The Race to the Bottom has recently been cited for the first time in a court opinion, the honor having been bestowed by the Delaware Chancery Court in Melzer v. CNET Networks, Civ. Action No. 3023-CC, n. 19 Del. Ch. Ct., Nov. 21, 2007. The case addressed inspection rights under Delaware law, focusing primarily on the scope of an inspection, specifically whether plaintiffs could obtain documents that predated their purchase of stock in the company.
After noting the requisite standard (some evidence to suggest a credible basis in support of allegations of mismanagement), the court dropped a footnote with a citation to Seinfeld, a recent case applying the standard. According to the footnote:
Delaware courts have been harshly criticized for this requirement. See, e.g. J. Robert Brown's Inspection rights Under Delaware Law, http://www.theracetothtbottom.org (Nov. 20, 2007, 6:16 a.m.)(arguing that the Seinfeld decision "illustrates that courts deliberately discourage the use of inspection rights by shareholders, using not the language in the statute but excessive pleading standards."). Such sensationalized criticism may make for an entertaining blog, but it is both unfair and incorrect. First, there is nothing "excessive" about requiring a petitioner to plead the elements of the statute under which he or she petitions the court. Section 220 makes inspection available only for shareholders with a "proper purpose." If a shareholder could satisfy this burden by conclusorily repeating words previously used to describe a proper purpose, the requirement would be rendered meaningless, and well settled canons of statutory construction prevent such absurd results. Second, as Justice Holland explained in Seinfeld, permitting a single shareholder to hound a corporation with exclusively personal requests for books and records is a waste of corporate resources that engenders no benefit for the shareholders in general. The proper purpose requirement protects against such wealth-reducing outcomes. Finally, the "credible basis" standard is "the lowest possible burden of proof" in Delaware jurisprudence, and this can hardly be characterized as an excessive pleading standard.
The referenced post has been moved and is now here. We will address the topic of this footnote later, in a series of posts. Suffice it to say that we disagree and, just because the courts call the credible basis standard the "lowest possible burden" doesn't make it so or mean that it hasn't been used to exclude inspections by meritorious plaintiffs.
For now, though, we note our greatest surprise with the characterization of our position as "sensationalized criticism," better suited for an "entertaining blog." The excessive use of pleading standards by Delaware courts is a serious problem, one worthy of debate and discussion, not pejorative labels. In fact, the topic has been discussed at length (in the independent director context) in Disloyalty without Limits. In any event, it is a topic worthy of additional discussion, something we shall continue to explore on this Blog.