Delaware Business Litigation Report

In a Books and Records Action, Court Critiques Defendant’s Motion to Dismiss, and Declines to Order Inspection of Documents Not Requested in the Plaintiff’s Demand

Paraflon Investments, Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. Apr. 3, 2020).

Sometimes it bears repeating that Section 220 actions are intended to be summary proceedings to evaluate a stockholder’s pre-suit demand to inspect a corporation’s books and records. 

Plaintiff sued Defendant after Defendant declined to produce all of the documents that Plaintiff demanded after Defendant ceased operations. After trial on a paper record, the Court held that Plaintiff was entitled to records related to a failed transaction with a potential investor but not entitled to the other records.

Although largely a routine case, two aspects of the Court’s Opinion stand out. First, the Court reiterated the reasoning behind its earlier decision to summarily deny Defendant’s motion to dismiss. Rather than leave the issue to the transcript of its prior bench ruling, the Court used its first footnote to characterize Defendant’s prior motion to dismiss the Section 220 complaint as “irregular” and contrary to the summary character of Section 220 proceedings. Second, the Court denied Plaintiff’s request for documents beyond those listed in its pre-suit demand. Specifically, the Plaintiff claimed he was induced to invest based on the Defendant’s representation that it had certain contracts with prominent retailers, which Plaintiff now suspected never existed. Plaintiff’s inspection demand did not, however, request the documents. In denying this request, the Court reasoned that striking the balance between stockholder inspection rights and board independence is “a core principle of Section 220 jurisprudence,” and “[h]olding that inspection will not be ordered unless a request is presented in the stockholder’s inspection demand preserves this balance[.]”

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