Shareholder-Friendly Ruling in Delaware

In a recent case significant for shareholders of Delaware corporations, the Supreme Court of the State of Delaware held that shareholders may inspect books and records in Delaware after filing a derivative action.  This decision empowers shareholders to hold fiduciaries of Delaware corporations accountable by clarifying a shareholder’s right to review a company’s books and records.  It reversed the Delaware Court of Chancery’s more limited view of when it is proper for a shareholder to request access to a company’s books and records.

Background and the Delaware Supreme Court Decision

Charles R. King’s initial shareholder derivative action on behalf of VeriFone, a provider of secured electronic payment technologies and security and encryption software, was filed in 2007 in the United States District Court for the Northern District of California, after the company announced that it would be restating some of its 2007 financial statements due to false financial accounting.  The court dismissed Mr. King’s complaint because he failed to plead sufficient facts to establish that demanding the board take appropriate action against the wrongdoers would have been a futile and useless act.  The judge suggested, however, that Mr. King pursue a books and records inspection demand in order to try to obtain the facts needed to allege demand futility and to demonstrate corporate wrongdoing.

Mr. King therefore brought a Section 220 books and records action against VeriFone in April 2010 in the Delaware Court of Chancery seeking access to documents relating to the futility of making a demand on the board of directors to take the action he was requesting in his shareholder derivative suit.  The Court of Chancery denied the request, stating that Mr. King lacked a proper purpose under Section 220 because he had already elected to prosecute a derivative action for the company. The court held that derivative plaintiffs should seek books and records and investigate demand futility before filing a derivative complaint.  The Delaware Supreme Court reversed the decision, noting King’s actions were “fully consistent with Delaware case precedent.”

The case is King v. VeriFone Holdings, Inc., 2011 WL 284966 (Del. Jan. 28, 2011).

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