a corporation’s books and records. After all, Delaware law provides directors with an almost unlimited right to a corporation’s records needed for them to exercise their fiduciary duties. Hence, these cases are rare. More ›
The Court of Chancery expects a plaintiff to supply those facts necessary to state a claim in reasonable detail, particularly when those essential facts might be obtained by an inspection of an entity’s records. Here the Court dismissed a complaint for its failure to state those facts that would have been evident from a records inspection and when the absence of those facts made the complaint too difficult to understand.
Exactly how much information is a stockholder entitled to under the “necessary, essential and sufficient” standard applied when the stockholder seeks to value his interest in the corporation? This decision suggests that 3 years of past financial information is enough.
What discovery is permitted in a books and records case has two dimensions. More ›
Inspection of a company's records may not be conditioned on an agreement not to trade the company's stock following the inspection.
This decision holds that after a director ceases to be a director, he loses any statutory or other right as a director to inspect a corporation's books and records.
This decision illustrates the danger in vesting practical control of the records an entity in a non-Delaware "agent." Simply put, as the agent is not subject to the statutory duty to produce those records and may not even be subject to Delaware jurisdiction, the Delaware forum is not available to enforce inspection rights
This decision explains the rare case when a litigant may gain access to the opposing party's litigation reserves. That information is usually subject to attorney-client privilege.
This books and records case provides a good summary of the law limiting inspection to what the petitioner really needs to fulfill her proper purpose in seeking inspection. The decision covers both inspection to value shares and to investigate alleged wrongdoing.
In recent years, the Delaware Supreme Court has stressed that it is desirable to file a books and records case before starting derivative litigation. But do you need to do that every time? In the unusual situation presented by this case, the Court of Chancery declined to hold up a derivative case to permit a books and records case to go first. In granting an immediate appeal, the Court recognized that the Supreme Court may want to clarify the law in this area.
In a books and records action, may the plaintiff also add a count for breach of duty? This decision holds that he cannot do so. After all, a books and records action is meant to be summarily litigated. That fast track cannot be achieved if other claims must also be decided at the same time.
To inspect corporate records to see if there has been "wrongdoing," a stockholder has to have a basis to suspect that wrongdoing has occurred. The evidence needed has been described as the lowest level possible if there is to be any standard at all. This decision illustrates that a standard does exist. Past lawsuits that have been settled are not sufficient to show present wrongdoing. General news articles about an industry-wide investigation are not sufficient. Both together do not get there either and the suit was dismissed.
The right of a stockholder to inspect a company's books and records is govenned by Section 220 of the DGCL. A beneficial owner must first show proof of beneficial ownership, however, and Section 220 tells how to do so. Here the plaintiff for some reason just ignored Section 220's requirements to show beneficial ownership. When then faced with a motion to dismiss, he argued that he could supply that proof later because it was just a clerical mistake to not do so when his complaint was filed. The Delaware Supreme Court forcefully rejected that argument and upheld the dismissal of his complaint.
Note that the Supreme Court sidestepped the holding of the Court of Chancery that once it filed a derivative suit, this plaintiff lost its rights under Section 220.