Court of Chancery Limits Use of Demand for Records
Highland Select Equity Fund, L.P. v. Motient Corp., C.A. No. 2092-N, 2006 WL 1903129 (Del. Ch. July 6, 2006).
In this case, the Court of Chancery dismissed a demand to inspect the records of a Delaware corporation because the demand for inspection was abusive. A demand to inspect corporate records must be based on a good reason and when the request is to inspect allegations of wrongdoing, those allegations must have some basis. While the Court here felt that part of the test for inspection had been met, the way the plaintiff went about its request cost it the litigation.
Particularly in the context of an ongoing proxy contest, a request to inspect should be targeted a rifle shot and not a shotgun. A proxy contest imposes even more tight time demands on the participants in the books and records suit and on the Court, and very broad requests are then even less likely to be treated favorably. Because there is a proxy contest going on, the Court knows full well that it will get dragged into monitoring the use in the proxy contest of any materials it orders produced for inspection. Asking for too much may mean you will get too little or as in this case, nothing at all when your motives are suspect.
On February 14, 2007, upon remand from theDelaware Supreme Court, the Court of Chancery further explained its reasoning