In Melzer v. CNET Networks, Inc., 2007 WL 4146237 (Del. Ch., Nov. 21, 2007), read opinion here, the Delaware Chancery Court provides a careful review of the Delaware law relating to a shareholder’s right to demand books and records under DGCL Section 220. This is the third part of a trilogy. The prior two decisions in this case are summarized on this blog here and here. (Hat tip and thanks to Delaware lawyer David Finger for sending us the opinion today). This opinion will be especially noted for ruling that the shareholder was entitled to books and records for a period of time prior to the date of stock ownership in order to allow for the detail necessary to plead a sustained and systemic failure of oversight by the board, as described in the famed Caremark case.
First I’ll cover an entertaining footnote and then I’ll address the meat of the decision. In the concluding sentence of the opinion, after explaining in a comprehensive and scholarly fashion why the defendant company must provide the requested documents, the court used a colorful means of telling the defendant to return to California where the parties were involved in a separate lawsuit (in which the judge had urged the parties to use DGCL Section 220 before amending the complaint in that case). Here is what the last sentence of the opinion stated:
"get ‘going, going/back, back/ to Cali, Cali’"
(citing THE NOTORIOUS B.I.G., Going Back to Cali, on LIFE AFTER DEATH (Bad Boy Records 1997)).
As previously noted on these pages, here, in connection with prior summaries of Chancery Court decisions, and on The Wall Street Journal Law Blog, here, the Chancery Court has "spiced up" other scholarly opinions with footnote references to popular music. It makes for fun and entertaining reading in what might otherwise be necessarily sober stuff.
The first footnote in this Chancery opinion is to a front page article in The Wall Street Journal in March 2006 about backdated stock options, which the court notes was the genesis of a large number of lawsuits filed in connection with backdated stock options. In this matter, a derivative suit was initially filed in 2006 in federal court in California. Even though in this case the company admitted to the backdating of options, the federal court dismissed the case on procedural grounds with leave to amend, but also specifically instructed the parties to cooperate to allow the plaintiff shareholder to obtain books and records pursuant to Section 220 of the DGCL (Delaware General Corporation Law — 8 Del. C. Section 220). When a demand letter proved fruitless, the plaintiff filed the instant lawsuit in Delaware. Compared to the many other Section 220 opinions summarized on this blog, (see, e.g., here, here, here, here and here), this opinion includes among the most succinct overviews of this important "corner" of Delaware corporate litigation, such as prerequisites to successfully pursuing a demand for books and records that are not readily obvious from a reading of the statute.
In addition to the last entertaining footnote, two of my favorite footnotes in this opinion include one that refers to a leading treatise on Delaware corporate law where one will find examples of the "proper purpose" element of a successful Section 220 action. Footnote 18 provides as follows:
See 1 EDWARD P. WELCH, ANDREW J. TUREZYN, & ROBERT SAUNDERS, FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 220.6.3 (supp. 2007-2) (listing well over ten examples of broad categories of proper purposes under section 220).
My next favorite footnote (coincidentally also the next chronologically), needs to be quoted to get the full flavor. The court recognized some scholarly criticism of the Delaware jurisprudence in Section 220 cases, in connection with citing a Delaware Supreme Court decision regarding pleadings standards, and then in a gentlemanly fashion with surgical precision, the court dissects and rejects the basis for the different academic point of view. (It also is another example of how blogs by law professors are being cited by courts more and more.) Footnote 19 provides as follows:
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 118 (Del. 2006). Delaware courts have been harshly criticized for this requirement. See, e.g., J. Robert Brown’s Inspection Rights under Delaware Law, http://www.thereacetothebottom.org (Nov. 20, 2007, 6:16 a.m.) (arguing that the Seinfeld decision “illustrates that courts deliberately discourage the use of inspection rights by shareholders, using not the language in the statute but excessive pleading standards”). Such sensationalized criticism may make for an entertaining blog, but it is both unfair and incorrect. First, there is nothing “excessive” about requiring a petitioner to plead the elements of the statute under which he or she petitions the court. Section 220 makes inspection available only for shareholders with a “proper purpose.” If a shareholder could satisfy this burden by conclusorily repeating words previously used to describe a proper purpose, the requirement would be rendered meaningless, and well settled canons of statutory construction prevent such absurd results. Second, as Justice Holland explained in Seinfeld, permitting a single shareholder to hound a corporation with exclusively personal requests for books and records is a waste of corporate resources that engenders no benefit for the shareholders in general. The proper purpose requirement protects against such wealth-reducing outcomes. Finally, the “credible basis” standard is “the lowest possible burden of proof” in Delaware jurisprudence, and this can hardly be characterized as an excessive pleading standard. Seinfeld, 909 A.2d 117 at 123.
This opinion is also replete with footnote references to the opinion of the federal judge in California who specifically instructed the defendant to cooperate in the Section 220 demand in order to allow plaintiff to obtain details necessary to plead demand futility with particularity.
Thus, this Chancery Court opinion also includes useful analysis of the demand futility standards under Aronson v. Lewis and related Delaware cases.
Much more could be written about the gems of Delaware law contained in this opinion, but in keeping with the attempted brevity of blog posts, and in light of this one being longer than usual, I encourage readers to access the first link above and read the whole thing.
This case was so good that I wanted to blog about it before I officially start my Thanksgiving holiday and while my family is sleeping. For students of Delaware corporate law, this opinion issued the day before Thanksgiving was just in time for a "Thanksgiving feast" for the mind. Happy Thanksgiving to all my loyal readers and thanks for visiting these pages.
Supplement: Here is a post I did about this case on The Harvard Law School Corporate Governance Blog.