King v.VeriFone Holdings, Inc., Del. Supr., No. 330, 2010 (Jan. 28, 2011), read opinion here, is a Delaware Supreme Court decision that provides added clarity to practitioners regarding the "proper purpose" and related prerequisites that a shareholder must satisfy in order to successfully seek books and records under DGCL Section 220. This ruling reversed a Chancery decision that found a lack of proper purpose in part because the Section 220 action was filed after a derivative suit was filed. Delaware’s High Court explained that it remains preferable to file Section 220 suits to obtain books and records prior to filing a derivative suit, but following that chronology is not, per se, a fatal flaw in a Section 220 action. I plan to provide a fuller summary on this case later.

This decision also highlights how contentious, lacking in simplicity and expensive Section 220 cases can be. I say lacking in simplicity because it is rare for the members of the Delaware Supreme Court and Court of Chancery to disagree on the interpretation of the DGCL. Also, I say expensive because appeals to the Delaware Supreme Court don’t come cheap. And remember that after all that effort, what does one win in a Section 220 case? Books and records only.


Background details about this case are available in the blog summary of the Chancery decision here. In sum, a shareholder derivative complaint was filed in California based on the defendant’s restatement of financial statements.

Notably, VeriFone provided most of the requested “categories of documents” that were sought before suit except one:  “The Audit Committee Report with the results of an internal investigation regarding the issues surrounding the restatement of VeriFone’s financial statements.”  This demand for books and records was pursuant to the specific direction of the federal court in which the derivative suit was pending, to use DGCL § 220 to amend the complaint in that case, in order to assist King in pleading demand futility in the California suit.

Supreme Court’s Section 220 Analysis

Delaware’s High Court recognized “investigation of corporate mismanagement” as a “proper purpose” for seeking books and records pursuant to DGCL § 220, among others.  Other cases were cited for the Delaware Court’s frequent exhortations to practitioners to use DGCL § 220 to obtain detailed information prior to a plenary lawsuit, in order to obtain the detailed facts needed to successfully plead “demand futility” for purposes of satisfying Court of Chancery Rule 23.1 in derivative suits.

Delaware’s High Court recognized that it may be ill-advised to file a § 220 suit after a derivative case is filed, but the Court explained that such a sequence “has not heretofore been regarded as fatal.”

Three Delaware decisions were discussed at length to support the Court’s reasoning that: “both this Court and the Court of Chancery [have] permitted stockholder-plaintiffs to utilize the Section 220 inspection process to gather new information and replead their derivative complaints.”  See slip op. at 11 and footnotes 25, 33 and 40 (citing Disney, McKesson HBOC and Melzer cases).  Two other Delaware cases that reached a different result were distinguished.  See slip op. at 17 and footnotes 48 and 56.

The Court emphasized that it was reaffirming “long-standing Delaware precedent” recognizing that a proper purpose under Section 220 includes seeking books and records to aid in pleading demand futility in a “to-be-amended” complaint in an existing plenary derivative action.

Moreover, while rejecting the trial Court’s holding that a prerequisite of a § 220 action is to file a § 220 suit prior to a derivative suit; the Delaware Supreme Court did not endorse that particular sequence as a best practice in connection with filing a § 220 suit.


Although the Court was sensitive to the policy issues involved with its rejection of a bright-line test for the timing of a § 220 suit, it explained that the Delaware General Assembly would need to amend the statute to impose a sequential prerequisite, and it would not be appropriate for the judiciary to do so.