Books-and-records litigation does not typically grab headlines. In fact, few cases litigated under Section 220 of the Delaware General Corporation Law result in written opinions authored by the Delaware Supreme Court. Nevertheless, books-and-records litigation is vibrant in Delaware. Books-and-records requests are the "tools at hand" Delaware courts encourage stockholders to use prior to filing derivative litigation. However, a stockholder's right to a Delaware company's books and records is not unfettered. Aside from needing to satisfy the preconditions set forth in Section 220, the Delaware Supreme Court recently apprised the Court of Chancery that it is within the Chancery Court's authority to restrict the use of certain books and records where equitable.
In United Technologies v. Treppel, No. 127, 2014 (Dec. 23, 2014), the Delaware Supreme Court held that the Court of Chancery has the authority to limit the use of books and records provided pursuant to Section 220. The underlying action involved a stockholder, Lawrence Treppel, who issued a books-and-records inspection request under Section 220 upon United Technologies Corp., a Delaware corporation. Treppel had previously issued a litigation demand letter to United Technologies' board of directors relating to a U.S. Department of Justice investigation of potential federal violations committed by United Technologies. The board rejected Treppel's litigation demand, which ultimately led to Treppel requesting books and records concerning United Technologies' evaluation of Treppel's litigation demand and the board's refusal to pursue litigation. United Technologies agreed to allow Treppel to inspect most of the documents he requested subject to his execution of a confidentiality agreement, which included a provision requiring any lawsuit arising out of, involving, or in connection with Treppel's inspection be brought in Delaware. Treppel refused to bind himself to suing in Delaware. Unable to bridge the impasse, Treppel filed his Section 220 lawsuit seeking inspection of United Technologies' books and records without any usage restriction. It is worth noting that at the time Treppel filed his Section 220 action, United Technologies' bylaws did not contain a forum selection clause requiring suits against the company be brought in Delaware; however, during the Section 220 litigation, United Technologies' board adopted such a bylaw.
In its post-trial opinion, the Court of Chancery held that it did not have the authority to restrict a stockholder's use of books and records to any legal action in a Delaware court. The Court of Chancery equated the restriction of Treppel's use of books and records to an anti-suit injunction. On appeal, the Supreme Court focused on the express language of Section 220(c), which states: "The court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the court may deem just and proper." The Supreme Court found Section 220 to give the Court of Chancery broad discretion to limit the use of books and records, including the ability to restrict the use of those books and records to litigation in Delaware.
Finding that the Court of Chancery had erred as a matter of law, the Supreme Court reversed and remanded the matter and identified certain "case-specific" factors that should be taken into consideration by the Court of Chancery. Those factors included, but were not limited to: (1) the existence of litigation in the Court of Chancery on the subject matter Treppel has threatened to file claims; (2) United Technologies' concern that it and its stockholders could face excessive costs associated with defending duplicative derivative litigation in another jurisdiction; (3) the risk of inconsistent rulings from multiple jurisdictions considering the same claims arising out of Delaware law; (4) the existence of a forum selection bylaw appointing Delaware as the appropriate forum for disputes; and (5) Treppel's inability to articulate a legitimate reason why he needs to litigate in another jurisdiction. In addition, the Supreme Court noted that the Court of Chancery's analogy to an anti-suit injunction was misplaced. An anti-suit injunction would prohibit a litigant from proceeding with litigation against a company in a foreign jurisdiction. The proposed restriction on the use of books and records does not prohibit the stockholder from commencing litigation in a foreign jurisdiction. Rather, it prohibits the stockholder from utilizing the books and records in aid of that foreign litigation.
What is clear from the Supreme Court's opinion is that while there is no bright-line rule on what is a permissible restriction on the use of a company's books and records, the Court of Chancery has the broad authority to craft restrictions on the usage of books and records. The Supreme Court noted the well-established precedent for books and records being produced subject to confidentiality restrictions. Other restrictions, such as a prohibition against using a company's books and records in foreign litigation, may also be appropriate where the Court of Chancery finds sufficient supporting factors. In any event, the Supreme Court declared the factual analysis to occur on a case-by-case basis and provided litigants with an array of factors to consider when determining whether to seek or oppose a restriction on the use of books and records.