Chancery Interprets Proper Purpose for DGCL Section 220 Demand

Caspian Select Credit Master Fund Ltd. v. Key Plastics Corp., C.A. No. 8624-vcn (Del. Ch. Feb. 24, 2014).

Practical Insights on Decision: This Chancery opinion is one of many examples highlighted on these pages over the last 9 years or so, of the not infrequent inefficiency and unsatisfying nature of an action based on DGCL Section 220 in which a shareholder seeks books and records of a corporation. In this instance, the defendant company made the shareholder incur the substantial time and expense of going to trial based on what I would regard as a tactic by the company to make it as expensive and time-consuming as possible to obtain the books and records sought to value the shares of the company, notwithstanding the truism that valuation has been well-established as a proper purpose for a demand under Section 220.

The company’s defense, that only a lawyer could assert with a straight face, was that the stated proper purpose was merely a pretense for another unstated, improper purpose. It took the considerable expense of discovery and a trial for the court to conclude that the stated purpose of valuation was the “actual, real”, primary purpose, and any secondary purposes would not defeat the Section 220 claim. In an instance of the “pot calling the kettle black”, the defendant claimed, unsuccessfully, that the “real” purpose of the plaintiff was to use litigation as an expensive tactic to force a purchase of the plaintiff’s shares.

Bottom line: After the expense of a trial, even though the plaintiff stockholder won, the plaintiff now has the unfulfilling task (and continuing expense) of haggling with the defendant company about what documents the company claims to have that comply with the court’s ruling to produce the requested books and records.

Concluding Comment: DGCL Section 220 as a basis to demand books and records of a company (despite the apparent simplicity of the statute and the courts’ frequent exhortation to use Section 220 before filing a plenary action), is a tool that is neither suitable for the fainthearted nor for those who lack the financial stamina to deal with recalcitrant companies. Stated another way, unless there is substantial money at stake in terms of the value of one’s shares, if a company is determined to wage a war of financial attrition, Section 220 is not an economically rational option for most non-institutional or non-substantial shareholders to exercise.