Source: http://www.delawarelitigation.com/2011/01/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-section-220-requirements/
Timestamp: 2017-05-24 21:33:54
Document Index: 106354865

Matched Legal Cases: ['§ 220', '§ 220', '§ 220', '§ 220', '§ 220', '§ 220', '§ 220']

Delaware Supreme Court Clarifies Section 220 Requirements | Delaware Corporate & Commercial Litigation Blog
Home > Delaware Supreme Court Updates > Delaware Supreme Court Clarifies Section 220 Requirements
Delaware Supreme Court Clarifies Section 220 Requirements
By Francis Pileggi on January 31, 2011 Posted in Delaware Supreme Court Updates
Background details about this case are available in the blog summary of the Chancery decision here. In sum, a shareholder derivative complaint was filed in California based on the defendant’s restatement of financial statements.
Supreme Court’s Section 220 Analysis
Delaware’s High Court recognized “investigation of corporate mismanagement” as a “proper purpose” for seeking books and records pursuant to DGCL § 220, among others. Other cases were cited for the Delaware Court’s frequent exhortations to practitioners to use DGCL § 220 to obtain detailed information prior to a plenary lawsuit, in order to obtain the detailed facts needed to successfully plead “demand futility” for purposes of satisfying Court of Chancery Rule 23.1 in derivative suits. Delaware’s High Court recognized that it may be ill-advised to file a § 220 suit after a derivative case is filed, but the Court explained that such a sequence “has not heretofore been regarded as fatal.”
Three Delaware decisions were discussed at length to support the Court’s reasoning that: “both this Court and the Court of Chancery [have] permitted stockholder-plaintiffs to utilize the Section 220 inspection process to gather new information and replead their derivative complaints.” See slip op. at 11 and footnotes 25, 33 and 40 (citing Disney, McKesson HBOC and Melzer cases). Two other Delaware cases that reached a different result were distinguished. See slip op. at 17 and footnotes 48 and 56.
The Court emphasized that it was reaffirming “long-standing Delaware precedent” recognizing that a proper purpose under Section 220 includes seeking books and records to aid in pleading demand futility in a “to-be-amended” complaint in an existing plenary derivative action.
Moreover, while rejecting the trial Court’s holding that a prerequisite of a § 220 action is to file a § 220 suit prior to a derivative suit; the Delaware Supreme Court did not endorse that particular sequence as a best practice in connection with filing a § 220 suit.
Although the Court was sensitive to the policy issues involved with its rejection of a bright-line test for the timing of a § 220 suit, it explained that the Delaware General Assembly would need to amend the statute to impose a sequential prerequisite, and it would not be appropriate for the judiciary to do so.
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