Delaware Supreme Court Holds That Court of Chancery Can Restrict Forum Where Books and Records Can Be Used
Previously we have discussed Delaware court decisions upholding forum selection bylaws requiring suits involving a corporation’s internal affairs to be filed in a specified court, such as the Delaware Court of Chancery (see posts here and here). Last week the Delaware Supreme Court gave corporate management another potential tool for controlling the forum for shareholder litigation, holding in United Technologies Corp. v. Treppel that the Delaware Court of Chancery has authority to limit the litigation forum where information obtained in a books and records action under Section 220 of the Delaware General Corporation Law can be used.
The shareholder plaintiff in United Technologies, Lawrence Treppel, sent United Technologies a litigation demand letter, requesting that it investigate and commence proceedings against certain officers and directors in connection with a U.S. Department of Justice investigation of whether the company had violated federal export laws. After United Technologies rejected the demand, Treppel requested related documents from the company under Section 220, which gives stockholders the right to inspect their corporation’s books and records, subject to certain conditions. United Technologies agreed to allow Treppel to inspect most of the documents he sought, provided that he would agree that any claim arising out of or relating to the inspection be brought in a Delaware court, but Treppel refused. Litigation ensued in the Delaware Court of Chancery, and United Technologies asked the court to restrict Treppel’s use of any information he obtained from the inspection to legal action in a Delaware court. The Court of Chancery rejected this request, concluding that such a forum limitation was not authorized under Section 220.
On appeal, however, the Delaware Supreme Court disagreed. In his opinion for the court, Chief Justice Strine emphasized the broad language contained in Section 220(c) of the Delaware General Corporation Law: “The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.” He noted that “Delaware case law has consistently reflected the underlying principle that the stockholder’s inspection right is a ‘qualified’ one,” observing that “the Court of Chancery has wide discretion to shape the breadth and use of inspections under § 220 to protect the legitimate interests of Delaware corporations.” Since nothing in the text of the statute or in relevant case law limits the Court of Chancery’s authority to restrict the use of material from an inspection, the Supreme Court concluded that the Court of Chancery did have authority to issue the requested restriction.
The Delaware Supreme Court declined to determine whether the restriction proposed by United Technologies was actually warranted, instead remanding the case for the Court of Chancery to make that determination in its discretion. The Supreme Court indicated that that the Court of Chancery could give weight to such factors as:
The fact that the plaintiff was seeking to file claims arising out of corporate conduct that was already the subject of derivative litigation in Delaware;
The company’s legitimate interest in obtaining consistent rulings on issues of Delaware law by Delaware courts;
The company’s subsequent adoption of a forum selection bylaw limiting internal affairs litigation to the Delaware courts;
The company’s investment in defending both the plaintiff’s Section 220 action and other derivative litigation concerning the same underlying allegations;
The plaintiff’s failure to explain how his rights would be unreasonably restricted by a forum limitation; and
The fact that the plaintiff had previously filed shareholder suits involving Delaware corporations in other jurisdictions that were not his home state.
On the other hand, the court cautioned that such a determination must be case-specific, suggesting that a forum restriction might not be justified in a different situation, such as where there has been no prior litigation on the same subject matter. This last point is likely to limit the circumstances in which the Court of Chancery would be willing to restrict the forum in which books and records information can be used. But a request for such a restriction is a potentially useful tool to control multi-forum litigation in an appropriate case.