Nature of Company's Defenses Can Expand Scope of Discovery
There is no question that, in a books-and-records action, the scope of discovery is limited and such discovery is not an appropriate means of obtaining the same books and records sought in the action. In Chammas v. NavLink (Del. Ch. Aug. 27, 2015), however, the Delaware Court of Chancery rejected an argument that discovery should be limited to whether the plaintiffs had a proper purpose for the books and records demanded. Rather, the court held that it was appropriate for the company to produce discovery related to the affirmative defenses it asserted in the action.
The plaintiffs, George Chammas and Laurent Delifer, are founders and directors of defendant NavLink Inc. The plaintiffs issued a books-and-records demand pursuant to 8 Del. C. Section 220, seeking an inspection of certain information in their capacity as directors of the company. Also pending was a breach of fiduciary duty action filed by relatives of the plaintiffs against other directors of the company. In response to the plaintiffs' discovery requests, the company filed a motion for protective order, seeking to limit discovery to the issue of whether the plaintiffs had a proper purpose for their demand. Although such information was not requested, the company also conceded that discovery would be appropriate into whether the plaintiffs were directors of the company and whether they made a proper demand under Section 220.
In deciding the company's motion, the court acknowledged that discovery under Court of Chancery Rule 26 is not an "appropriate means of gaining access to the same books and records which are the objectives of an 8 Del. C. Section 220 action." The court, however, would not limit discovery to the extent requested by the company. Instead, the court found that, "even though this is a books-and-records action, the director plaintiffs likely have legitimate discovery needs, and their needs may vary with the nature of the defenses that the company interposes." In particular, the company asserted the affirmative defenses of unclean hands; that the scope of the demands exceeded any proper purpose; that the action was moot because of the company's agreement to produce certain documents; laches; and that the documents requested were sought to aid in the prosecution of the action for breach of fiduciary duty. The court found the plaintiffs were entitled to conduct discovery related to the affirmative defenses asserted by the company.
The court further found discovery was necessary to address the company's claim that certain categories of documents either did not exist or would be too costly and unduly burdensome to produce. The court stated that "focused discovery in order to gain an understanding of [the company's] email systems, how it maintains electronically-stored information, and the extent of its retention policies is appropriate." The court noted, however, that comprehensive electronic discovery was not warranted. The court stated, "The number of possible custodians is limited, and the topics can be limited to proper purpose and the affirmative defenses asserted by [the company]."
Finally, with respect to an appropriate confidentiality order, the court limited protection to the documents the company would produce in discovery. The company had requested a broader order that covered both documents produced in discovery and ultimately as a result of the final decision in the case. On this point, the court found that: "Whether books and records ordered to be produced through the Section 220 action, if any, should be subject to confidentiality restrictions is a question that needs to be resolved as part of the Section 220 merits-based process."
As an action under Section 220 is in the nature of a summary proceeding with a narrow focus, the scope of discovery typically is limited. This decision demonstrates, however, that the scope of discovery can be expanded based on the types of defenses asserted. In an effort to avoid such a result, it seems companies should carefully consider their potential defenses and assert only those that are absolutely necessary.