Issue Addressed: Was a stockholder entitled to additional books and records from Hewlett-Packard regarding accounting fraud at a company HP purchased? Answer: No
This post-trial letter opinion from the Court of Chancery denying a request for books and records under DGCL Section 220 is useful for those who would either defend or pursue such a request, and should be consulted in its entirety for both purposes, as well as for the court’s overview of the policies underlying Section 220. The court’s introduction to the decision is eminently worthy of quoting verbatim:
This case once again calls upon this Court to state the obvious: that the right of stockholders to documents under Section 220 is both essential to good corporate governance, and capable of being exercised in a manner that is inimical to such governance; and that we therefore must be vigilant in enforcing both rights under that Section and the limits to those rights.
Among the several noteworthy highlights in this pithy ruling include the following restatement of well-settled principles:
- Even if one states a proper purpose for Section 220 purposes, the company may still defend against a request if they can establish a different “actual” purpose.
- Some examples of improper purposes under Section 220 are: (i) those instances where the true intent is to disseminate confidential data about the company, and (ii) when it was shown that the real purpose was to assist in an acquisition of the company.
- The court explained that many of the requested documents in this case were already produced and that the additional documents requested were not necessary for the purposes stated. Moreover, the court summarized that plaintiff’s trial testimony as including an admission that the additional 750,000 documents requested were for purposes of a “fishing expedition” (the court’s description”) which is not permitted under Section 220. Moreover, the focus of many requests was related to actions of a target that was acquired by HP which took place prior to HP’s acquisition.
- The court rejected the company’s defense argument that the plaintiff stockholder was a mere “straw man” (my words) for the plaintiffs’ attorneys who allegedly were using the stockholder as a conduit to obtain documents to use in a later plenary suit.
One observation that can be made about this matter, and the many other Section 220 cases highlighted on these pages, is that there are many nuances to a Section 220 request for books and records of a corporation that make such an exercise anything but simple. This case is an example of a stockholder that spent substantial sums necessary for a trial on a Section 220 claim only to find the court reject his arguments.