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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 87 posts in Books and Records.
To facilitate the proper exercise of one’s fiduciary duties, the right of directors to inspect a corporation’s books and records is broad, often referred to as unfettered. The right of managers to inspect an LLC’s books and records generally is equivalent, subject to modification in the LLC agreement. A significant showing is required to avoid a fiduciary’s inspection on the basis that is not for a proper purpose, i.e., any purpose reasonably related to the inspector’s fiduciary status. The company must put forward concrete evidence that the fiduciary will violate duties and use the information to harm it. Without such a showing, the Court generally does not assume the role of questioning the fiduciary’s business judgment about the records he needs to do his job. This decision is an example of the LLC failing to prove the manager lacked a proper purpose for his inspection, with the backdrop of much friction and other litigation among the LLC’s several managers.
To obtain inspection rights from a Delaware corporation to investigate alleged wrongdoing, the petitioner needs some evidence to support his suspicions. As this decision explains, the filing of a suit by someone else is not enough. However, when that other complaint has detailed facts to support it or documents attached that show wrongdoing, that will suffice. This is also a good decision on the scope of inspection rights.
When a demand to inspect corporate records states a purpose other than to value the corporation’s stock, it is often difficult to determine if the basis for the demand is properly supported by the facts in the petition. The petition must state a credible basis to investigate any alleged wrongdoing. This decision is an excellent summary of what facts are sufficient to support such a demand and the analysis the Court will use to decide that issue.
This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection. While the “credible basis” standard for suspecting mismanagement is low, it is not that low.
While the standard to win the right to inspect corporate records to investigate alleged wrongdoing is a lenient one, it is still not enough to just allege something was done improperly. As this decision shows, you still need to prove some factual basis for the inspection. Just showing the contract with an insider was amended does not get you the right to inspect.
This decision has potential far-reaching consequences for shareholder-plaintiff litigation. As is well known, some entrepreneurial plaintiff-side corporate law firms advertise that they are “investigating” matters following a corporation’s report of some misfortune. That is done to attract a stockholder as a potential client. They then use that client’s status as a stockholder of the corporation to bring suit or, often, to demand an inspection under Section 220 of the DGCL of the books and records they need to support a well-pled complaint. This decision holds that when the demand is really generated by the law firm, and not the client, inspection will be denied for failure of an actual “proper purpose.” The case turned on its facts showing that the client had no real interest in what the law firm wanted to investigate. While some will argue that problem may be cured by a better “informed” client, that perhaps is too cynical. We shall see if this decision makes it harder for such plaintiff-side firms to bring such cases in the future.
A stockholder may inspect a corporation’s records for any recognized proper purpose, including investigating alleged mismanagement. If that stockholder later files a complaint based on the records produced, must the stockholder agree that any reviewing court may consider all those records in ruling on a motion to dismiss rather than being limited to the complaint’s allegations? Under this decision, and a similar decision in the Yahoo! litigation, yes, potentially. While this decision notes that such a condition is within the Court’s discretion, the language of the opinion suggests that condition will be granted as a matter of course.
Court Of Chancery Protects Privilege In Books and Records Action And Addresses Corwin’s Effect On Mismanagement Investigation Claims
This is an important decision for its analyses implicating the Garner and Corwin rules. The Garner rule is that, under certain narrow circumstances where the plaintiff establishes good cause, the attorney-client privilege will be unavailable to corporate fiduciaries who are defending against claims brought by the stockholders who are the object of their fiduciary duties. Here, the Court of Chancery declined to invoke the Garner rule and protected the attorney-client privilege in a books and records case where the same stockholders were already pursuing derivative litigation against the company on the same subject as the records demand but could not gain access under Garner in that earlier litigation. More ›
This is the rare decision explaining when restrictions on stock transfers (permitted by Section 202 of the DGCL) can be enforced. While the statute seems clear enough, the real lesson from this decision is that it might be difficult to show a stockholder had advanced knowledge of restrictions that are not on the stock certificate when no other written notice exists. Without such advanced knowledge or later assent by the stockholder, the restrictions are not enforceable.
This decision does a good job of explaining when there is an adequate showing of possible wrongdoing sufficient to justify a books and records inspection. It also explains why conducting a proxy contest does not warrant denying inspection.
Court of Chancery Holds That A Books And Records Plaintiff Must Be A Stockholder At The Time Of Suit
This decision resolved a matter of first impression: a plaintiff seeking corporate records under Section 220 of the DGCL must be a stockholder at the time he files his complaint to have standing. Thus, when a stockholder makes a proper Section 220 demand, and a merger terminates his ownership interest in the corporation before he files his books and records action, the now-former stockholder loses standing to sue. In short, stockholder-plaintiffs must be diligent in pursuing their record demands to avoid losing standing.
Court Of Chancery Holds That Wrong Forward Looking Statement Insufficient To Support Records Inspection
It is not enough that certain forward-looking statements failed to come true to justify requiring an inspection of corporate records. More evidence of wrongdoing is needed if your inspection is based on a theory of mismanagement.
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.