Graulich
v. Dell, Inc. (Del. Ch. May 16, 2011).
What this case is about:
This Court of Chancery opinion involved a demand by a
shareholder for books and records of Dell, Inc. for the ostensible purpose of
enabling him to investigate possible mismanagement. Further summary and
commentary follows, but first a word from our sponsor.
The Corporate Statute that this Chancery
Opinion is Based on:
Section 220 of the Delaware General Corporation Law
(DGCL) allows a stockholder to demand certain books and records under
circumscribed circumstances if various prerequisites are satisfied. For
example, in order to prevail on a Section 220 demand, a stockholder must
demonstrate: (i) that she is actually a stockholder of the corporation during
the relevant periods involved; (ii) certain format and content requirements of
the demand have been met; and (iii) the stockholder has a "proper purpose"
reasonably related to her interest as a stockholder. Moreover, the courts have
superimposed the requirement of a "credible basis" for alleged wrongdoing onto
DGCL Section 220 in order for one to support the stated purpose of
investigating even potential wrongdoing.
Factual Background of Decision
The stockholder in this case sought books and records in
order to allow him investigate possible mismanagement and thereafter to pursue
derivative claims based on Dell's sale of OptiPlex computer systems sold from
2003 to 2005. The allegation was that certain parts related to those systems
required Dell to incur costs for replacement and servicing, and that the
problems had a negative impact on its brand name. In addition, the allegation
was that the board of Dell failed to monitor or otherwise address the situation
appropriately.
Highlights of Court's Decision
The Court rejected the demand for books and records in a
thoroughly reasoned opinion that was based on three fundamental points:
(i) The claims were barred by a settlement agreement and
release in a prior class action styled as In Re Dell, Inc., Derivative
Litigation,
(ii) The applicable statute of limitations on any such
claim (that could be brought in a later derivative action) had already run.
(iii) The stockholder did not satisfy the "proper
purpose" requirement of Section 220 because the only purpose stated was to
pursue a derivative suit with the data requested, and the stockholder would not
be able to bring a derivative suit because he was not a stockholder during the
time period in which the matters complained of were alleged to have taken
place. Plus, even if that hurdle were to have been overcome, the Court cast
doubt on the ability to satisfy the substantive challenge of prevailing on a Caremark
claim based on the facts presented.
Short Commentary
We have written frequently on these pages about Section
220 decisions and their nuances. See, e.g., compilation of Section
220 cases and commentary highlighted on this blog here. This most
recent Chancery decision is another example of how difficult Section 220
demands for books and records can be. (Although this case may not be the best
example because it seems to have been based on a comparatively weak Section 220
argument.) Many decisions from Delaware's Supreme Court and Court of Chancery
exhort practitioners to use what the courts refer to as the "tools at hand"
(i.e., Section 220), to obtain detailed information from a company before
filing a derivative action. However, this case demonstrates that not all
efforts to obtain books and records pursuant to Section 220 prevail-despite the
apparent simple provisions of the statute. And there are ample examples of a
stockholder pursuing his case all the way to the Delaware Supreme Court only to
be told by the court after the time and expense of that appeal, that the
stockholder is not entitled to books and records based on the particular facts
presented.
One "take-away" message based on the decisions summarized
on this blog over the past six years, is that it is not cheap, simple or fast
to pursue a Section 220 demand, especially if a company is committed to making
the shareholder spend as much time and money as possible, and if the company
intends to make it as difficult as possible for the stockholder to obtain any
data. Admittedly, the stockholder in this case had at least 3 strikes against
him before those considerations came into play.
But even in those cases where a stockholder prevails in
his Section 220 demand after trial, the company may further frustrate the
intent of Section 220 by playing a game of "hide the ball" and the stockholder
can spend substantial money and time trying to force the company to produce all
the data to which the stockholder is entitled -even after a ruling in favor of
the stockholder.
Still more time and money needs to be spent if the
stockholder seeks electronic data. The statistics in the business world today
indicate that most data produced today is produced electronically-but is
never printed in hard paper format.
So, if a company only produces hard copies of the data
requested, and refuses to produce electronic data, the stockholder is faced
with spending more money to fight that issue because I am here to tell all
readers that, (as hard as it may be to believe), there is no authoritative
Delaware court opinion that squarely addresses the issue of whether electronic
data must be produced under Section 220-even when a court has ruled that a
stockholder is entitled to "books and records" under Section 220. I am
co-authoring an article on that very issue that we hope to publish in the near
future.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Fox Rothschild LLP.
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