The Supreme Court of Delaware recently held that the state’s Court of Chancery could restrict the forums in which shareholders can use information obtained in a books and records inspection pursuant to Section 220 of the Delaware General Corporation Law. The case is United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014).
The Facts of the Case
United Technologies Corp., a Delaware Corporation, sought to restrict the use of any information garnered from an inspection by a shareholder to legal action in a Delaware court. The Court of Chancery denied the corporation’s request after concluding that such a limitation “is not the type of restriction that 220(c) seeks to impose.”
On appeal, United Technologies argued that the court is authorized to restrict the forum in which books and records information can be used. It pointed to the broad text of the statute itself, which states: “The Court may, 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.” United Technologies further highlighted that the line of cases interpreting Section 220 have held that deciding whether to impose a condition is a fact specific determination that is within the court’s discretion.
The Delaware Supreme Court’s Ruling
The Delaware Supreme Court overturned the Court of Chancery’s decision, finding that the court erred in determining that it lacked authority under the statute to impose the requested restriction.
In its opinion, the court emphasized that “Delaware case law has consistently reflected the underlying principle that the stockholder’s inspection right is a ‘qualified’ one.’” It also noted that “the Court of Chancery has wide discretion to shape the breadth and use of inspections under § 220 to protect the legitimate interests of Delaware corporations.”
The Delaware Supreme Court remanded the case back to the Chancery Court, along with a non-exhaustive list of factors to consider when exercising its discretion under Section 220. Those factors include:
- The fact that the plaintiff 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 the Delaware Supreme Court;
- United Technologies’ legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the Delaware courts;
- 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
- The investment the corporation has already made in defending not only the prior derivative litigation in the Court of Chancery, but also in the Section 220 action.
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