Print PDF

Books-and-Records Action Dismissed for Failing to Comply With Section 220

July 24, 2013
Morris James LLP
Delaware Business Court Insider

In Barnes, plaintiff Kevin Barnes, representing himself pro se,  claimed to be a minority stockholder of defendant Telestone Technologies Corp.  Telestone was a Delaware corporation with headquarters in China. Barnes alleged  that he had purchased stock in Telestone on April 12. He made a  books-and-records demand pursuant to Section 220 on April 15. Attached to the  demand letter was a sworn affidavit by Barnes affirming that he was a beneficial  owner of Telestone stock. According to the demand, Barnes' purpose was to value  his Telestone common stock in light of Telestone's April 2 announcement that it  would be unable to timely file its Form 10-K. The plaintiff repeated his demand  on April 23. Telestone failed to respond, so Barnes filed his books-and-records  complaint April 30. Telestone moved to dismiss the complaint under Court of  Chancery Rule 12(b)(6) for failure to state a claim.

In deciding Telestone's motion to dismiss, the court focused on Section  220(b), which requires that a beneficial owner's demand under oath "state the  person's status as a stockholder, be accompanied by documentary evidence of  beneficial ownership of the stock, and state that such documentary evidence is a  true and correct copy of what it purports to be." The plaintiff's demand did not  include any documentary evidence of his beneficial ownership of Telestone stock.  Barnes did not provide such documentary evidence (a brokerage statement) until  filing his answering brief in opposition to the motion to dismiss. Although he  conceded that he had not provided documentary evidence with his  books-and-records demand, Barnes argued that his sworn affidavit constituted  sufficient evidence under Section 220. Applying Central Laborers Pension Fund  v. News Corp., 45 A.3d 139 (Del. 2012), Vice Chancellor Sam Glasscock III  concluded a sworn affidavit did not constitute documentary evidence of  beneficial ownership and therefore the plaintiff did not meet the form and  manner requirements of Section 220. The plaintiff did not fix this failure by  providing documentary evidence of his beneficial ownership with his answering  brief. Again applying Central Laborers, Glasscock recognized that a  corporation must receive a books-and-records demand in proper format before  litigation is instituted. Barnes' belated production of documentary evidence did  not cure the lack of documentary evidence in the demand.

The plaintiff asked the court to view his failure leniently because he was  not represented by counsel. Acknowledging that a court may grant a pro se party  some leniency on matters within its discretion, Glasscock held that he had no  discretion to overlook the form and matter requirements of Section 220 as set by  the General Assembly. It is well settled under Delaware law that strict  compliance with the express requirements of Section 220 is required.  Accordingly, the court granted the defendant's motion to dismiss.

This decision illustrates how strictly Delaware courts view the requirements  of Section 220. In other contexts, it might be acceptable (albeit not a  preferred approach) for a litigant to remedy an omission after litigation is  filed. That will not work, however, in the Section 220 context. Section 220  requires documentary evidence of beneficial ownership. The plaintiff's failure  to provide that evidence with his demand led to dismissal of his case. This  decision also reflects the dangers of proceeding pro se. A lawyer familiar with  the requirements of Section 220 would have made sure that the plaintiff included  documentary evidence of his beneficial ownership with his demand. While not  unsympathetic to the plaintiff's pro se status, the court could not overlook the  requirements of Section 220. A stockholder considering a books-and-records  demand should consult counsel to make sure the requirements of Section 220 are  satisfied.