Opinion ID: 2556088
Heading Depth: 4
Heading Rank: 3

Heading: The Melzer Case

Text: A third example is Melzer v. CNET Networks , which factually is similar to this case. [40] Unlike Disney and McKesson HBOC, where the plenary derivative actions were first-filed in the Delaware Court of Chancery, the plaintiffs in Melzer (like King here) first filed a plenary derivative action in the California Federal Court. [41] The Melzer plaintiffs alleged that the board of CNET Networks (CNET) had breached their fiduciary duty, and violated federal securities law, by granting backdated stock options to former and current directors. [42] CNET moved to dismiss the derivative complaint under FRCP 23.1 for failure to make a pre-suit demand on the board. [43] The California Federal Court granted the motion to dismiss, holding that the complaint failed to plead particularized facts that, if true, would show that a majority of the directors had a conflicting financial interest. [44] That dismissal was granted with leave to amend, however, and the California Federal Court suggested (as it did in this case) that the plaintiffs file a Section 220 books and records action in Delaware. [45] The plaintiffs, like King here, did that. Granting the plaintiffs relief in their Section 220 action, the Court of Chancery found that the plaintiffs had a proper purpose for demanding inspection, because the California Federal Court had granted them leave to amend and refile their derivative complaint. [46] Thus, the plaintiffs were found to have a proper purpose for bringing a Section 220 action to inspect CNET's books and records, namely, to investigate facts needed adequately to plead demand futility in their to-be-amended California federal derivative complaint. [47] These examples illustrate that what the California Federal Court suggested to King in this caseand what King did herewas fully consistent with Delaware case precedent. The defendants, however, point to other cases where Delaware courts refused to allow a post-filed Section 220 action to go forward. Those cases, however, are inapposite for the reasons next discussed.