DGCL §220 Does Not Limit Court’s Ability to Restrict Shareholder Inspection Rights

By Eric Freedman and Eric Taylor

In an en banc decision, the Delaware Supreme Court reversed a decision of the Delaware Court of Chancery holding that the court lacked the authority to impose a specific restriction on a shareholder’s inspection of a corporation’s books and records under section 220(c) of the Delaware General Corporation Law (the “DGCL”). United Technologies Corp. (“UnitedTechnologies”) had sought to restrict the use of information obtained in an inspection of the company’s books and recordsby its shareholder Lawrence Treppel (“Treppel”). Specifically, United Technologies asked Treppel to sign a confidentiality agreement that would require Treppel to bring any legal action “arising out of” the inspection in a Delaware court. Treppel refused to sign the agreement and filed a section 220 action seeking access to United Technologies’ books and records without any such restriction. United Technologies challenged whether Treppel had a “proper purpose” for the information request (as required by section 220(b) of the DGCL), but also asked the Court of Chancery to use its legal authority under section 220(c) to limit the use of information gained from Treppel’s books and records inspection to action in a Delaware court. Section 220(c) grants the court the discretion to “prescribe any limitations or conditions with respect to [an] inspection,” or award such further relief as the court deems proper.

The Court of Chancery ruled that the restriction sought by United Technologies was “not the type of restriction that [section]220(c) seeks to impose,” noting that a corporation has other mechanisms (namely provisions in the corporation’s charter or bylaws) to limit the forum in which a suit may be brought. United Technologies appealed, arguing that the Court of Chancery erred in its analysis of section 220(c) and asserting that the company was entitled to the restriction. (The Court of Chancery also ruled that Treppel’s purpose for inspecting United Technologies’ books and records–inquiring into a decision of UnitedTechnologies’ board of directors to deny Treppel’s prior litigation demand–was proper, a ruling that United Technologies did not challenge on appeal.)

In reversing the decision of the Court of Chancery, the Delaware Supreme Court emphasized the breadth of discretion (“any limitations or conditions”) granted by the plain language of section 220(c) and noted that Delaware courts have repeatedly “placed reasonable restrictions on shareholders’ inspection rights in the context” of a suit brought under section 220(c). Observing that “Delaware case law has consistently reflected the underlying principle that the stockholder’s inspection right [under section 220] is a ‘qualified’ one,” the Supreme Court held that the Court of Chancery erred in concluding that it lacked the statutory authority to impose its own preclusive limitation here.

The Supreme Court declined to decide on the merits of the restriction sought by United Technologies and instead remanded the case back to the Court of Chancery to consider the matter in the first instance. The Supreme Court did offer a number of factors for the Court of Chancery to consider in making its decision, including the legitimate interests of the corporation in avoiding inconsistent rulings resulting from similar litigation claims in multiple jurisdictions, the existence of prior litigation from other shareholders relating to the same claims, and the costs to the corporation’s stockholders of defending againstmultiple overlapping litigation proceedings (including the section 220 action).

Copyright © 2019, K&L Gates LLP. All Rights Reserved.