Topic: Books and Records Demand

Chancery Court Denies Assignor’s Inspection Demand under Real Party in Interest Rule, Prohibits Substitute Plaintiff

By: Scott E. Waxman and Michael C. Payant

In SolarReserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC, C.A. No 2020-0064-JRS (Del. Ch. July 24, 2020), the Delaware Court of Chancery (the “Court”) examined an alleged breach of contract based on the denial of inspection rights to which SolarReserve CSP Holdings, LLC (“SR”) was allegedly entitled under the LLC Agreement (the “LLCA”) of Tonopah Solar Energy, LLC (the “Company”). The Court entered judgment for the Company, finding (i) SR was not a real party in interest under Chancery Court Rule 17 because it had made a complete assignment of its rights under the LLCA, and (ii) the real party in interest assignee was not entitled to inspection rights under the LLCA.

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COURT OF CHANCERY ANALYZES BOOKS AND RECORDS CLAIM UNDER THE LLC ACT

By: Scott Waxman and Zack Sager

In Riker v. Teucrium Trading, LLC, the Delaware Court of Chancery granted in part and denied in part a member’s demand for books and records under Section 18-305 of the Delaware Limited Liability Company Act (the “LLC Act”).  The Court also denied the member’s request for attorneys’ fees.

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Plaintiff Entitled to Inspect Additional Documents Where Proper Purpose Demonstrated as to Mismanagement and Wrongdoing

By: Joanna Diakos Kordalis and Pouya Ahmadi

In Paraflon Investments Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. April 3, 2020), the Delaware Court of Chancery (the “Court”) granted, in part, stockholder Paraflon Investments, Ltd.’s (“Paraflon”) request, after a trial on a paper record, for corporate books and records pursuant to Section 220 of the DGCL where proper purpose was shown with respect to the desire to investigate mismanagement and wrongdoing.

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Request for Attorneys’ Fees Denied Under Corporate Benefit Doctrine

By: Annette Becker and Zack Sager

In Martin v. Harbor Diversified, Inc., the Delaware Court of Chancery denied the plaintiff’s request for attorneys’ fees under the corporate benefit doctrine because the corporate benefit produced by the litigation was “a mere externality” to the plaintiff’s ultimate, personal goal of achieving a buyout of his interest in the corporation.

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Delaware Court of Chancery Grants Stockholder’s Post-Merger Request to Review Company’s Books and Records under DGCL § 220

By Scott E. Waxman and Frank J. Mazzucco

In Kosinski v. GGP Inc., C.A. No. 2018-0540-KSJM (Del. Ch. Aug. 28, 2019), the Delaware Court of Chancery (the “Court”) granted a stockholder’s request, following a merger, to review a company’s books and records under Section 220 of the Delaware General Corporation Law (“DGCL”).

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Delaware Court of Chancery Allows Stockholder to Inspect Books and Records Over Defendant Corporation’s Objections

By Scott Waxman and Serena Hamann

In Senetas Corporation, Ltd. v. DeepRadiology Corporation, C.A. No. 2019-0170-PWG (Del. Ch. July 30, 2019), the Delaware Court of Chancery allowed a stockholder’s books and records inspection despite objections raised by the defendant corporation because the stockholder established a proper purpose for the inspection by proving a credible basis from which the Court could infer mismanagement or wrongdoing may have occurred and because the defendant failed to prove the plaintiff’s stated purpose was offered under false pretenses.

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Russian Interference and Data Privacy: Facebook Stockholders Demand Section 220 Inspection to Investigate Wrongdoing of Board and Senior Management

By: Scott Waxman and Adrienne Wimberly

In In re Facebook, Inc., C.A. No. 2018-0661-JRS (Del Ch. May 30, 2019), the Delaware Court of Chancery granted a Section 220 demand for inspection of Facebook’s books and records, (the “Demand”) for the purpose of investigating potential wrongdoing on the part of the company’s Board of Directors (the “Board”). The consolidated action comes on the heels of news that the data of over 50 million Facebook users were poached by British political consulting firm, Cambridge Analytica and used to influence the 2016 Presidential Election. In April 2018, Plaintiff, Construction and General Building Laborers’ Local No. 79 General Fund (“Local No. 79”), a Facebook stockholder since 2015, served its initial Section 220 Demand. After receiving about 1,700 pages of significantly redacted books and records, Local No. 79 filed the present action to compel production which was consolidated with two similar Section 220 demands. After holding a paper record trial in March 2019, the Court ruled in favor of the Plaintiffs with some limitations on the scope of the demand.

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COURT OF CHANCERY FINDS NO SECTION 220 ISSUE WHERE STOCKHOLDER’S AND ITS COUNSELS’ PURPOSES FOR DEMAND ALIGN

By: Megan A. Wotherspoon and Rachel Cheasty Sanders

In Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corp., C.A. No. 2017-0910-MTZ (Del. Ch. Jan. 25, 2019), the Delaware Court of Chancery enforced an institutional stockholder’s demand for books and records under Title 8, Section 220 of the Delaware General Corporation Law (“Section 220”). The Court found that the stockholder’s affidavit affirming the demand in substantially final form, although not in exact final form, did not violate Section 220’s “under oath” requirements where the only change between the versions was the addition of a signature and the date. The Court also found that the stockholder’s demand was not lawyer-driven under Wilkinson v. A. Schulman, Inc., C.A. No. 2017-0138-VCL (Del. Ch. Nov. 13, 2017), where the stockholder’s goals of the demand and the purposes stated in the lawyer-drafted demand were not fundamentally misaligned, even where the stockholder’s representative could not articulate all the legal nuances of such purposes in deposition testimony.

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SOPHISTICATED PARTY OR NOT, LLC AGREEMENT STILL GOVERNS

By: Scott Waxman and Rich Minice

In Durham v. Grapetree, LLC, Civil Action No. 2018-0174-SG (Del. Ch. June 4, 2019), the Delaware Court of Chancery granted the request made by Grapetree, LLC ( “Grapetree”) to shift its fees incurred in defending this litigation to the mostly unsuccessful plaintiff, Andrew Durham (“Durham”). In shifting Grapetree’s fees under this litigation, the Court reinforced the longstanding principal that Delaware law is contractarian in nature, and that parties shall be held to their bargains regardless of their legal sophistication. The underlying litigation and the Court’s initial findings (the “Books and Records Action”) were previously summarized by this blog here.

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WITHDRAWN LIMITED PARTNER IS NOT ALLOWED TO INSPECT BOOKS AND RECORDS

By Scott E. Waxman and Annamarie C. Larson

In Harry Greenhouse v. Polychain Fund I LP and Polychain 2030, LLC, C.A. No. 2018-0214-JRS (Del. Ch. May 29, 2019), the Delaware Court of Chancery held that a withdrawn limited partner no longer retains an equity interest in the partnership and therefore is not entitled to inspect the partnership’s books and records.

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CHANCERY COURT GRANTS MOTION TO DISMISS SECTION 220 DEMAND MADE DURING A PENDING PLENARY CLAIM DUE TO LACK OF SPECIAL CIRCUMSTANCES

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.

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NO LOVE LOST IN BOOKS AND RECORDS REQUESTS

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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