memorandum opinion, the Delaware Supreme Court, relying on an alternative rationale, affirmed the Delaware Court of Chancery’s determination that an action brought by a beneficial stockholder under Section 220 of the Delaware General Corporation Law (“Section 220”) should be dismissed. The Delaware Supreme Court confirmed that stockholders seeking inspection of books and records under Section 220 must strictly comply with the statutory requirements governing demands for inspection.
This appeal arose out of an action brought by the plaintiff, Central Laborers Pension Fund (“Central Laborers”), seeking to inspect and copy books and records pursuant to Section 220 (the “Section 220 Action”) relating to a potential acquisition of Shine Group’s outstanding shares by News Corporation (“News Corp.”) in a transaction valued at approximately £415 million (the “Shine Transaction”). On March 7, 2011, Central Laborers sent a demand (the “Demand”) to inspect and copy books and records relating to the Shine Transaction to News Corp.’s general counsel. The Demand’s stated purpose was to investigate potential wrongdoing, including breaches of fiduciary duty, in connection with the Shine Transaction. The Demand also contended that, before commencing a derivative action, Central Laborers desired to determine whether a presuit demand on News Corp.’s board of directors would be excused. Although it was a beneficial holder of News Corp. stock, Central Laborers failed to submit documents with the Demand that evidenced its beneficial stockownership.
On March 16, 2011, Central Laborers, together with another plaintiff, commenced a derivative action (the “Derivative Action”) in the Court of Chancery, asserting that the Shine Transaction was the product of an unfair process that resulted in an unfair price and also asserting claims for breach of fiduciary duty against the members of News Corp.’s board of directors. One hour after filing the Derivative Action, Central Laborers filed the Section 220 Action. Central Laborers’ complaint in the Section 220 Action alleged that a primary purpose for the Demand was to investigate potential breaches of fiduciary duty to determine whether demand on News Corp.’s board was excused before commencing a derivative action.
News Corp. moved to dismiss the Section 220 Action. News Corp. asserted three grounds in support of its motion. First, the Demand failed to comply with the requirements of Section 220 because documentary evidence of Central Laborers’ beneficial ownership of News Corp. stock was not submitted with the Demand. Second, the Demand lacked a proper purpose, as demonstrated by the simultaneous filing of the Derivative Action and the 220 Action. Third, the scope of the Demand was overbroad. Central Laborers conceded that documentary evidence of its beneficial stockownership was not submitted with the Demand, but argued that the failure was a “clerical error” and that the submission of appropriate documentary evidence with its answering brief in opposition to News Corp.’s motion to dismiss cured any deficiency in the Demand.
The Court of Chancery granted the motion to dismiss the Section 220 Action. The Court of Chancery held that Central Laborers’ request for inspection lacked a proper purpose, reasoning that the filing of the Derivative Action reflected Central Laborers’ belief that it already had sufficient grounds for alleging both its substantive claims and demand futility without the aid of Section 220.
The Supreme Court affirmed, relying on an alternative rationale. The Supreme Court held that, as a beneficial stockholder, Central Laborers’ failure to submit documentary evidence of its beneficial stockownership was fatal to its Section 220 claim and incapable of being cured by the later submission of appropriate documentary evidence with its answering brief in opposition to News Corp.’s motion to dismiss. The Supreme Court reasoned that stockholders must strictly comply with the requirements of Section 220 and that, absent strict compliance, stockholders have “not properly invoked the statutory right to seek inspection, and consequently, the corporation has no obligation to respond.” The Supreme Court then concluded its analysis and did not reach the question of whether Central Laborers could show a proper purpose in light of its filing of the Derivative Action.
The full opinion is available here.