Posts in Books and Records

Court Of Chancery Appoints Books And Records Receiver

Jagodzinski v. Silicon Valley Innovation Company LLC, C.A. 6203-VCP  (February 14, 2012)

This is an interesting decision because the Court appointed a receiver to enforce its orders granting a right to inspect an LLC's records when the LLC management did not comply with those past orders.  How far that receiver might go in his inspection is not clear but given that the receiver is the plaintiff's own agent, pretty far seems likely.

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Court Of Chancery Limits Inspection When Prior Case Filed

Amalgamated Bank v. NetApp Inc., C.A. 6772-VCG (February 6, 2012)

The interaction between two cases in two jurisdictions is again examined in this decision. The court held that a Section 220 books and records case may not be pursued to provide discovery to support the amendment of a complaint in a case pending elsewhere when the time to amend that complaint has passed.  The mere possibility that the time to amend may be extended is not enough to get under the rule in the King decision that permitted a books and records action to proceed when the right to amend a complaint was still present.

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Supreme Court Clarifies Inspection Rights

Espinoza v. Hewlett-Packard Company, C.A. 208, 2011 (November 21, 2011) This decision clarifies the scope of the right to inspect a company's records to investigate allegations of wrongdoing.  The decision is somewhat unique because it also raised issues of attorney-client privilege and work product protection that the Supreme Court did not need to decide. Briefly, a document may be subject to inspection when it is "essential" to accomplish the purpose of the inspection.  That in turn means the document must address the issue involved, such as the alleged wrongdoing, and not just be information otherwise made available to the inspector. Obviously, this is a fact intensive test.  In this case, for example, the information sought was contained in other documents provided and the document sought did not really add much to the mix of information addressing the key question the stockholder wanted to investigate. Share

Court Of Chancery Explains Books And Records Rights In An LLC

DFG Wire Company LLC v. Eight Estates Wine Holdings LLC, C.A. 6110-VCN (August 31, 2011)

Inspection rights in LLCs are different from those in corporations.  The statute is different and the relationship between the owners is different.  This decision does a good job of explaining inspection rights in an LLC, including when those rights may reach the records of a subsidiary.

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Court Of Chancery Denies Fruitless Inspection

Graulich v. Dell Inc., C.A. 5846-CC (May 16, 2011)

The Court denied a petition to inspect corporate records for the purpose of determining if a suit should be filed against the Board when the plaintiff lacked standing to file such a suit, the statute of limitations barred the claim, and the potential claim was already the subject of a settlement of a prior suit.  One has to wonder why this petition was ever filed.

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Court Of Chancery Explains Right To Inspect After Demand Refused

Louisiana Municipal Police Employees Retirement System v. Morgan Stanley & Co. Inc., C.A. 5682-VCL (March 4, 2011)

This decision explains why a stockholder is entitled to inspect the documents surrounding a corporation's refusal to pursue derivative litigation when the board appears independent enough to be able to properly refuse the demand to sue.  The Court carefully reviews past Delaware precedent and outlines what documents the stockholder may review.

The decision makes major points.  First, the stockholder who has made a pre-suit demand does not thereby conclusively concede the board is independent and disinterested.  Second, the decision to not sue is subject to the business judgment rule but that presumption may be rebutted by a showing the decision was not in good faith or was unreasonable.  [Note that it is generally thought that the BJR precludes a reasonableness review but we will see if that is still true in this limited area.  Most likely what the Court meant is that the decision has to be so unreasonable that no director in good faith could reach that conclusion.]  Third, the Court of Chancery has, according to a federal court, exclusive jurisdiction over books and records cases under Delaware law.

This is an important decision because it shows the way much future derivative litigation must proceed.  Books and records cases are fairly easy to litigate.  This then permits plaintiffs to get behind the usual demand-refused letter that just states the process used and the conclusion not to sue and fails to say why.  Of course, it remains to be seen if any plaintiff can make a showing after inspection to overcome a rejection of a demand to sue.

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Court Of Chancery Permits Inspection of Pre-Ownership Events

Sanders v. Ohmite Holding LLC, C.A. 5145-VCL ( February 21, 2011)

This decision determines that an owner of an LLC interest may obtain inspection of its books and records even with respect to events that occurred before he became a member.

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Supreme Court Upholds Late Inspection Suit

King v. Verifone Holdings Inc.,  No. 330, 2010  (January 28, 2011)

This decision reinstates a books and records case that was dismissed by the Court of Chancery. The Court of Chancery held that a stockholder who first files a derivative complaint may not later file a books and records case.  The Supreme Court overturned that bright line test.

Instead, the Supreme Court held that when a stockholder suit might prove useful even after a derivative suit is filed, the books and records case may proceed.  Thus, if the derivative suit is still pending or even after it has been dismissed if it may be refiled, the inspection of company records may be requested by a book and records suit.  If, however, the derivative suit is dismissed with prejudice, then inspection serves no proper purpose and will be denied.

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Court Of Chancery Explains Expedited Procedures

Lavi v. Wideawake Deathrow Entertainment LLC, C.A. 5779-VCS (January 18, 2011)

The Delaware corporate and alternative entity laws have several provisions for expedited treatment of corporate disputes, such as over the right to inspect corporate records. Those matters are to go to trial quickly and, as this decision explains, are seldom subject to motion practice such as for summary judgment.  Thus, the better practice is to ask for a trial date, soon.

A word of caution is in order on this point, however.  When the Court calls in response to a request for a fast schedule, you had better be prepared to say why any trial is needed.  At least in some cases, the Court has been known to rule on the merits during such a call when faced with a lawyer who has no good reason to oppose inspection or a decision on entitlement to vote stock.

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Court Of Chancery Again Dismisses Late Books And Records Case

Baca v. Insight Enterprises. Inc., C.A. 5105-VCL (June 3, 2010)

Just as it did last month in the King case, the Court of Chancery has again dismissed a complaint for inspection of a company's books and records when that complaint was filed after a derivative suit was filed and is an effort to find a a basis to sustain the derivative case.

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Court Of Chancery Upholds Right To Member List

Brown Investment Management L.P.  v.  Parkcentral Global L.P., C.A. 5248-VCL (May 24, 2010)

 A member of a LLC  or LP has the right to a list of its members even after it has gone bust.

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Court of Chancery Explains Beneficial Ownership Proof Requirement

Smith v Horizon Lines, Inc., C.A. 4573-CC (August 31, 2009)

When the statute governing demands for inspection rights was changed to permit a demand by a beneficial owner, it also required proof of beneficial ownership. This decision explains what form that proof must take. An account statement that just has the owner's last name and does not indicate the date is not good enough. You would think that someone named "Smith" would have been told by now to be more explicit.

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Court of Chancery Acts to Resolve Inspection Suit

Bosse v. WorldWebDex Corp. C.A. 4443-CC (July 30, 2009).

The Court of Chancery frequently acts to promptly resolve actions seeking inspection rights even faster than the parties might expect or ask. This is an example of the Court reviewing the complaint and response and deciding to grant judgment on the pleadings when there does not seem to be any valid defense.

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Court of Chancery Applies Corporate Law to Books and Records of LLC

Mickman v. American International Processing LLC, C.A. 3869-VCP (July 28, 2009).

This decision applies corporate case law to a demand for the records of an LLC. The Court held that a right to review "all books and records" under the LLC agreement means just that, all the pertinent records. It also held that the grant of access to the records includes the right to copy them.

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Court of Chancery Limits Inspection Rights in LLC

Jakks Pacific, Inc.v. THQ/Jakks Pacific LLC, C.A. 4295-VCL (May 5, 2009)

When the business of an LLC is limited, so too may inspection rights be limited. Here the "business" was to exploit a license that was about to come to an end, and the Court held there was no need to inspect business records to value the business as there may well be nothing left to value.

Further, the Court held that mere allegations, unsupported by facts at trial, do not provide a basis to inspect records to determine if there has been any wrongdoing.

 

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