Stating That an Inspection under DGCL Section 220 Is Not “Merely For The Curious,” The Chancery Court Reaffirms The Need for a Stockholder to Show a Proper Purpose for a Section 220 Demand and, in Doing So, Holds That a Derivative Suit That is Dismissed With Prejudice is Collateral Estoppel as to All Stockholders

By David Bernstein and Lauren Garraux

Vice Chancellor Noble denied the demand of plaintiff Fuchs Family Trust to inspect the books and records of defendant Parker Drilling Company under Section 220 of the Delaware General Corporation Law and, in doing so, held that Fuchs’s ability to institute future stockholder derivative litigation — one of the stated purposes underlying its demand — was barred by collateral estoppel based on the dismissal with prejudice of a prior stockholder derivative lawsuit — to which Fuchs was not a party — on procedural grounds.

Starting in 2007, the United States DOJ and the SEC began investigating possible violations of the Foreign Corrupt Practices Act (“FCPA”) by Parker Drilling Company (“Parker” or the “Company”), violations which the Company’s internal investigation subsequently confirmed may have occurred. Following Parker’s disclosure of these events, various stockholders of Parker, including plaintiff Fuchs Family Trust (“Fuchs”), filed derivative suits in Texas state court, and one stockholder filed a derivative suit in Texas federal court, without making demands on Parker’s board.  The suits in the state courts ultimately were dismissed on procedural grounds, for failure to plead demand futility, with the federal court action being dismissed with prejudice. Parker settled the DOJ and SEC investigations in early 2013, admitting that two senior executives had funnelled bribes to Nigerian officials through a partner at a law firm retained by the Company. In November 2013, Fuchs made a demand under Section 220 of the Delaware General Corporation Law (“DGCL”) to examine documents in order to determine whether current and former officers and directors of Parker had breached their fiduciary obligations in connection with Parker’s FCPA violations. After Parker rejected the demand, Fuchs narrowed its demand to the identities of the executives, the lawyer and the law firm involved in the FCPA violations.

After noting that a demand under Section 220 must be for a proper purpose, Vice Chancellor Noble explained that determining whether to bring a derivative suit would not be a proper purpose for Fuchs, because the Texas federal court’s dismissal with prejudice of a derivative suit brought by another stockholder would collaterally estop Fuchs from pursuing a derivative suit with regard to the FCPA violations. Although Fuchs was not a party to the Texas federal court suit, Vice Chancellor Noble cited a Texas state court decision, applying Texas law, in which the court held that “the unique nature of derivative litigation logically leads to a finding of privity between all shareholder plaintiffs.”

Vice Chancellor Noble also rejected Fuchs’s argument that it needed the information it was demanding in order to make a demand on the Parker board, stating that the information that Fuchs was seeking — namely, the identities of the executives, the lawyer and the law firm that had been involved in the FCPA violations — was not necessary to enable Fuchs to do so.

Fuchs Family Trust vs Parker Drilling

 

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