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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 102 posts in Books and Records.
Chancery Finds Proper Purpose in Books and Records Demand to Investigate Potential Wrongdoing in CBS-Viacom Merger, Orders Narrowed Inspection that Includes Electronic Documents
A stockholder seeking books and records in Delaware states a proper purpose for inspection by demonstrating a credible basis to suspect that fiduciaries engaged in wrongdoing. So long as the documents sought are necessary and essential to that purpose, the Court of Chancery will order inspection. The Court generally will not, however, require a broad production of electronic documents akin to plenary discovery. More ›
Chancery Declines to Establish New Rule Concerning Books and Records Inspections Related to Proxy Contests
Section 220 of the DGCL grants stockholders a qualified right to inspect corporate books and records “necessary and essential” to a “proper purpose.” One recognized proper purpose is investigating potential corporate wrongdoing or mismanagement. In such cases, the stockholder must establish a “credible basis” for the suspicion before the Court of Chancery will order inspection. When a stockholder makes that showing, the Court has permitted use of the produced books and records to mount a proxy contest. However, as the Court of Chancery observes in this decision, no Delaware court has compelled inspection “when the stockholder’s only stated purpose for inspection is a desire to communicate with other stockholders in furtherance of a potential proxy contest.” And under the facts and circumstances of this case, the Court declines to be first. More ›
Chancery Rejects Claim that Books and Records Demand was “Pretextual,” Finds Sufficient Overlap Between Demand Letter and Plaintiff’s Purpose
A stockholder-plaintiff seeking a corporation’s books and records must have a genuine proper purpose, and cannot rely simply on a lawyer-crafted demand letter to justify her request. There must be alignment between a plaintiff’s books and records demand and her own stated interest in seeking books and records. In this recent decision, the Court of Chancery considers and rejects an attempt by a defendant-corporation to argue that a books and records demand was really driven by plaintiff’s counsel, and that the plaintiff lacked any genuine proper purpose. More ›
Shareholders of a Delaware corporation have a qualified right to access corporate books and records for a “proper purpose.” One such proper purpose is to investigate potential mismanagement or fiduciary wrongdoing. Indeed, Delaware law encourages shareholders to use this “tool at hand” prior to bringing a derivative action. But this type of inspection has an important precondition: the shareholder must advance some evidence to suggest a “credible basis” from which the Court can infer actionable wrongdoing. As this decision involving Facebook illustrates, the credible basis standard is lenient but not meaningless, and may turn on, among other things, the potential for monetary damages arising out of the alleged wrongdoing. After a trial on a paper record, the Court of Chancery denied an attempt by two stockholders of defendant Facebook, Inc. to obtain additional documents related to the company’s executive compensation practices. More ›
Delaware Supreme Court Clarifies: No Presumption of Confidentiality for Documents Produced Pursuant to a Books and Records Request
The Delaware Supreme Court held that documents produced pursuant to a request for books and records under Section 220 of the Delaware General Corporation Law are not subject to a presumption of confidentiality. More ›
Plaintiff was assigned a membership interest in the defendant, a Delaware limited liability company, and sought to exercise books and records inspection rights. But the LLC’s operating agreement circumscribed its members’ ability to transfer their interests, stating that any disposition without prior written consent of all members was “null and void,” and otherwise authorized only members to inspect books and records. According to the Court of Chancery, because the transferor never received prior written consent for the transfer to plaintiff, the transfer was void under the LLC agreement, plaintiff was not a member of the LLC, and plaintiff had no right to inspect the LLC’s books and records. In addition, the Court relied on the Delaware Supreme Court’s decision in CompoSecure, L.L.C. v. CardUX, LLC to find that the plaintiff could not rely on equitable theories to validate the transfer. According to the Court, equity can only validate voidable acts, not void acts. And the LLC agreement’s plain language in this case rendered the attempted transfer void, even if it would have been only voidable under common law.
Seeking to inspect an entity’s books and records to value an investment typically is a proper purpose. But a plaintiff must have standing to demand inspection. More ›
Section 220 of the Delaware General Corporation Law permits a stockholder to inspect the books and records of a corporation, provided that the demand for inspection meets certain form and manner requirements, and the inspection is sought for a proper purpose—e.g., one reasonably related to the interests of stockholders. Plaintiff stockholders bear the burden of proving that each category of documents sought is essential to accomplish the stockholders’ purpose for the inspection. Section 220 inspections of books and records are not intended to produce a comprehensive set of documents that would likely be produced under discovery rules in a plenary action. Rather, the goal in a 220 action is to provide stockholders with a discrete set of documents sufficient or necessary to accomplish their purpose. More ›
One proper purpose for a books and records inspection under Section 220 of the Delaware General Corporation Law is to investigate potential plenary claims. But what happens when the stockholder seeks records under Section 220 after it already initiated its plenary claims on the same subject? Shouldn’t investigations, by their nature, precede a charge? And may Section 220 be used as an end-around discovery rules in the pending plenary action? This decision addresses these issues, discusses the relevant Delaware precedent, and explains that, “although there is no bright-line rule prohibiting stockholders from using Section 220 to investigate pending plenary claims, Delaware courts have enforced those inspection demands in special circumstances only.” Special circumstances may include where the plenary complaint was dismissed without prejudice, with leave to amend. No special circumstances were present in this books and records action, so the Court of Chancery dismissed it.
It is sometimes fair to characterize plaintiff-side representative litigation in the corporate context as lawyer-driven. This decision is notable because it addresses how that dynamic might affect a stockholder’s right to inspect corporate books and records under Section 220 of the Delaware General Corporation Law. The right to access records is not a license to fish. A stockholder can get necessary records, for a proper purpose—one that is in fact the stockholder’s true and primary purpose. That is where a lawyer’s involvement might make a difference. The purposes stated by counsel might not align with the stockholder’s actual motivations. More ›
Delaware Supreme Court Addresses Emails and Jurisdictional Use Conditions in Books and Records Actions
Two prevailing questions for books and records inspections under Section 220 of the Delaware General Corporation Law are what records can I get, and what can I do with them? This decision from the Delaware Supreme Court addresses both issues. More ›
As a general matter, under Section 220 of the DGCL, directors of a Delaware corporation enjoy the right to virtually unfettered access to the corporation’s books and records so they can exercise their fiduciary duties. In this recent post-trial decision, the Court of Chancery addressed a request by Papa John’s founder and longtime spokesperson, John Schnatter, to inspect documents and communications leading up to the formation of a special committee that decided to terminate certain relationships with him following remarks construed as racial in nature. While the parties resolved most of their disputes consensually, the remaining issues turned largely upon the Court’s factual finding that Schnatter sincerely wished to investigate potential mismanagement in connection with the committee’s decision to distance the company from him. Particularly noteworthy, after considering recent precedents in this area, the Court ordered the production of communications relating to this issue that may be found in the other directors’ personal email accounts or on personal devices. Also notable, in light of all the circumstances, the Court declined to find a separate action for breach of fiduciary duty filed by Schnatter in his capacity as a stockholder was a basis for denying inspection in his capacity as a director.
Litigation seeking to inspect a corporation’s records under Section 220 of the DGCL might toll the statute of limitations for certain claims under the right circumstances. There are important limits to this form of tolling. For example, it is not automatic and will only apply to claims that are the subject of the inspection demand. This decision does a good job of explaining these limits and the factors a court will consider in determining whether inspection-based tolling should apply. It otherwise examines and applies the law on the statute of limitations and issues of inquiry notice.
Court of Chancery Outlines Proof Sufficient for Books and Records Inspection and Permits Inspection of Emails
This decision reflects a good example of how summary books and records actions often proceed in the Court of Chancery: the parties typically work to narrow the issues for trial; the defendant often moots less objectionable records requests, many times in the weeks or days leading to trial; and the plaintiff often narrows disputed requests shortly before trial. Here, the parties did all the above. The petitioner thereafter carefully marshaled its evidence and showed why it should be permitted to inspect emails and other materials that are sometimes off limits in books and records actions. As the Court put it regarding email inspection, the petitioner established that “(1) the produced documents do not allow it to adequately address the stated purposes, and (2) the produced documents also suggest that other documents exist, including emails, that address the crux of the stated purposes and are unavailable from another source.”
An investor seeking books and records for the purpose of investigating wrongdoing or mismanagement must establish a “credible basis” from which to infer such conduct may have occurred. This Master in Chancery report well demonstrates how the Court of Chancery analyzes a books and records demand for such a purpose. The decision discusses several important principles. First, the credible basis standard is very low, requiring only some evidence to suggest misconduct. Second, proving a credible basis is not the same thing as proving actual misconduct. Thus, as the other side of that same coin, the Court generally will not consider defenses that go to the merits of whether wrongdoing actually occurred. Third, the Court will analyze the action before it and not necessarily be influenced by a decision in another court regarding similar allegations.