Topic: Books and Records Demand


By: Remsen Kinne and Stephanie Winkler

In CHC Investments, LLC v. FirstSun Capital Bancorp, C.A. No. 2018-0610-KSLM (Del. Ch. January 24, 2019), the Court of Chancery (the “Court”), in a motion to dismiss, found that CHC Investments, LLC’s (“CHC” and “Plaintiff”) pending plenary claims rendered CHC’s purpose for demanding inspection corporate books and records pursuant to Section 220 of the Delaware General Corporate Law (“Section 220”) improper, and granted FirstSun Capital Bancorp’s (“FirstSun” and “Defendant”) motion to dismiss.

Before bringing a Section 220 claim against Defendant, Plaintiff filed a direct plenary action in the Court against Defendant and certain former directors, officers, and stockholders of Strategic Growth Bancorp, Inc. (“SG Bancorp”), which had merged into Defendant after Plaintiff became a shareholder in SG Bancorp”) in 2013. In 2014, Plaintiff invested an additional $25 million dollars in SG Bancorp securities to fund SG Bancorp’s national mortgage platform and real estate investment trust operations. Within months after the additional investment, SG Bancorp announced its intention to spin-off the mortgage unit through an exchange offer transaction in which Plaintiff declined to participate. In May 2015, SG Bancorp released financial statements, which Plaintiff alleged, contained information that was previously concealed from Plaintiff. The plenary action complaint alleged that SG Bancorp’s investment solicitation disclosures contained material misrepresentations or omissions regarding SG Bancorp’s mortgage business, asserted claims of fiduciary duty breach, fraud, and related causes of action, and sought damages, rescission, and costs and attorney’s fees.

After filing the plenary action, Plaintiff served the Defendant with a demand to inspect company books and records, pursuant to Section 220. The Plaintiff’s stated purpose was to investigate the facts behind SG Bancorp’s disclosures, corporate management in association with the mortgage unit spin-off, and alleged improprieties regarding the exchange offer transaction. The Defendant denied the demand for inspection. In response, Plaintiff commenced an action to compel inspection. The Defendant responded, and moved to dismiss.

The Court applied Court of Chancery Rule 12(b)(6) (“Rule 12(b)(6)”) to the Defendant’s motion to dismiss. Under Rule 12(b)(6) the Court will grant a motion to dismiss only if “the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.” Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). 

In order to inspect corporate books and records pursuant to Section 220, a stockholder must state a proper purpose for inspection. Plaintiff admitted that it designed its inspection request to “give Plaintiff the information necessary to investigate the claims” asserted in the plenary action. The Defendant claimed that investigating claims asserted in a pending action is not a proper purpose.

In support of its Section 220 claim, Plaintiff cited two cases in which the Court held that special circumstances supported ordering enforcement of a stockholder’s Section 220 rights notwithstanding a pending plenary action. First, Plaintiff argued that Khanna v. Covad Communications Group, Inc., 2004 WL 187274 (Del. Ch. Jan. 23, 2004) should be interpreted broadly to permit a stockholder claimant such as Plaintiff to pursue its plenary claims while also seeking to investigate those claims under Section 220 where the stockholder faces statute of limitations or laches pressures. Rejecting this interpretation, the Court instead held that Khanna is limited to circumstances in which timing pressures are caused by the defendant, or at least, not by the plaintiff, and found that Plaintiff alleged no facts suggesting that Defendant was at fault for the timing of the Section 220 claim. 

Plaintiff further asserted that King v. Verifone, 12 A.3d 1140 (Del. Supr. 2011) should be interpreted broadly to permit a claimant such as Plaintiff that has filed a plenary action to pursue a Section 220 inspection where the claimant has the opportunity to amend the plenary complaint. The Court ruled that King should be construed narrowly, however, and held that Plaintiff’s right to amend the complaint, standing alone, does not create a proper purpose for a Section 220 inspection while a plenary action is pending, citing in support of this holding decisions in Central Laborers Pension Fund v. News Corporation, 2011 WL 6224538 (Del. Ch. Nov. 30, 2011) and Amalgamated Bank v. NetApp, Inc., 2012 WL 379908 (Del. Ch. Feb. 6, 2012). The Court held that these precedent cases support enforcing Section 220 rights where a court has deemed a pending plenary action complaint insufficient and permitted a stockholder to re-plead, or amend its complaint, but are not applicable to Plaintiff’s Section 220 claim since no judicial action had occurred in Plaintiff’s plenary suit.

In addition, the Court noted that Khanna and King also did not apply to Plaintiff’s Section 220 claim because Khanna and King both involved plenary actions brought as derivative claims, whereas Plaintiff’s plenary action was a direct claim. The Court indicated that derivative and representative claims may be afforded greater leniency since they seek to further the interests of all stockholders and there are greater incentives for preserving their claims. In a direct claim plenary suit such as Plaintiff’s, the Court reasoned, none of the policy considerations affording leniency are implicated.

Because the Court found that no special circumstances or policy considerations were alleged or existed as would be required to support enforcement of Plaintiff’s Section 220 claim, the Court granted FirstSun’s motion to dismiss.


By: Scott Waxman and Rich Minice

In Durham v. Grapetree, LLC, Civil Action No. 2018-0174-SG (Del. Ch. January 31, 2019), the Delaware Court of Chancery granted in part and denied in part a suit to compel books and records under Section 18-305 of the Delaware Limited Liability Company Act. Durham is illustrative of the rule that books and records requests are not a proper method to conduct plenary discovery into a business entity or its management, especially if driven by animus, but must be related to a proper purpose established by the requestor in his or her demand on the business.

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By: Jessica Pearlman and Adam Heyd

In Mudrick Capital Management, L.P. v. Globalstar, Inc., C.A. No. 218-0351-TMR (Del. Ch. July 30, 2018), plaintiff Mudrick Capital Management L.P. (“Mudrick Capital”), a minority stockholder of defendant Globalstar, Inc. (the “Company”), brought a demand under Section 220 of the Delaware General Corporate Law (“Section 220”) to inspect certain communications and documents relating to the Company’s proposed merger with Thermo Acquisitions, Inc. (“Thermo”).  The Delaware Court of Chancery granted Mudrick Capital’s demand for certain emails, communications and valuation materials relating to the merger, and denied Mudrick Capital’s demand for certain internal draft materials.

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Manager is Entitled to Books and Records in Capacity as Manager, and as a Member Under the LLC Agreement, Despite Assertion of Improper Purpose

By: Scott E. Waxman and Douglas A. Logan

In William T. Obeid v. Gemini Real Estate Advisors, LLC, et al., (C.A. No. 2017-0510-JTL (Del. Ch. June 5, 2018)) the Court ruled the manager of a limited liability company had an essentially unfettered right to access the books and records of the company.

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Chancery Court Limits Access to Books and Records Based on Stockholder’s Failure to State Purpose in Section 220 Demand

By: James S. Bruce and Taylor B. Bartholomew

In KT4 Partners LLC v. Palantir Technologies, Inc., C.A. No. 2017-0177-JRS (Del. Ch. Feb. 22, 2018), in a post-trial ruling, the Delaware Court of Chancery granted a stockholder limited rights to inspect a corporation’s books and records related to the stated purpose of investigating possible wrongdoing, but the Court denied the stockholder’s request to obtain other books and records related to the purpose of valuing its shares because its initial demand did not explicitly state a valuation purpose.

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Chancery Court Finds Credible Basis for Demand to Inspect Books and Records of UnitedHealth in connection with Possible Medicare Overbilling

By: David Forney and Joshua Haft

In In re UnitedHealth Group, Inc. Section 220 Litigation, Consolidated C.A. No. 2017-0681-TMR (Ch. Ct February 28, 2018) certain stockholders (“Plaintiffs”) of UnitedHealth Group, Inc. (“UnitedHealth”) sent a books and records inspection demand to UnitedHealth relying on a complaint in a type of whistleblower (qui tam) action alleging that UnitedHealth engaged in improper Medicare billing, United States ex rel. Poehling v. UnitedHealth Group, Inc. (the “Qui Tam Action”).  The Qui Tam Action was based in part on a 5-year investigation by the US Department of Justice (“DOJ”) and included depositions of 20 of UnitedHealth’s employees and production by UnitedHealth of over 600,000 documents. Plaintiffs made their demand in order to investigate mismanagement or misconduct, possible breaches of fiduciary duties and the independence and disinterestedness of the board. UnitedHealth rejected the demand and a trial was held on January 9, 2018.  UnitedHealth argued that Plaintiffs were not entitled to inspection of books and records because they lacked a credible basis to infer wrongdoing or mismanagement based on the Qui Tam Action and because the alleged activities of UnitedHealth were not illegal.  The Court found that Plaintiffs’ demand stated a proper purpose and a credible basis from which a court could infer mismanagement or wrongdoing.

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Court of Chancery Compels Production of Some, but not all, Books and Records for Plaintiff’s Permitted Purposes

By Scott Waxman and Ernest Simons

In Aloha Power Company, LLC v. Regenesis Power, LLC, the Court of Chancery granted in part and denied in part plaintiff’s action to compel inspection and production of certain books and records pursuant to provisions in the defendant’s operating agreement and the Delaware Limited Liability Company Act.  The Court held that the operating agreement expressly required production of certain books and records without demand for inspection and determined whether there existed a proper purpose for inspection for the remaining demanded books and records.

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Court of Chancery Holds That Corwin Defense Is Not Appropriate for the Limited Scope and Purpose of a Books and Records Action Under Section 220

By: David Forney and Tami Mack

In Lavin v. West Corporation, C.A. No. 2017-0547-JRS (Del. Ch. December 29, 2017), the Court of Chancery held that stockholder plaintiff Mark Lavin (“Lavin”) had adequately demonstrated a credible basis from which the Court could infer that wrongdoing had occurred regarding the merger of West Corporation (the “Company”) and Apollo Global Management (“Apollo”) in support of Lavin’s Section 220 demand for inspection, and that a Corwin defense (that the transaction at issue was approved by a majority of disinterested and informed stockholders) is not a bar to an otherwise properly supported Section 220 demand for inspection.

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Chancery Court Partially Grants Books and Records Request

By David Forney and Jonathan Miner

In Mehta v. Kaazing Corporation, C.A. No. 2017-0087-JRS (Del. Ch. Sept. 29, 2017), the Delaware Court of Chancery partially granted and partially denied a plaintiff shareholder’s books and records inspecting demand under Section 220(c) of the Delaware General Corporation Law (“DGCL”).  Although valuation of equity is usually a proper purpose, here the shareholder did not identify any reason why his equity needed to be valued, so this purpose was deemed improper.  The shareholder’s other purposes, including alleged wrongdoing and mismanagement, were deemed proper notwithstanding the shareholder’s open employment litigation action against the company, but the scope of his requests were limited only to those documents that addressed the crux of those purposes.

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By: Kevin Stichter and Nathan G. Harrill

In Salberg v. Genworth Financial, Inc., C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017), the Delaware Court of Chancery denied the demand by the plaintiff stockholders (the “Stockholders”) for books and records from defendant Genworth Financial, Inc. (“Genworth”) under Section 220 of the Delaware General Corporation Law.  Genworth asserted the attorney-client privilege and the Stockholders sought to invoke the “celebrated” Garner fiduciary exception.  While the § 220 demand was made in the context of a pending merger, influential to the ruling was the fact that the requested books and records were relevant to a separate derivative action among the same parties.  Although most of the Garner “good cause” factors weighed in favor of an exception to the privilege, the court held that the unique facts and circumstances surrounding the Stockholders’ demand barred them from accessing privileged information that was shielded from discovery in the derivative suit.

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Court of Chancery Dismisses Complaint Seeking to Enforce a Stockholder’s Section 220 Demand to Inspect the Books and Records of Fannie Mae on Issue Preclusion Grounds

By: David L. Forney and David Valenti

In Pagliara v. Federal National Mortgage Association, C.A. No. 12105-VCMR (Del. Ch. May 31, 2017) the Court of Chancery dismissed a complaint brought by a preferred stockholder of Federal National Mortgage Association (“Fanny Mae”) seeking to enforce his rights under Section 220 of the Delaware General Corporation Law to obtain documents (“Section 220 Demand”) to investigate certain actions of Fannie Mae on issue preclusion grounds.  The Court of Chancery ruled that a prior judgment of the Eastern District of Virginia was preclusive on the dispositive issue of whether Fannie Mae stockholders retained the right to obtain the corporate books and records of Fannie Mae under the Housing and Economic Recovery Act of 2008 (the “HERA”).

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Court of Chancery Holds that Stockholder Was Not Bound by Stock Transfer Restrictions that Were Not Noted on Stock Certificates, Because Stockholder Did Not Have Actual Knowledge of Such Restrictions When He Acquired the Stock and Did Not Affirmatively Assent to Such Restrictions Thereafter

By Eric E. Freedman and H. Corinne Smith

In Henry v. Phixios Holdings, Inc., C.A. No. 12504-VCMR (Del. Ch. July 10, 2017), the Court of Chancery, interpreting Section 202 of the Delaware General Corporation Law,  found that a stockholder had not forfeited his shares by engaging in activities prohibited by stock transfer restrictions contained in a company stockholder agreement, because the restrictions were not printed on the stock certificate and the stockholder did not have actual knowledge of the restrictions at the time that he acquired the stock, and did not agree to the restrictions thereafter. The Court of Chancery therefore rejected the company’s assertions that the individual was a former stockholder rather than a current stockholder, and ordered the company to produce books and records requested by the individual in his capacity as a stockholder.

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