Delaware Business Litigation Report

Court of Chancery Orders Production of Documents in Books and Records Action

Sutherland v. Dardanelle Timber Co., C.A. No. 671-N (Del. Ch. May 16, 2006). Defendant objected to Master in Chancery's report granting relief to Plaintiff on majority of her requests in Section 220 action. Plaintiff objected to Master in Chancery's narrowing the scope of documents she demanded. Defendant was a family owned and operated Delaware corporation. Plaintiff owned 25% of Defendant's common stock; her three brothers, Dwight Jr., Perry and Todd owned the remaining 75% of Defendant's common stock. Defendant's preferred shares were owned by a trust, that Perry controlled as trustee. Perry and Todd managed the Defendant. Plaintiff did not get along with Perry and Todd, who secretly removed her as a director of Defendant in February 2004. In March 2004, Plaintiff requested certain records and information of the Defendant. After Defendant provided some of the requested records, Plaintiff learned that she had been removed as a director and that Perry and Todd had approved employment agreements for their own benefit. Plaintiff made a formal written demand for books and records pursuant to 8 Del. C. 220. Defendant refused to permit inspection, claiming Plaintiff was demanding inspection for personal and vexatious purposes that had nothing to do with her status as a shareholder. Plaintiff instituted this action. After trial, the Master in Chancery found that Plaintiff's stated purpose of investigating potential self-dealing of Perry and Todd was a proper purpose under 8 Del. C. 220. However, the Master in Chancery narrowed the categories of documents to be produced and the time period of documents to be produced from seven years to one year. Applying a de novo standard of review, the Court of Chancery adopted most of the Master in Chancery's holdings. The Court held that Plaintiff had established a proper purpose as required by 8 Del. C. 220 because she had proved a credible basis to believe there was wrongdoing at Defendant. Although investigating wrongdoing at Defendant was probably not Plaintiff's sole purpose for bringing the case, the Court concluded it was her primary purpose. The Court held that Plaintiff's purpose in bringing her demand entitled her to a broader scope of documents than granted by the Master in Chancery because many of the documents sought related to Perry and Todd's alleged wrongdoing. However, Plaintiff was not entitled to documents of a subsidiary only partly owned by Defendant and that Plaintiff had failed to establish Defendant controlled. Finally, the Court held that Plaintiff's request for documents dating back seven years was overbroad and that she was entitled to documents dating back a year before the death of her father (who had founded and run Defendant). Share