Highland Select Equity Fund v. Motient Corp., (Del. Ch., March 14, 2007), read opinion here. In this decision, upon remand from the Delaware Supreme Court, the Chancery Court clarified two questions that the Delaware Supreme Court required clarification on regarding a prior Chancery decision in this case involving DGCL Section 220. The original Chancery Court decision was summarized here.
The Supreme Court asked the Chancery Court to clarify whether “all of Highland’s actual purposes were improper and if so, what were Highland’s actual purposes and why did they preclude relief under Section 220." The Chancery Court explained that the starting point of its analysis was the initial demand letter that “suffers from such extreme overbreath that it is impossible to conclude that it was drawn in a good faith effort to comply with the clear, controlling authority of the Delaware Supreme Court. That letter spanned 25 single spaced pages . . ..” (citing Security First Corporation v. U.S. Die Casting and Development Co., 687 A.2d 563, 570 (Del. 1997)). The Chancery Court also listed five other factors why it concluded that the use of the Section 220 process by the plaintiff in this case was designed for some purpose other than to exercise the legitimate right of a stockholder.
Moreover, the Chancery Court emphasized that its opinion must be understood in the context in which Highland pressed its demand. For example, the Court’s reasoning was based on the circumstances existing during the course of the litigation. In this connection, the existence of the impending proxy contest was a substantial factor. As the court quoted from its original opinion:
“Recent experience teaches that the potential for abuse is very much alive when the Section 220 demand is made – – as this one is – – in the context of an impending proxy contest. While a Section 220 books and records action is a summary proceeding that demands prompt attention from this court, it can be difficult to process from start to finish from a schedule that accommodates the foreshortened time frame of an ongoing proxy fight. This is especially true when a stockholder makes a broad demand and expects to be able to publicly disclose in its proximate materials otherwise confidential documents or information obtained from the corporation after trial.”
The Chancery Court emphasized that in the context of such a demand, it is essential to the orderly process of the court that the stockholder make a “narrowly tailored, good faith demand in compliance with the clearly established precedent of the Delaware Supreme Court” (citing Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1034-35 (Del. 1996)). The Supreme Court on April 4 upheld this clarification in a short Order.