Opinion ID: 2556088
Heading Depth: 1
Heading Rank: 3

Heading: King's Section 220 Action

Text: Unable to resolve the dispute through mediation, on November 6, 2009, King filed this Section 220 action in the Court of Chancery for an order permitting him to inspect the Audit Report and any documents relied upon in its preparation. In his Chancery complaint, King referenced an April 2, 2008 press release from VeriFone, which stated that [a]s a result of the issues identified by [VeriFone's] management and the Audit Committee independent investigation, management has concluded that VeriFone did not maintain effective internal control over financial reporting. [11] That press release, King alleged, showed that the Audit Report was essential to enable him to plead demand futility in the California Federal action, because the Audit Report would likely show that VeriFone's officers and Board knew of the company's inadequate financial reporting controls, yet consciously disregarded that fact in violation of their fiduciary duty of loyalty. VeriFone moved to dismiss the Section 220 complaint under Court of Chancery Rule 12(b)(6), claiming that King had initiated this litigation backwards by first filing his derivative suit in California. Citing an earlier Court of Chancery decision, Beiser v. PMC-Sierra , Inc., [12] VeriFone argued that King's Section 220 action violated the long-standing public policy-based rule that derivative plaintiffs should utilize the Section 220 inspection process before commencing a derivative action. The Court of Chancery agreed and dismissed King's action, holding that King lacked a proper purpose for inspection as 8 Del. C. § 220 requires. The Vice Chancellor reasoned that because King had elected to file his California derivative action before conducting a pre-suit investigation (including resort to the Section 220 process), King was precluded from using the Delaware courts to obtain discovery that was unnecessary or unavailable in his federal derivative action. [13] In reaching this result, the Court of Chancery articulated the following bright-line rule: [S]tockholders who seek books and records in order to determine whether to bring a derivative suit should do so before filing the derivative suit. Once a plaintiff has chosen to file a derivative suit, it has chosen its course and may not reverse course and burden the corporation (and its other stockholders) with yet another lawsuit to obtain information it cannot get in discovery in the derivative suit. [14] To hold otherwise, the Court of Chancery concluded, would offend public policy and encourage an inefficient race to the courthouse. [15] This appeal followed. [16]