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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 84 posts in Books and Records.
Court Of Chancery Permits Inspection of Pre-Ownership Events
Sanders v. Ohmite Holding LLC, C.A. 5145-VCL ( February 21, 2011)
This decision determines that an owner of an LLC interest may obtain inspection of its books and records even with respect to events that occurred before he became a member.
ShareSupreme Court Upholds Late Inspection Suit
King v. Verifone Holdings Inc., No. 330, 2010 (January 28, 2011)
This decision reinstates a books and records case that was dismissed by the Court of Chancery. The Court of Chancery held that a stockholder who first files a derivative complaint may not later file a books and records case. The Supreme Court overturned that bright line test.
Instead, the Supreme Court held that when a stockholder suit might prove useful even after a derivative suit is filed, the books and records case may proceed. Thus, if the derivative suit is still pending or even after it has been dismissed if it may be refiled, the inspection of company records may be requested by a book and records suit. If, however, the derivative suit is dismissed with prejudice, then inspection serves no proper purpose and will be denied.
ShareCourt Of Chancery Explains Expedited Procedures
Lavi v. Wideawake Deathrow Entertainment LLC, C.A. 5779-VCS (January 18, 2011)
The Delaware corporate and alternative entity laws have several provisions for expedited treatment of corporate disputes, such as over the right to inspect corporate records. Those matters are to go to trial quickly and, as this decision explains, are seldom subject to motion practice such as for summary judgment. Thus, the better practice is to ask for a trial date, soon.
A word of caution is in order on this point, however. When the Court calls in response to a request for a fast schedule, you had better be prepared to say why any trial is needed. At least in some cases, the Court has been known to rule on the merits during such a call when faced with a lawyer who has no good reason to oppose inspection or a decision on entitlement to vote stock.
ShareCourt Of Chancery Again Dismisses Late Books And Records Case
Baca v. Insight Enterprises. Inc., C.A. 5105-VCL (June 3, 2010)
Just as it did last month in the King case, the Court of Chancery has again dismissed a complaint for inspection of a company's books and records when that complaint was filed after a derivative suit was filed and is an effort to find a a basis to sustain the derivative case.
ShareCourt Of Chancery Upholds Right To Member List
Brown Investment Management L.P. v. Parkcentral Global L.P., C.A. 5248-VCL (May 24, 2010)
A member of a LLC or LP has the right to a list of its members even after it has gone bust.
ShareCourt of Chancery Explains Beneficial Ownership Proof Requirement
Smith v Horizon Lines, Inc., C.A. 4573-CC (August 31, 2009)
When the statute governing demands for inspection rights was changed to permit a demand by a beneficial owner, it also required proof of beneficial ownership. This decision explains what form that proof must take. An account statement that just has the owner's last name and does not indicate the date is not good enough. You would think that someone named "Smith" would have been told by now to be more explicit.
ShareCourt of Chancery Acts to Resolve Inspection Suit
Bosse v. WorldWebDex Corp. C.A. 4443-CC (July 30, 2009).
The Court of Chancery frequently acts to promptly resolve actions seeking inspection rights even faster than the parties might expect or ask. This is an example of the Court reviewing the complaint and response and deciding to grant judgment on the pleadings when there does not seem to be any valid defense.
ShareCourt of Chancery Applies Corporate Law to Books and Records of LLC
Mickman v. American International Processing LLC, C.A. 3869-VCP (July 28, 2009).
This decision applies corporate case law to a demand for the records of an LLC. The Court held that a right to review "all books and records" under the LLC agreement means just that, all the pertinent records. It also held that the grant of access to the records includes the right to copy them.
ShareCourt of Chancery Limits Inspection Rights in LLC
Jakks Pacific, Inc.v. THQ/Jakks Pacific LLC, C.A. 4295-VCL (May 5, 2009)
When the business of an LLC is limited, so too may inspection rights be limited. Here the "business" was to exploit a license that was about to come to an end, and the Court held there was no need to inspect business records to value the business as there may well be nothing left to value.
Further, the Court held that mere allegations, unsupported by facts at trial, do not provide a basis to inspect records to determine if there has been any wrongdoing.
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Court of Chancery Explains Interaction with PSLRA
Beiser v. PMC-Sierra Inc., C.A. 3893-VCL (Del. Ch. Feb. 26, 2009)
Under the federal PSLRA, discovery may be stayed while a motion to dismiss is pending. Parties have tried to get around this stay by filling a books and records complaint in the Court of Chancery. This decision explains when you can get away with that, and holds, not very often.
Briefly, a books and records action may only proceed when the plaintiff is not already involved in a federal case over the same issues, when the plaintiff's attorney is also not involved in a pending federal case, and where the plaintiff agrees not to use the materials produced in the Delaware case to prosecute a pending federal case.
ShareCourt of Chancery Denies Redundant Inspection
Repeated books and records demands by different stockholders should be viewed favorably. When, as here, a special litigation committee (SLC) has reviewed the conduct sought to be investigated by the plaintiff, and the independence and diligence of the SLC cannot be fairly questioned, then a stockholder who demands inspection may receive the SLC report and some backup materials, but no more absent a stronger showing of real justification to think the SLC did not do its job.
ShareCourt of Chancery Upholds Corporate Documentation
Tanyous v. Happy Child World, Inc., C.A. 2947-VCN (Del. Ch. July 18, 2008)
This decision holds that when the corporate internal documents say the plaintiff is a stockholder, an alleged oral agreement that he was really just a lender with the stock as security is not to be believed. What is striking about this case is the extraordinary patience the Court gave to what seems to be a pretty far-fetched story that documents do not mean what they say.
The plaintiff contended that he was a stockholder entitled to inspection rights. The defense was that despite all the corporate documentation, including tax returns, that said the plaintiff was a stockholder, there really was a side deal that he was only a lender with a security interest in stock. Not surprisingly, that story did not wash.
ShareCourt of Chancery Confirms Limits of Inspection Litigation
TravelCenters of America LLC v. Brog, C.A. 3516-CC (Del. Ch. March 31, 2008)
This decision confirms that for limited liability companies the rule applies from corporate law that a suit for inspection of books and records is a limited case that may not also include other claims such as breach of fiduciary duty.
ShareCourt of Chancery Extends Books And Records Inspection
Melzer v. CNET Networks, Inc., C.A. No. 3023-CC (November 21, 2007).
The scope of inspection rights may be affected by when a stockholder first acquired her stock. If the inspection is to investigate alleged wrongdoing, the rationale for granting inspection is to permit the filing of a derivative suit if the inspection shows that it is warranted. Hence, prior case law has held that inspection of records existing before the petitioner became a stockholder is not warranted because the stockholder has no right to sue for those pre-ownership wrongs under Delaware law.
This decision extends inspection rights when the potential claim is for a Caremark case alleging a "sustained or systematic failure" of oversight. Then, the Court held, showing past failures is relevant to showing a sustained wrong that culminated in damage to the entity after the petitioner became a stockholder. Under that rationale, the scope of inspection may extend to pre-ownership records.
ShareCourt of Chancery Explains The "Some Evidence" Rule In Section 220 Cases
Louisiana Municipal Police Employees Retirement System, C.A. No. 2608-VCN (October 2, 2007).
To obtain inspection of corporate records to investigate allegations of wrongdoing, it has long been held that a stockholder must have "some evidence" that there was indeed wrongdoing to investigate. Otherwise, mere allegations would permit intrusive books and records reviews.
Here, the allegation was that options had been back dated and the Court permitted inspection based on a statistical analysis that showed stock price rises immediately after many option grants. The Court felt this was "some evidence" that warranted inspection. However, the Court was clearly skeptical and cautioned that it was going to continue as the gate keeper to limit inspections that were not justified.
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