Chancery Addresses Finer Points of Section 220 Demand for Books and Records

Quantum Technology Partners IV, L.P. v. Ploom, Inc., C.A. No. 9054-ML (Del. Ch. May 14, 2014).

Why This Ruling is Noteworthy: This post-trial Master’s Final Report deserves careful reading by those who need to understand the nuances of either making a demand for books and records or defending such a demand based on DGCL Section 220. This 45-page decision includes one of the better and more complete explanations of: (i) the prerequisites that must be satisfied in order to obtain books and records pursuant to Section 220; (ii) the many nuances and shades and facets of potential defenses that a company can employ to make a stockholder’s exercise of Section 220 rights a very expensive experience; (iii) the categories of documents that the court may require to be produced in connection with a stated purpose to value shares in a closely held company; and (iv) the terms of a confidentiality agreement that production of documents will be subject to — including a description of what documents may be labeled merely “confidential” as compared to those documents that may bear the more restrictive designation of “highly confidential”. See discussion beginning at page 33.

Also notable is the discussion at page 32 about the Court retaining jurisdiction for a year so that a new Section 220 demand (and new lawsuit) would not need to be initiated in the event that the stockholder merely requested updated financials and related documents. Updated data are especially helpful for the valuation of fast-growing start-up companies as were involved here.

Although a Master’s Report may be modified upon review by a Vice Chancellor or Chancellor, the 135 footnotes in this decision provide a wealth of prior Delaware opinions that may be relied on for the various arguments and rebuttals that make Section 220 cases more complicated than may be apparent based on an initial reading of the statute.  Included in the copious citations, for example, is a prior Chancery decision that served as a reference point for the deciding the terms of a confidentiality order pursuant to which documents were produced.

The Court also expressed frustration with the parties for not making a more productive effort to resolve or clarify certain minor issues, such as whether the documents should be produced within 5 days or 10 days of the court’s final order. The Master’s Report begins with the observation that if the company reached a settlement before trial, then it likely would have produced fewer documents than what the Court ultimately determined to be required under Section 220.