Corporate

Delaware Court of Chancery Denies Stockholder Demand for Section 220 Records

 Fuchs Family Trust v. Parker Drilling Company, C.A. No. 9986-VCN (Del. Ch. March 4, 2015) [an enhanced version of this opinion is available to lexis.com subscribers].

This opinion of the Delaware Court of Chancery analyzes a stockholder demand pursuant to DGCL Section 220 seeking information concerning violations by the company of the Foreign Corrupt Practices Act (the “FCPA”). The court rejected the stockholder request for documents in this post-trial opinion based on a paper record, which would reveal identities of those who allegedly violated the FCPA.

After explaining the nuances and prerequisites of a stockholder demand under Section 220, the court explained in a 20 page opinion with 57 footnotes why the stockholder was not entitled to any documents. This is a highlight of the basis for the court’s decision. The court explained that:

Even if a plaintiff demonstrates a proper purpose [under DGCL § 220], that plaintiff is not entitled to inspect all the documents that he or she believes are relevant or even likely to lead to information relevant to that purpose. The scope of inspection . . . is limited to those documents that are necessary, essential and sufficient to the stockholder’s purpose. A requesting stockholder bears the burden of proving that the books and records sought are essential to accomplish its purpose. (footnotes omitted.)

The court held that the stockholder did not satisfy the foregoing prerequisite because it already had sufficient information to make a demand on the board to take further action against wrongdoers even if it did not know the identity of the wrongdoers.

This case is another example of how expensive and lacking in simplicity Section 220 cases can be. In my view, unless a stockholder has a substantial amount of  money at stake, and is willing to spend a considerable amount of time and money to obtain those documents, Section 220 is not a cost effective way to obtain records from a company – – especially if that company is determined to make it as difficult and as expensive as possible for a stockholder to exercise her rights under Section 220.

 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 Eckert Seamans.

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