Opinion ID: 1927497
Heading Depth: 1
Heading Rank: 5

Heading: Allowable Discovery after Demand Refusal

Text: The Court of Chancery ruled as a matter of law that plaintiffs were not entitled to limited discovery regarding rejection of their demand. [31] Because plaintiffs contest the validity of that ruling, we review this question of law de novo. [32] We will affirm the Court of Chancery's ruling unless it represents an error in formulating or applying a legal principle. [33] The law in Delaware is settled that plaintiffs in a derivative suit are not entitled to discovery to assist their compliance with the particularized pleading requirement of Rule 23.1 in a case of demand refusal. [34] A plaintiff's standing to sue in a derivative suit, whether based on demand-refused or demand-excused, must be determined on the basis of the well-pleaded allegations of the complaint. [35] Plaintiffs argue, however, that the situation presented in this case is unique, thus requiring departure from the well-established rule. First, plaintiffs contend that the Executive Committee has denied them access to books, records and any other documents that would provide information on the reasons why demand was refused. Second, plaintiffs contend that the correction of facts surrounding the appointment of the Special Committee warrants discovery. Finally, plaintiffs argue that although the derivative demand was submitted to each member of the full Board, it was the Executive Committee that rendered the decision to refuse the demand, and the Executive Committee was under the influence of the alleged wrongdoers, acting apparently without authority. Plaintiffs' arguments are not persuasive. First, this Court in Grimes recognized the potential for difficulty plaintiffs may meet when attempting to satisfy the particularization requirement of Rule 23.1 without benefit of discovery. Yet this Court reminded the plaintiffs in that case that they have many other avenues. The tools at hand are available to obtain information bearing on the subject of their claims: [A] stockholder who makes a demand is entitled to know promptly what action the board has taken in response to the demand. A stockholder who makes a serious demand and receives only a peremptory refusal has the right to use the tools at hand to obtain the relevant corporate records, such as reports or minutes, reflecting the corporate action and related information in order to determine whether or not there is a basis to assert that demand was wrongfully refused. In no event may a corporation assume a position of neutrality and take no position in response to the demand. [36] Plaintiffs have not taken advantage of the opportunity to bring an action under 8 Del. C. § 220 to inspect minutes, reports and other books and records of the Exchange targeted [37] at the process and findings of the Board, the Special Committee and the Executive Committee in acting on this demand. On July 28, 1994, Scattered served a demand upon the Exchange seeking permission to review certain books and records. But the Court of Chancery determined at that time that an action seeking inspection of books and records under section 220 was not available to members of a non-stock corporation such as the Exchange. [38] Effective July 1, 1995, however, the General Assembly amended section 220 to close this gap identified by Scattered's Court of Chancery action. Because of the amendment, section 220 is now available to members of non-stock corporations. [39] Meanwhile, before the new statute became effective, Scattered commenced an action in Superior Court seeking a writ of mandamus requiring the Exchange to produce an extraordinarily broad range of books and records. The mandamus action sought to compel a comprehensive inspection of all documents that could shed light on the merits of Scattered's claims, but did not specifically target the materials relating to the refusal of the pursuit demand at issue here. Applying traditional mandamus standards, not section 220 standards, the Superior Court, in its discretion, denied the petition, and that order [40] was affirmed by this Court. [41] In the Order affirming the Superior Court's refusal to issue the writ of mandamus, this Court noted the distinction between the traditional mandamus remedy and a section 220 remedy, emphasizing the broad discretion of the Superior Court in the former case. It was primarily on the basis of the breadth of discretion that the Superior Court's refusal of the writ was affirmed by this Court. We noted that the Superior Court could properly take into account the litigiousness of the parties and the Superior Court's skepticism about Scattered's stale attempt to gain leverage for other agenda as contrasted with a proper purpose in seeking the writ of mandamus. [42] Both the Superior Court [43] and this Court noted the availability to Scattered of a fresh section 220 demand by reason of the amendment to the statute. Specifically, we stated: Section 220 has now been amended to allow an action to be brought by a member of a non-stock corporation. We need not decide whether Scattered would now have a valid claim if it were to pursue the more traditional remedy of section 220, assuming it continues to desire to review the Exchange's books and records. If so, we trust that any such litigation which may ensue will be conducted in a less contentious manner so that the courts of this State are not unnecessarily drawn into what appears to be an excess of litigiousness. in light of all the contentious litigation to date, we trust it is not vain to hope that the parties will find a non-judicial basis for resolving their differences. [44] That demand, and a section 220 action, if necessary, targeted to documents relevant to the refusal of the pre-suit demand, could have been asserted upon the effective date of the new statute or thereafter. Yet, according to this record, plaintiffs inexplicably did not bring such an action. Accordingly, plaintiffs cannot argue that they have used the available `tools at hand' to obtain the necessary information before filing a derivative action. [45] Plaintiffs' reasons why they should be granted discovery are based upon unsubstantiated inferences without corroborating facts. Accordingly, the Court of Chancery properly denied plaintiffs' request for limited discovery.