Although many DGCL Section 220 cases are summarized on this blog, the following 3 unrelated Chancery Court decisions, all rendered within the last few weeks, give a good overview of some of the challenges that face one seeking books and records under Section 220 and highlight the fact that despite being a summary statutory proceeding, it is not always as simple a matter as one might be tempted to otherwise think.
Highland Select Equity Fund, L.P. v. Motient Corporation, download file. In this Chancery Court opinion interpreting Section 220 of the DGCL, the entire demand for books and records was denied, after an expedited trial, due to the request being overly broad. This opinion is a helpful and instructive analysis regarding the limited scope of Section 220 in terms of the documents that are available even if the prerequisites of the statute are satisfied–by comparison with the broader scope of discovery under Rule 34 in a conventional lawsuit. Many Section 220 cases have been summarized on this blog (and they can be easily searched using the search function in the margin), but this case is among the better explanations for the limited scope of a Section 220 demand under the DGCL as compared with Rule 34 and the broader scope of normal discovery.
The court also explained that in addition to the statutory prerequisites of proper purpose reasonably related to status as a shareholder, as well as a credible basis for alleged wrongdoing, there is a requirement of both good faith on which a request must be based, as well as a responsibility of the court to prevent “possible abuse of the shareholder’s right of inspection,” so that the requested inspection of books and records is limited to those necessary and essential to the satisfaction of the stated purpose.
In this particular case, there were several affiliated proceedings in other states and the court made it clear that Section 220 of the DGCL is not a way to circumvent discovery proceedings and is not meant to be a forum for the types of wide-ranging document requests permissible under Rule 34. The Chancery Court relied on the Delaware Supreme Court decision of Security First Corporation v. U.S. Die Casting and Development Company, 687 A.2d 563 (Del. 1997), which described the limited scope of discovery in a Section 220 case.
The court also noted that the pretrial discovery in this case, before the trial on the Section 220 case, involved a deposition under Rule 30(b)(6) which was problematic in some respects. For example, the designated representative of the company was not very knowledgeable. The court cited authority for the requirement that in a 30(b)(6) deposition the entity presenting the designated person has an affirmative duty to produce a witness who can answer questions regarding the subject matter listed in the notice and that a corporate party violates the rule when a person is sent to the deposition unequipped to participate meaningfully.
In sum, the court rejected in its entirety the overly broad request for documents that initially was 25 pages of single-spaced type, even though the day before the Section 220 trial the list of documents requested was reduced, but not with the "rifled precision" required for demands made under the statute. A practical lesson from this case, among others, is that if one’s Section 220 demand is too broad, one runs the risk of it being rejected in its entirety.