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Court of Chancery Addresses Mooted Purpose for Books and Records Inspection

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In | On February 16, 2012

The Court of Chancery in Amalgamated Bank v. NetApp, Inc., C.A. No. 6772-VCG, recently addressed a shareholder’s right to a books and records inspection under 8 Del. C. § 220 where the shareholder first proceeded with a derivative action in another jurisdiction. In denying a motion to compel, the Court provided some helpful pointers for practitioners representing shareholders of Delaware corporations:

  • For efficiency when litigating in multiple jurisdictions, shareholders should pursue their books and records action in Delaware before filing a substantive matter elsewhere.
  • “Nothing . . . permits a books and records examination to become a device for parallel discovery to be pursued in two jurisdictions . . . .”
  • “[T]he theoretical possibility of leave to amend a pleading [does not] convert the desire for such discovery into a proper purpose.”

Background

Plaintiff Amalgamated Bank first filed a derivative action in California, bringing a Caremark claim against NetApp, Inc., a Delaware corporation in which Plaintiff is a shareholder, and its board. Plaintiff did not make a books and records demand before filing the California action. Plaintiff then filed an amended complaint in California. The California defendants filed demurrers for failure to plead demand futility. The California court temporarily granted those motions, but gave Plaintiff 60 days to file a second amended complaint after Plaintiff had time to file a books and records action in Delaware.

Following the California decision, Plaintiff issued its demand letter, which was rejected and followed by the filing of a books and records action in Delaware. During the pendency of the books and records action, Plaintiff filed its second amended complaint in California – without the benefit of information in response to its books and records action. Defendants filed demurrers in response. The California court set February 1, 2012 as the firm deadline for briefing on the demurrers, noting that by the hearing on the demurrers they would be sustained or Plaintiff will have submitted a third amended complaint that survived the demurrers. After filing the second amended complaint, Plaintiff moved to expedite the Delaware action.

Following a trial in Delaware, the Court of Chancery held that Plaintiff’s purpose for seeking books and records to survive a futility challenge was proper and nearly 300 documents were produced. The parties, however, engaged in briefing on a motion to compel as to the scope of the production with a teleconference scheduled for February 1, 2012 – which also happened to be the deadline in California for submissions on the demurrers. Even though the information would possibly be relevant to the California action, Plaintiff did not seek expedited treatment of its motion to compel in Delaware.

Standard: Proper Purpose

A shareholder of a Delaware corporation has a statutory but qualified right to inspect corporate books and records so long as the purpose is “reasonably related to the person’s status as a stockholder.” Where the purpose is to collect information regarding demand futility, “the Plaintiff should, for purposes of economy, and consistent with the requirements of Rule 11, bring the Section 220 action before filing the substantive action.”

However, in limited situations, seeking such information for purposes of amending a complaint can be a proper purpose. In King v. Verifone Holdings, Inc., 12 A.3d 1140 (Del. 2011), the Delaware Supreme Court overturned a Chancery decision “holding that a stockholder-plaintiff who brought a derivative suit, without first seeking a corporation’s books and records, was (in the formulation of [the Delaware] Supreme Court) ‘for that reason alone, legally precluded from prosecuting a later-filed Section 220 proceeding.’” The Delaware Supreme Court, rather, held that a “‘rule that would automatically bar a stockholder-plaintiff from bringing a Section 220 action solely because that plaintiff previously filed a plenary derivative suit’ was ‘unsupported by the text of, and the policy underlying, Section 220.’”

Analysis: Proper Purpose Extinguished

With Plaintiff failing to plead new facts by the February 1, 2012 deadline in California, the Court held that Plaintiff’s reliance on King was misplaced. Under King, where a party has been granted leave to amend there may be a proper purpose; as opposed to the misinterpretation that where a party has the right to seek leave to amend the proper purpose is the de facto result. Where leave no longer exists, “a plaintiff’s proper purpose is extinguished.” Thus, with the window to amend closed in California, Plaintiff no longer had a proper purpose in Delaware and the motion to compel was moot.

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