Section 220 Claim and Fiduciary Duty Claims Need Separate Complaints

The Ravenswood Investment Company, L.P. v. Winmill & Co., Inc., C.A. No. 7048-VCN (Del. Ch., Jan. 31, 2013). Issue Addressed: Whether a fiduciary duty claim can be combined with a Section 220 claim in the same complaint.   Short Answer: No.

Brief Summary

This case involved a complaint that sought relief under DGCL Section 220 and also asserted fiduciary duty claims based on the argument that the board of directors of Winmill withheld information for the purpose of suppressing the stock price, resulting in the reluctance of investors to acquire shares in a company that refuses to disclose information.  The argument was that such a lowered stock price would give insiders an opportunity to acquire a greater percentage of ownership in the private company at a lower price.

This letter opinion begins with a thoughtful observation that is applicable to virtually every litigated matter:

“Sometimes disputes that arise during the course of litigation can be resolved by resort to grand principles.  Sometimes a practical approach offers a better option for moving the matter along.  The current disagreement seems to fall in the latter category.”

The Court observed that a Section 220 action is intended as a summary proceeding, and a companion fiduciary duty claim would slow the pace.  Therefore the two claims should not have been brought together.  See footnote 4.

The Court also addressed the somewhat unique aspects of limited discovery in a Section 220 case, which is very narrow in purpose and scope and is typically very limited as it relates to the corporate defendant.  Nonetheless, in this case the Court allowed the functional equivalent of a Rule 30(b)(6) deposition of a corporate designee and depending on the results of that deposition, allowed for the possibility of the plaintiff deposing members of the board of directors of the corporate defendant, in order to inquire about why the defendant was insisting as a condition of producing documents that the plaintiff not trade on the information that it received and otherwise to inquire into the reluctance of the corporate defendant to produce records based on their concern about what the plaintiff might do if it received the non-public corporate financial information.

In support of this inquiry, the Court stated that if the corporate defendant refused to produce its directors for deposition on this issue, those corporate directors would not be entitled to testify at trial.

See generally two prior Chancery decisions between these parties highlighted on these pages.