Graulich v. Dell, Inc., 2011 WL 1843813 (Del. Ch. May 16, 2011).
What this case is about:
This Court of Chancery opinion involved a demand by a shareholder for books and records of Dell, Inc. for the ostensible purpose of enabling him to investigate possible mismanagement. Further summary and commentary follows, but first a word from our sponsor.
[Editor’s note: Regular readers are undoubtedly aware that in addition to the recently installed new graphics that gave this homepage its first facelift in the six years of its existence, the last few weeks may have witnessed the fewest number of case summaries in the six-plus years of this blog’s existence. The diminution in output is due to my concurrent affiliation with a new firm and the concomitant extra time devoted to that exercise in addition to the demands of paying clients. I plan to catch up imminently and I am grateful for the patience of my many (free) subscribers. Civil and constructive comments on the new graphics are welcomed.]
The Corporate Statute that this Chancery Opinion is Based on:
Section 220 of the Delaware General Corporation Law (DGCL) allows a stockholder to demand certain books and records under circumscribed circumstances if various prerequisites are satisfied. For example, in order to prevail on a Section 220 demand, a stockholder must demonstrate: (i) that she is actually a stockholder of the corporation during the relevant periods involved; (ii) certain format and content requirements of the demand have been met; and (iii) the stockholder has a “proper purpose” reasonably related to her interest as a stockholder. Moreover, the courts have superimposed the requirement of a “credible basis” for alleged wrongdoing onto DGCL Section 220 in order for one to support the stated purpose of investigating even potential wrongdoing.
Factual Background of Decision
The stockholder in this case sought books and records in order to allow him investigate possible mismanagement and thereafter to pursue derivative claims based on Dell’s sale of OptiPlex computer systems sold from 2003 to 2005. The allegation was that certain parts related to those systems required Dell to incur costs for replacement and servicing, and that the problems had a negative impact on its brand name. In addition, the allegation was that the board of Dell failed to monitor or otherwise address the situation appropriately.
Highlights of Court’s Decision
The Court rejected the demand for books and records in a thoroughly reasoned opinion that was based on three fundamental points:
(i) The claims were barred by a settlement agreement and release in a prior class action styled as In Re Dell, Inc., Derivative Litigation,
(ii) The applicable statute of limitations on any such claim (that could be brought in a later derivative action) had already run.
(iii) The stockholder did not satisfy the “proper purpose” requirement of Section 220 because the only purpose stated was to pursue a derivative suit with the data requested, and the stockholder would not be able to bring a derivative suit because he was not a stockholder during the time period in which the matters complained of were alleged to have taken place. Plus, even if that hurdle were to have been overcome, the Court cast doubt on the ability to satisfy the substantive challenge of prevailing on a Caremark claim based on the facts presented.
We have written frequently on these pages about Section 220 decisions and their nuances. See, e.g., compilation of Section 220 cases and commentary highlighted on this blog here. This most recent Chancery decision is another example of how difficult Section 220 demands for books and records can be. (Although this case may not be the best example because it seems to have been based on a comparatively weak Section 220 argument.) Many decisions from Delaware’s Supreme Court and Court of Chancery exhort practitioners to use what the courts refer to as the “tools at hand” (i.e., Section 220), to obtain detailed information from a company before filing a derivative action. However, this case demonstrates that not all efforts to obtain books and records pursuant to Section 220 prevail–despite the apparent simple provisions of the statute. And there are ample examples of a stockholder pursuing his case all the way to the Delaware Supreme Court only to be told by the court after the time and expense of that appeal, that the stockholder is not entitled to books and records based on the particular facts presented.
One “take-away” message based on the decisions summarized on this blog over the past six years, is that it is not cheap, simple or fast to pursue a Section 220 demand, especially if a company is committed to making the shareholder spend as much time and money as possible, and if the company intends to make it as difficult as possible for the stockholder to obtain any data. Admittedly, the stockholder in this case had at least 3 strikes against him before those considerations came into play.
But even in those cases where a stockholder prevails in his Section 220 demand after trial, the company may further frustrate the intent of Section 220 by playing a game of “hide the ball” and the stockholder can spend substantial money and time trying to force the company to produce all the data to which the stockholder is entitled –even after a ruling in favor of the stockholder.
Still more time and money needs to be spent if the stockholder seeks electronic data. The statistics in the business world today indicate that most data produced today is produced electronically–but is never printed in hard paper format.
So, if a company only produces hard copies of the data requested, and refuses to produce electronic data, the stockholder is faced with spending more money to fight that issue because I am here to tell all readers that, (as hard as it may be to believe), there is no authoritative Delaware court opinion that squarely addresses the issue of whether electronic data must be produced under Section 220–even when a court has ruled that a stockholder is entitled to “books and records” under Section 220. I am co-authoring an article on that very issue that we hope to publish in the near future.