Amalgamated Bank v. NetApp, Inc., C.A. No. 6772-VCG (Del. Ch. Feb. 6, 2012).
Whether supplemental documents should be produced to comply with post-trial determination pursuant to DGCL Section 220 that books and records must be provided.
In October 2010, the plaintiff in this case filed a stockholder derivative action in California based on a Caremark claim, relying on Delaware Law. Prior to that California case, the plaintiff had not previously filed a books and records demand pursuant to DGCL § 220. The California court gave the plaintiff an opportunity to amend its complaint, explaining that it was relying on the Delaware Supreme Court’s decision in King v. VeriFone Holdings, Inc., 12 A.3d 1140 (Del. 2011) (highlighted on these pages here), to give the plaintiff an additional period of time to file its Section 220 case in Delaware before the deadline for amending the California complaint.
The Section 220 case in Delaware was filed on August 9, 2011 and the defendant answered the complaint on August 30, 2011. The plaintiff moved for summary judgment on September 12, 2011. Without having received any information pursuant to the Section 220 action, the plaintiff filed a second amended complaint in California. Next, in the Delaware Section 220 action, the plaintiff filed a Motion to Expedite on September 26, 2011. A trial in the Delaware Section 220 case was held on November 16, 2011, and the Court of Chancery ruled from the bench that the plaintiff had a proper purpose for its books and records demand, and ordered production.
Post-trial Production Issue in this Section 220 Case.
This is one of the rare Delaware opinions which addresses compliance, post-trial, with a ruling pursuant to Section 220, that certain books and records must be produced. This decision ruled on a Motion to Compel Production of Documents based on a post-trial decision to produce books and records. The plaintiff alleged that the production was not in full compliance with the post-trial ruling in favor of the plaintiff pursuant to Section 220.
The issue of electronically stored information (ESI) does not appear to have been an issue in the post-trial motion to compel in this case. [Kevin Brady and I will be publishing an article in the near future that addresses the lack of controlling authority in Delaware on the issue of what ESI must be provided after a determination has been made that “books and records” must be produced pursuant to Section 220.]
On December 5, 2011, the Court of Chancery held a teleconference to instruct the parties on the “universe of documents that needed to be made available” based on its post-trial ruling in favor of the plaintiff in November. This was designed to address the dispute that arose between the parties over the scope of the material to be produced as ordered after trial. On December 7, 2011, the defendant produced 286 heavily redacted pages of documents. On December 20, 2011, the plaintiff filed a Motion Requesting to be Allowed to File Under Seal, a Motion to Compel Documents. That motion to file under seal was granted on January 3, 2012, and on January 4, 2012 the plaintiff filed his Motion to Compel Documents and the parties stipulated to a briefing schedule. On January 13, 2012, the defendant filed its Answer to the Motion to Compel. On January 23, 2012 the plaintiff filed its Reply to the Motion to Compel. The Court held a teleconference for argument on the motion on February 1, 2012. This 15-page decision followed on February 6, 2012. Meanwhile, however, the California derivative action was proceeding on a parallel course. The plaintiff met a deadline in California on February 1, 2012 by which a Reply Brief on the Motion to Dismiss in California was due.
Analysis of Section 220 Standard
The Court reviewed the familiar Section 220 standards for seeking an inspection of corporate books and records, which include the prerequisite of establishing a proper purpose reasonably related to one’s status as a stockholder. The Court noted that seeking books and records to amend an already filed shareholder complaint can be a proper purpose but the Court also observed that it would be more consistent with the requirements of Rule 11, and economy, to bring a Section 220 action before filing a plenary action. It is well-established that a proper purpose under Section 220 includes the goal of seeking information necessary to meet the pleading requirements in a plenary action.
The Court of Chancery in this opinion discussed the recent Delaware Supreme Court decision in King v. VeriFone, which addressed the issue of whether seeking books and records to amend a dismissed stockholder derivative complaint could constitute a proper purpose. The Delaware Supreme Court reversed the Chancery decision in King v. VeriFone, and established the Delaware law in Section 220 cases as follows: a rule that would automatically bar the stockholder-plaintiff from bringing a Section 220 action solely because that plaintiff previously filed a plenary derivative suit, was unsupported by the text of the statute or the policy underlying Section 220. See footnote 50.
The Section 220 trial in this case on November 16, 2011, relied heavily on statements by the presiding judge in California and his comments about allowing the plaintiff to pursue a Section 220 case and to use that information in the pending California derivative action.
Motion to Compel Post-Trial Section 220 Production to Comply with Post-Trial Order
In its Motion to Compel Post-Trial Production, the plaintiff argued that the production of books and records provided by the defendant, after trial, was insufficient in a variety of ways. The defendant opposed the motion, denying that its production was incomplete but in any event stating that the purpose for plaintiff needing books and records was now moot in light of developments in the parallel California derivative action.
The Court distinguished the Delaware Supreme Court decision in King v. VeriFone, as applied to the facts of this case, in light of post-trial developments in the California case, regarding whether plaintiff still had a proper purpose in seeking books and records, even though that prerequisite had been established and acknowledged as being satisfied at trial. The Court explained that the previous need to obtain data to use in the California derivative action had become moot due to developments in the California litigation that occurred after the trial in the Section 220 case. Specifically, the Court of Chancery determined that it was no longer possible to use books and records to amend the California complaint in the pending derivative matter.
The Court of Chancery concluded its reasoning by emphasizing that: “nothing in King or Section 220, however, permits a books and records examination to become a device for parallel discovery to be pursued in two jurisdictions” nor does the theoretical possibility of leave to amend the pleading convert the desire for such discovery into a proper purpose” See footnote 82.
Postscript. Substantial commentary on Section 220 cases has filled the electronic pages of this blog but suffice it to say for purposes of these closing comments that this case serves as another reminder of the expense of Section 220 cases with no guarantee, ex ante, whether a Section 220 case will “survive a cost/benefit analysis”. For example, in this case, the plaintiff won after the expense of a trial the right to receive books and records that were sought pursuant to Section 220. After trial, however, the plaintiff still needed to file a Motion to Compel to obtain the data sought, but that motion was denied, however. At the “end of the day” the plaintiff did not receive all the records he sought.