Delaware Court Upholds Forum Use Restrictions in Books and Records Demand

January 9, 2015

A recent decision by the Delaware Supreme Court provides companies another tool to control the forum for costly stockholder derivative litigation. In United Technologies Corp. v. Treppel, the court affirmed the authority of Delaware courts to limit the litigation forum where information obtained in a books and records action can be used. Previously, Delaware courts have held that companies can enforce bylaws that require stockholder lawsuits to be brought in Delaware, even if those provisions were adopted without stockholder consent. In this case, United Technologies would permit a stockholder demand to inspect books and records, provided that the stockholder agreed that any claim arising out of or relating to the inspection be brought in a Delaware court. Under Section 220 of Delaware corporate law, stockholders have the right to inspect and copy corporate records, including board minutes, “for any proper purpose.” Delaware courts encourage this procedure as an information-gathering tool, rebuking stockholders for failing to use it before filing a claim of corporate mismanagement. However, according to the court, “Delaware case law has consistently reflected the underlying principle that the stockholder’s inspection right is a ‘qualified’ one.” Accordingly, the Court of Chancery has wide discretion to shape the breadth and use of inspections under Section 220 to protect the legitimate interests of Delaware corporations. 

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