A recent Delaware Court of Chancery post-trial opinion addressing a demand for books-and-records by an LLC member did not attract my attention for the rather routine legal issues it decided, but it provides an opportunity to rely on it as a launchpad for broader commentary generally on this common type of Delaware corporate and commercial litigation. This post is intended for advanced readers of these pages who have followed at least some of the 200-plus highlights on this blog regarding Delaware decisions on DGCL Section 220 over the last 15 years, and a fewer number of case highlights regarding the analog to Section 220 in the Delaware LLC Act: Section 18-305.
In Riker v. Teucrum Trading, LLC, C.A. No. 2019-0314-AGB (Del.Ch. May 12, 2020), the Court determined after trial that only some of the requested data requested by the LLC member, and not yet provided, was required to be produced, although the case followed a familiar pre-trial pattern: The company initially refused to produce most of the documents requested prior to the suit being filed; then additional documents were produced after suit was filed, but not as many as requested. At trial, the Court needed to determine how many of the documents still requested were required to be produced.
The complaint was filed in April 2019. Court guidelines suggest a trial date within 90 days of the complaint for summary proceedings such as these, but through no fault of the court, that timetable may not always be possible. In this case, a pre-trial mediation took place that resulted in additional documents being produced, and that process added additional months to the timetable for trial. Post-trial briefing was also submitted.
Highlights of Decision
- The Court held that all the “form and manner” requirements of the statute were met, in terms of stating a proper purpose, for example. See pages 8-18.
- Valuation was recognized as a well-established statutory proper purpose, so the focus was on whether the documents requested were necessary in order to perform a valuation using the DCF method, which the plaintiff testified he was qualified to perform. The Court held that he was entitled to only one of the documents requested–most of them already having been produced. See generally, Lim v. PowerWise, highlighted on these pages, a 2010 Chancery decision that determined what documents were necessary to pursue the proper purpose of valuation in the context of that case.
- The second purpose was recognized as proper–investigation of mismanagement–but a prerequisite for pursuing such a purpose is presenting a “credible basis” of wrongdoing which the plaintiff in this case did not establish in connection with the documents requested for this category of requests. See pages 21-28.
General Commentary on Section 220/Books-and-Records Cases
Hundreds of highlights on these pages, over the last 15 years, of Delaware decisions on demands for books and records–based on both the corporate statute and the LLC Act–and the many cases of this type that I have handled over the last 30 years or so, reveal a few common themes:
- Although a reading of DGCL Section 220 and Section 18-305 of the LLC Act may appear to the casual observer as relatively simple and straightforward, the many hundreds of published decisions interpreting those statutes tell a different story.
- Exhortations in ample Delaware corporate litigation decisions instruct Delaware lawyers to “employ the tools at hand”, including Section 220, prior to filing a plenary action, especially a derivative suit which requires that one plead with particularity why pre-suit demand is futile. But what a blunt instrument Section 220 can be. Notably, Section 220 case law is often used by analogy when applying Section 18-305.
- Highlights on these pages of decisions on this topic recite the many nuances and prerequisites that must be mastered for a successful books and records claim under either statute, often added by judicial gloss, which are not obvious from a reading of the statutes only.
- Having represented both companies and stockholders/members in these cases over the years, there are many traps for the unwary. Companies have many arrows in their quiver to oppose a request under either statute. In addition to challenging a proper purpose (which can include a defense that the stated purpose is not the “true” purpose), a fertile field for disputes in this area relates to whether each of the documents requested is necessary to accomplish the stated purpose.
- These cases are not for the faint of heart because:
(i) As this case indicates, the litigation can last for a year or more (and some cases highlighted on these pages have lasted several years through appeal);
(ii) In connection with the litigation lasting as long as some plenary cases, the fees incurred in these cases can be substantial for matters such as discovery (however limited and circumscribed by the narrow scope and summary nature of these cases) and motion practice, for example, related to discovery disputes (though dispositive motions are strongly discouraged.);
(iii) As the instant case highlighted above exemplifies, the results of trial in these types of case are often unsatisfying to the extent that even if one is successful–which is never a certainty–the court merely orders the production of documents. This contrasts with a typical trial in which success often means a monetary award or substantive relief. So too, an order for production of records does not equate with receipt of records. It’s not uncommon that a continuing struggle ensues to enforce the production ordered by the court.
(iv) Truly egregious behavior, as an exception to the American Rule, must be presented before the court will engage in fee shifting–otherwise each party pays its own fees. Thus, the economics must support pursuing one of these cases through trial, and possible appeal.
UPDATE: Professor Stephen Bainbridge, a nationally-prominent corporate law professor whose scholarship is often cited in Delaware court opinions, kindly linked to this post on his blog.