Kaufman v. Computer Associates International, Inc., download file, presents the issue of whether a books and records action under Section 220 of the DGCL should be stayed at the request of a special litigation committee (SLC) when a derivative action encompassing substantially the same allegation of wrongdoing filed by different plaintiffs is pending in another jurisdiction. The court ruled that such a stay should be denied in no small part due to the light burden imposed by the demand. Although the separate litigation in a separate state included claims substantially covered by the Section 220 request, the plaintiff is not a party to the separate litigation.
The court noted that Section 220 books and records actions are often used to investigate claims of mismanagement to assess whether or not derivative litigation is warranted and the Delaware Supreme Court has instructed that such proceedings are the “tools at hand” that should be used prior to substantive litigation being filed.
The court also acknowledged that a special litigation committee (SLC) formed in accordance with Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), has broad powers to control litigation filed derivatively on behalf of a corporation, and that such committee is generally empowered to stay all such proceedings even when the board as a whole may be disqualified from doing so.
However, a Section 220 claim to inspect books and records exists independently of any claims the stockholder might ultimately choose to bring. Although the court noted some cases where Section 220 actions were stayed pending internal investigations, there are other cases where they were allowed to proceed despite related parallel litigation, because courts have never found that Section 220 actions are conclusively precluded by the filing of related derivative litigation. The court also recognized that in some instances where a Section 220 case may be filed as a means to avoid the power of a SLC, the result may be different. For example, the court reasoned that a Section 220 case may proceed if there is a basis for demonstrating that a “sham SLC is established merely as a device for delaying litigation.” Other recent books and records cases have been summarized on this blog here and here and here.