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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Chancery Addresses Lawyer-Driven Effort Defense to Books and Records Inspection
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.
This case involved a fund that outsourced its key investment and legal functions, and relied on outside counsel to keep track of potential mismanagement and wrongdoing related to its investments. In arguing that the stockholder lacked a proper purpose, defendants characterized the demand as a lawyer-driven effort, and pointed to outside counsel’s leading role in monitoring the stockholder’s investments, identifying potential issues with those investments, and drafting and prosecuting the demand and subsequent litigation. The Court of Chancery held as a factual matter, however, that the stockholder did not have an actual purpose different than those advanced by counsel, and thus the inspection was allowed.