Delaware Chancery Court Considers Scope of Section 220 Books and Records Demand Made Where Sole Purpose Is to Investigate a Potential Derivative Suit

In Graulich v. Dell, Inc., 2011 WL 1843813 (Del. Ch. May 16, 2011), the Delaware Court of Chancery rejected a stockholder's demand under Section 220 of the Delaware General Corporation Law (“Section 220”). Section 220 provides that a stockholder in a Delaware corporation may, under certain conditions, request that that corporation make available certain books and records, provided that the request is made for a “proper purpose.” In Graulich, the Court held that the plaintiff stockholder, who sought books and records for the purpose of investigating and possibly filing a derivative lawsuit against the company's officers and directors, nonetheless lacked a “proper purpose” because the stockholder did not have legal standing to bring the derivative suit and the potential claims the stockholder wished to pursue were time-barred and barred by claim preclusion.

Plaintiff in Graulich made a Section 220 demand to defendant Dell, Inc. (“Dell”) to inspect Dell's books and records. Plaintiff's demand letter to Dell requested that Dell make available for inspection documents regarding alleged corporate mismanagement relating to Dell's sale of OptiPlex computer systems from 2003 to 2005 and its 2006 corporate disclosures. Issues with defective parts in Dell's OptiPlex computer systems had led to extensive losses. Plaintiff?s demand stated that he wished to inspect Dell's books and records for the purpose of commencing “an appropriate suit.” Dell refused plaintiff's Section 220 demand, asserting that plaintiff failed to state a proper purpose under Section 220 because plaintiff was not a stockholder at the time of the alleged misconduct and because Dell had entered into a settlement in a Texas state court related to the OptiPlex issues at Dell (the “Texas Action”) whereby Dell obtained a full release of all claims –– including future claims –– relating to OptiPlex.

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Published In: Business Organization Updates, Civil Procedure Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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