Delaware Supreme Court Further Strengthens Managements Hand: Courts May Condition Books and Records Requests on Forum Limitations

In United Technologies Corp. v. Treppel Chief Justice Strine further strengthened managements hand by overturning a Court of Chancery opinion that held that a court did not have the authority to impose a specific condition on a books and records inspection under § 220(c) of the Delaware General Corporation Law (DGCL).

United Technologies, which at the time the claim was brought did not have a forum selection clause in their charter documents had sought to restrict the use of any information gained by a shareholder exercise of inspection rights under of DGCL 220 ( c) through the use of a confidentiality agreement limited the forum to Delaware.  When the Treppel refused to agree to the limitation the corporation asked that the Court do it for them by using their discretionary power under 220 ( c), which grants the Court of Chancery  the right to, “in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.”

The Court of Chancery found that despite the broad grant of discretion in 220 (c ) a forum selection limitation “is not the type of restriction that 220(c) seeks to impose.” (Treppel v. United Technologies Corp., C.A. No. 8624-VCG, Tr. Transcript, Jan. 13, 2014 [hereinafter Opinion], at 77. )  Instead, the Court of Chancery stated that “[t]here is a mechanism for limiting which forum a suit may be brought in to enforce corporate interests, and that is through either a charter or bylaw provision.”

Strine, writing for the Delaware Supreme Court, disagreed.  While the Court refused to decide whether such a limitation would be appropriate in this case—instead remanding on that issue—it made it clear that in at least some situations, the Chancery Court could impose forum selection limits pursuant to Section 220 (c ).

The Court noted that “nothing in the text of § 220 itself or Delaware case law in interpreting it limits the Court of Chancery’s authority to restrict the use of material from an inspection….” to protect the legitimate interests of the corporation.  In determining whether any restriction is necessary or appropriate:

  • the Court of Chancery is entitled to give weight to factors such as: (i) the fact that [a stockholder]  seeks to file claims arising out of the same corporate conduct that was already the subject of derivative litigation in the Court of Chancery and this Court; (ii) [the corporation’s] legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the courts of this state; (iii) [the corporation’s] adoption of a forum selection bylaw that represents a non-case-specific determination by its board of directors that internal affairs litigation involving the company should proceed in a single forum; and (iv) the investment the corporation has already made (which comes at a cost to its stockholders) in defending not only the prior derivative litigation in the Court of Chancery, but also this § 220 action. 

The Court did not give unfettered support to limiting the use of information obtained through a books and records request noting that  

  • if a petitioner files for books and records and has a good faith purpose to investigate possible wrongdoing, and there has been no prior litigation in this or other forums, then the Court of Chancery might conclude that there is no reason to impose a use restriction of the kind United Technologies seeks here. In that situation, the Court of Chancery can consider in its discretion whether a forum use restriction is warranted, because the possible complications the restriction injects into the § 220 litigation may not be justified by any substantial interests of the respondent corporation. The absence of pre-existing litigation would be relevant because the company and its stockholders would not have suffered the costs of defending duplicative litigation, and the petitioner may decide not to pursue any plenary action at all.
  • As a more general matter, we recognize that the circumstances in which books and records are sought are diverse, and the Court of Chancery should therefore exercise its traditional care in evaluating the factors relevant to the specific application before it in determining on remand whether to impose the requested use restriction. 

Despite this small sop, it is clear that the Delaware Supreme Court likes actions to be brought in Delaware.  What a surprise.

Celia Taylor