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Stating Proper Purpose Doesn't Guarantee Books-and-Records Entitlement

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March 18, 2015
Morris James LLP
Delaware Business Court Insider

It is well settled that stockholders of Delaware companies generally have the right to inspect the company's books and records upon the showing of a proper purpose. However, as demonstrated in the Court of Chancery's decision in Fuchs Family Trust v. Parker Drilling, C.A. No. 9986-VCN (Del. Ch. Mar. 4, 2015), that right is not absolute. Even where a proper purpose exists, the demand is properly denied where the requested books and records would not advance that purpose.

Background

On Aug. 9, 2007, defendant Parker Drilling Co. disclosed that it was under investigation by both the U.S. Department of Justice and the Securities and Exchange Commission for potential violations of the Foreign Corrupt Practices Act (FCPA). In particular, Parker, which provides drilling and drilling-related services, was being investigated for its alleged participation in bribery schemes in Kazakhstan and Nigeria. Parker later disclosed that an internal investigation "ha[d] identified potential issues relating to potential non-compliance with applicable laws and regulations, including the FCPA."

Thereafter, a stockholder made a demand on Parker's board to take action "to remedy breaches of fiduciary duties by the directors and certain officers of the company." In response, the board formed a special committee to evaluate the stockholder demand and determine an appropriate course of action. Additionally, various stockholders, one of which was plaintiff Fuchs Family Trust, filed derivative actions in Texas state court and in the U.S. District Court for the Southern District of Texas. The derivative actions were subsequently dismissed for failure to demonstrate demand excusal.

In the meantime, Parker announced, on Feb. 15, 2013, that it had reached an agreement in principle to settle the DOJ and SEC investigations. The settlement involved an agreement to pay $15.85 million in fines, penalties and disgorgement; consent to a permanent injunction against FCPA violations; and the adoption of new internal controls. In connection with the settlement, Parker issued papers that described the bribery scheme and admitted that certain unnamed executives, identified only as "Executive A" and "Executive B," had funneled $1.25 million in bribes through a partner at a law firm retained by the company. After a number of revisions, Fuchs' books-and-records demand was narrowed to a request for documents sufficient to identify the identity of Executive A, Executive B, outside legal counsel and the law firm. Fuchs sought this information for the stated purpose of assessing the options for potential litigation and/or to demand that Parker take action.

Analysis

Although the court found that Fuchs stated proper purposes, it denied relief, because the requested information would not further the purposes stated. In particular, the court noted that "investigating the possibility of pursuing a derivative action based on perceived wrongdoing ... represents a proper purpose for a Section 220 demand." The court, however, further found that a demand may be denied as a matter of law "if claim or issue preclusion would bar future derivative action." As the earlier derivative actions had been dismissed with prejudice, the court found that Fuchs could not relitigate the issues alleged. It, therefore, could not obtain books and records in furtherance of such a purpose.

Fuchs also could not obtain documents for the purpose of demanding that Parker's board take action against the anonymous executives and attorneys. The court found that, although Fuchs did not know the relevant identities, Parker's board did have that information. Fuchs also had significant detail about the bribery scheme as a result of the resolution papers. Accordingly, Fuchs had more than sufficient information and did not need to know the requested identities to make the demand.

As a result of the disconnect between its stated purposes and the documents requested, Fuchs was denied relief under Section 220.

Delaware Business Court Insider  |  March 18, 2015

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