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Court Of Chancery Explains Right To Inspect After Demand Refused

Louisiana Municipal Police Employees Retirement System v. Morgan Stanley & Co. Inc., C.A. 5682-VCL (March 4, 2011)

This decision explains why a stockholder is entitled to inspect the documents surrounding a corporation's refusal to pursue derivative litigation when the board appears independent enough to be able to properly refuse the demand to sue.  The Court carefully reviews past Delaware precedent and outlines what documents the stockholder may review.

The decision makes major points.  First, the stockholder who has made a pre-suit demand does not thereby conclusively concede the board is independent and disinterested.  Second, the decision to not sue is subject to the business judgment rule but that presumption may be rebutted by a showing the decision was not in good faith or was unreasonable.  [Note that it is generally thought that the BJR precludes a reasonableness review but we will see if that is still true in this limited area.  Most likely what the Court meant is that the decision has to be so unreasonable that no director in good faith could reach that conclusion.]  Third, the Court of Chancery has, according to a federal court, exclusive jurisdiction over books and records cases under Delaware law.

This is an important decision because it shows the way much future derivative litigation must proceed.  Books and records cases are fairly easy to litigate.  This then permits plaintiffs to get behind the usual demand-refused letter that just states the process used and the conclusion not to sue and fails to say why.  Of course, it remains to be seen if any plaintiff can make a showing after inspection to overcome a rejection of a demand to sue.

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