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Court of Chancery Permits 220 Action To Proceed Despite Likelihood that Documents Would Give Rise to Precluded Causes of Action

Amalgamated Bank v. UICI, C.A. No. 884-N, 2005 WL 1377432 (Del. Ch. June 2, 2005) Plaintiff Amalgamated Bank brought an action under 8 Del. C. § 220 to inspect the books and records of UICI, a corporation in which it was a shareholder. The Court of Chancery permitted Plaintiff's inquiry, despite the request encompassing documents likely only to reveal time-barred and other precluded causes of action. In its demand letter,Amalgamated set forth its purposes for inspection as follows:
(1) to enable [Amalgamated] to investigate whether [UICI's] directors: (a) breached their fiduciary duties in connection with any related party transactions, or (b) otherwise acted unlawfully to the detriment of shareholders; and (2) to enable [Amalgamated] to evaluate whether a valid basis exists to bring a shareholder action to challenge the [UICI's] related party transactions, Board member actions or otherwise seek shareholder redress.
Amalgamated identified numerous related party transactions between UICI and Ronald Jensen, founder and chairman of UICI, his children, and various entities controlled by Jensen or his children. Documents sought by Amalgamated dated back to 1997. They involved transactions potentially beyond the applicable statute of limitations and therefore immune from further judicial scrutiny through invocation by UICI's directors of the doctrines of collateral estoppel and res judicata based upon derivative and class litigation concluded in October 2001 in Texas. The court found that the potential availability of affirmative defenses to withstand fiduciary duty claims cannot solely act to bar a plaintiff under Section 220. Because a Section 220 action is a summary proceeding, the factual development necessary to assess fairly the merits of a time-bar affirmative defense, for example, as to each potential claim, is not consistent with the statutory purpose. The court further found that "courts should not be called upon to evaluate the viability of affirmative defenses to causes of actions that have not been, and more importantly may not ever be, asserted." Finally, the court found just because an action that arises out of a particular transaction may be barred does not mandate the conclusion that documents relating to that transaction are not "necessary, essential, and sufficient" for a shareholder's proper purpose with respect to more recent transactions. To be sent a PDF copy of this opionion, please click here. Authored by: Liza Haley Sherman 302.888.6940 lsherman@morrisjames.com