Central Laborers Pension Fund v. News Corp., No. 682, 2011 (Del. May 29, 2012).
Issue Raised on Appeal: Whether one can satisfy the proper purpose requirement of DGCL section 220 when a derivative action is filed simultaneously with the section 220 action.
Short Answer: The Delaware Supreme Court declined to address the issue and instead affirmed the Court of Chancery’s dismissal of the suit on different grounds. Namely, the prerequisite of showing beneficial ownership was not satisfied. Bonus: A LexisNexis videocast provides a short overview of this case.
Practice Comment: This opinion provides a helpful review of a few fundamentals of DGCL section 220 but does not announce new law or new developments regarding section 220. A law review article on section 220 that was just published this week, and addresses ESI issues in connection with section 220, is available here, and joins many other posts on the topic over the last 7 years.
The plaintiff filed a section 220 suit and a simultaneous derivative action. The Court of Chancery dismissed solely on the basis that the statutory prerequisite of a “proper purpose” could not be satisfied because when the derivative suit was filed, the presumption was that there was a sufficient basis to do so without the need for data from a section 220 action. The Supreme Court affirmed on different grounds and did not address the “proper purpose” issue. Delaware’s High Court ruled that:
Central Laborers’ failure to attach documentary evidence of its beneficial ownership of News Corp. stock is statutorily fatal to both its section 220 inspection demand and to the 220 Action, and mandates an affirmance of the Court of Chancery’s dismissal. Therefore, on that basis alone, and without deciding whether Central Laborers asserted a proper purpose, the judgment of the Court of Chancery is affirmed.
This decision provides a useful overview of the policy behind section 220 and a reminder that the “form and manner” requirements of the statute will be strictly enforced by the courts. The net result of this decision is that the plaintiff did not receive any books and records, and has little or nothing to show for its litigation efforts, due to failure to comply with what some may refer to as clerical aspects of the statutory prerequisites.