A shareholder makes a demand to review board minutes under DGCL 220. The “Memorandum Supplementing Order Affirming Judgment Pursuant to Rule 84.16(b)”, dated Aug. 20, 2013, from the Western District, describes the shareholder as:
“demanding, pursuant to Delaware General Corporation Law Section 220, to inspect and copy “the minutes of the Company’s Board of Directors and Nominating Committee from January 2009 to the present date.” [The shareholder] explained that the purpose of the demand was “to confirm that the Company’s Directors satisfied their fiduciary duties and maintained board independence, as opposed to the entrenchment of management, in connection actions taken since January 1, 2009.” A week later, [the issuer’s] legal counsel sent a response to [a stockholder] declining the demand for several reasons, including that the demand failed to state a proper purpose under Delaware law, was not made in good faith, and failed to consider [the issuer’s] legitimate interest in protecting the confidentiality of nonpublic corporate records.”
This author is somewhat displeased that the court’s discussion of this matter is in a memorandum not generally available (i.e., not available through Westlaw or Lexis). Does this not present an issue of the type as to which practicing lawyers should have guidance?
By way of background, Delaware law provides shareholders have the right to inspect books and records for proper purposes under DGCL 220. This right is important, because the Delaware law is that if a derivative lawsuit is brought without demand having been first made, discovery is stayed pending determination of whether demand was excused is determined. As the Drexler et al. treatise (§ 42.03) explains,
More after the break …
“Levine [v. Smith] did firmly establish … that a derivative plaintiff is not entitled to dscovery before his allegations of futility are tested by a motion to dismiss.”
And, if the shareholder first brings a demand, it will have conceded the independence of the board, which will be examined under the Business Judgment Rule (generally a loser). See Zapata Corp. v. Maldonado, 430 A.2d 779, 784 n.10 (Del. 1981).
So, what is a proper purpose for seeking records under DGCL 220 is not a minor matter.
As to the existence of wrongdoing, recent Delaware authority states the test:
the plaintiff-stockholder must present “some evidence” to suggest a “credible basis” from which a court could infer possible mismanagement that would warrant further investigation…. Because the “credible basis” standard “sets the lowest possible burden of proof,” any reduction of that burden would be tantamount to permitting inspection based on the plaintiff-stockholder’s mere suspicion of wrongdoing.
City of Westland Police & Fire Retirement Sys., 1 A.3d 281, 287-88 (Del. 2010) (emphasis added) (footnote omitted). This is a case cited in the complaining shareholders’ brief (not an obscure case; your author shared it with his students a few weeks ago)–so this authority is not a surprise to the appellate court. (Additionally, one can have a proper basis for seeking books and records where mismanagement is not a required element. See, e.g., Macklowe v. Planet Hollywood, 1994 WL 560804 (Del. Ch. Sept. 29, 1994) (describing issuer’s claim that a purpose consisting of a desire to value shares must be accompanied by a present to sell, or “some other actual need” to value the shares, as “bereft of legal support”).)
After having had their demand for records refused, the lawsuit proceeded, seeking other records as well. What about the right to books and records? Here’s what the court has to say:
[The shareholders’] February 10, 2011 request to inspect was limited to a single category of documents — “[a] complete and correct copy of the minutes of the Company’s Board of Directors and Nominating Committee from January 1, 2009 to the present date” — not the nineteen categories of documents set forth in the petition. [The shareholders] cannot demonstrate that the Board refused to allow them access to documents when a request for access to such documents was never made.
Moreover, their request for access to the single category of documents mentioned in the February 10, 2011 letter was not made pursuant to Section 351.215. Rather, as [the shareholders’] stated in their letter and affirmed in their brief and oral argument, their request was made pursuant to 8 Delaware Code Section 220 (2011). Section 220 gives stockholders of Delaware corporations the right to inspect corporate documents if certain requirements are met and the remedy, if their request is denied, of applying to the Delaware Court of Chancery for an order to compel such inspection.3 Because [the shareholders’] request to inspect was made pursuant to 8 Delaware Code Section 220, they cannot demonstrate that the Board refused its duty to allow them access under Section 351.215.
[The shareholders] failed to show a clear, unequivocal, and specific right to a writ of mandamus compelling inspection under Section 351.215. Therefore, the court properly granted summary judgment in favor of [the issuer] and the Board on Count IV of [the shareholders’] petition. Point VI is denied.
[FN3] Indeed, Section 220(c) states that the Delaware Court of Chancery has “exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought.” While some courts have found that this provision and others like it have no effect on a sister state’s jurisdiction, see Anderson v. Children’s Corner, Inc., No. CV106011812S, 2011 WL 925442, at *2-3 (Conn. Super. Feb. 15, 2011), Sachs v. Adeli, 804 N.Y.S.2d 731, 733 (2005), other courts have found that this provision divests sister states of jurisdiction to hear claims under Section 220, see Lynch v. Basinger, No. 12-637 (RBK/KMW), 2012 WL 6213781, at *5 (D.N.J. Dec. 12, 2012); Yale South Corp v. Eclipse Servs., Inc., No. 10-CV-0337-CVE-FHM, 2010 WL 2854687, at *3-4 (N.D. Okla. July 19, 2010); Reserve Solutions, Inc., v. Vernaglia, 438 F. Supp. 2d 280, 288-89 (S.D.N.Y. 2006). We need not determine what effect this provision has on the present proceeding, however, because the mere fact that [the stockholders’] request to inspect was made under 8 Delaware Code Section 220 defeats their claim that they are entitled to a writ of mandamus compelling inspection under Section 351.215.
Your author was a transactional lawyer. He is not particularly enamored of tedious litigation strategies that allow a corporation to deny access to books and records that the court does not conclude to have been improperly sought, based on a claim that the access to records should be litigated in Delaware.
It also is not clear why the lawsuit’s ultimate determination was not stayed pending litigation of right to access the 220 books and records materials in Delaware.
This author was looking forward to an analysis of the extent to which requested access to this information was proper. Unfortunately, the memorandum does not provide guidance on that matter. Moreover, this author would have thought that practicing lawyers would want to know that a Missouri court will not allow access to a Delaware corporation’s records, at least under these circumstances. These procedural issues are significant.
Practicing Missouri corporate lawyers should be aware that starting the litigation in Delaware, to get the books and records first, may be the way to go, if one wishes to succeed. So, the first step, now, is to arrange local Delaware counsel. Great. Not.