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From Securities Regulation Daily, December 29, 2014

Delaware courts may impose forum restrictions on books and records requests

By John M. Jascob, J.D.

Reversing the ruling below, the Delaware Supreme Court held that the Chancery Court has the authority to restrict a shareholder’s use of information gathered from a books and records inspection to legal action in a Delaware court. As the plain text of the statute provides for broad judicial power to condition such inspections, the Chancery Court erred in determining that it lacked authority to impose a forum limitation on the use of the information under Section 220(c) of the Delaware General Corporation Law (United Technologies Corp. v. Treppel, December 23, 2014, Strine, L.).

Usage restrictions. Shareholder Lawrence Treppel had sent United Technologies Corporation a demand letter in August 2012, demanding that the company investigate and commence proceedings against certain officers and directors.  Treppel’s claims arose out of an investigation by the U.S. Department of Justice into violations of federal law by United Technologies for exporting software to the Chinese government for use in a military helicopter. After the board decided to reject Treppel’s demand, Treppel responded in March 2013 by seeking to use his inspection rights under Section 220 to “evaluate” the board’s decision.

United Technologies then agreed to allow Treppel to inspect most of the requested documents, but insisted that he first sign a confidentiality agreement which contained a provision requiring that any claim or dispute involving or connected to the inspection be brought in a Delaware court. Treppel refused to bind himself to suing in Delaware, however.  After negotiations between the parties failed, Treppel filed a Section 220 action in the Chancery Court seeking access to United Technologies’ books and records without any usage restrictions.

Although also holding that Treppel’s purpose for the inspection was proper under Section 220(b), the Chancery Court’s ruling centered on whether it had the authority under Section 220(c) to restrict Treppel’s use of the books and records to any legal action in a Delaware court. The court determined that United Technologies was not entitled to such a restriction because  it was not the type of limitation that 220(c) seeks to impose. Rather, the court reasoned, charter or bylaw provisions are the proper mechanism for limiting which forum a suit may be brought in to enforce corporate interests.

Broad authority under Section 220(c). On appeal, United Technologies argued that the Chancery Court erred in limiting its own authority to impose the restriction. The Delaware Supreme Court noted, however, that the plain text of Section 220(c) allows the Chancery Court to prescribe “any limitations or conditions” with reference to a books and records inspection. Moreover, Delaware precedent has consistently reflected the underlying principle that a stockholder’s inspection right is a “qualified” one by restricting the stockholder’s ability to use corporate books and records in certain ways.  As the Chancery Court thus has broad discretion to shape the breadth and use of inspections  to protect the legitimate interests of Delaware corporations, the lower court erred in concluding it lacked the statutory authority to impose its own preclusive limitation.

Relevant considerations. The Delaware Supreme Court declined United Technologies’ invitation to analyze, on a cold appellate record, the considerations relevant to the Chancery Court’s exercise of discretion to grant the novel restriction that the company sought. Instead, the state high court found it prudent to have the Chancery Court consider how to exercise its discretion by giving weight to such factors as: (1) the fact that Treppel sought to file claims arising out of the same corporate conduct that was already the subject of derivative litigation in Delaware; (2) United Technologies’ legitimate interest in having consistent rulings on related issues of Delaware law made by the Delaware courts; (3) United Technologies’ subsequent adoption of a forum selection bylaw that represents a non-case-specific determination by its board of directors that internal affairs litigation involving the company should proceed in a single forum; and (4) the investment that the corporation has already made in defending not only the prior derivative litigation but also the present Section 220 action.

The case is No. 127, 2014.

Attorneys: William Savitt (Wachtell, Lipton, Rosen & Katz) and William M. Lafferty (Morris Nichols Arsht & Tunnell LLP) for United Technologies Corp. Felipe J. Arroyo (Robbins Arroyo LLP) and Blake A. Bennett (Cooch and Taylor, P.A.) for Lawrence Treppel.

Companies: United Technologies Corp.

MainStory: TopStory CorporateGovernance DirectorsOfficers DelawareNews

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