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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
In general, the bar is low for exercising inspection rights to investigate claims of wrongdoing. Plaintiffs need provide only some evidence to suggest a credible basis from which the Court can infer possible mismanagement or wrongdoing. But as this decision holds, when there is an obvious defense to the claim, such as the board’s reliance on an audit firm for a complicated accounting issue, inspection may be denied.
This is an almost unprecedented decision to limit the inspection rights of a corporate director. Directors generally have “essentially unfettered” access to the corporate records to fulfill their fiduciary roles. Here, given the director’s improper motive to use the records to compete with or harm the corporation, the result is entirely justified under the bizarre set of facts.
This is the first decision examining the right to inspect the records of a Delaware Statutory Trust. Applying settled law from decisions in the LLP and LLC context regarding whether to read statutory and contractual inspection rights as separate and independent, the Court held that a contractual right to inspection is not subject to the conditions in the trust statute (Section 3819) unless the Trust language says so. The Court also held that defending against the inspection on the grounds of an improper purpose requires proof of probable harm to the trust if the Court allowed the inspection.
This decision holds that when stock issued is void, the recipient is not entitled to records inspection even if he is listed as a stockholder on the company's stock ledger.
This is an interesting decision because it explains inspection rights in the LLC context under the two different standards set out in Section 18-305(a) and (b) of the LLC Act. As expected, it is better to seek inspection as a manager than as a member. Managers have similar “unfettered” access to company books and records as corporate directors, absent restrictions in the LLC agreement. Also notable, inspection rights may include the books and records of subsidiaries, under the right circumstances.
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.