King v. DAG SPE Managing Member, Inc., C.A. No. 7770-VCP (Del. Ch. Dec. 23, 2013) (Parsons, V.C.)

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In this memorandum opinion, the Court of Chancery dismissed an action under Section 220 of the Delaware General Corporation Law brought by a former director to inspect a corporation’s books and records.  The Court found that the non-stockholder Plaintiff lost standing to pursue his claim for books and records when he ceased being a director of the corporation.  In doing so, the Court declined to adopt a broader reading of Section 220(d) to confer limited inspection rights on former directors.

Plaintiff was a non-stockholder and former director of defendant, DAG SPE Managing Member, Inc. (“DAG” or the “Company”), which, together with its affiliates, owns, operates and supplies retail gas stations, convenience stores and car washes.  In December 2000, Plaintiff, along with DAG’s three sole stockholders, was named an initial director of DAG.  Through subsequent corrections and amendments to DAG’s certificate of incorporation, Plaintiff was named as the single independent director of the Company.  On December 18, 2003, DAG’s stockholders removed and replaced Plaintiff as DAG’s independent director by unanimous written consent, although DAG did not amend its certificate of incorporation to remove Plaintiff’s name as independent director.  More than eight years later, Plaintiff delivered a written demand to inspect the books and records of DAG, under Section 220 and the common law, to investigate generally whether mismanagement or breaches of fiduciary duties occurred during the period of his directorship. 

Plaintiff alleged that he had no knowledge of DAG until March 28, 2003 when, according to Plaintiff, the President of DAG, who was also a director of the Company and one of Plaintiff’s long-time acquaintances, indicated to Plaintiff that he intended to name Plaintiff as a director of DAG.  In the spring of 2011, Plaintiff discovered a copy of a March 28, 2003 unanimous written consent that he had executed and also a copy of a similar document dated April 1, 2003, which Plaintiff denied having signed but which appeared to have been executed by all of the Company’s directors, including Plaintiff.  This prompted Plaintiff to direct his counsel to investigate DAG’s filings, which revealed to Plaintiff—allegedly for the first time—that he had been appointed as an independent director of DAG as early as December 2000.  In April 2012, Plaintiff delivered a demand pursuant to Section 220 to determine, among other things, whether his signature was forged on any documents.  Plaintiff then filed suit in the Court of Chancery to compel the production of those documents demanded by Plaintiff.  DAG moved to dismiss, arguing Plaintiff lacked standing under Section 220 because he was no longer a director of the Company.

Section 220(d) provides a director with the right to examine a corporation’s books and records.  Citing Jacobson v. Dryson Acceptance Corp., 2002 WL 75473, at *4 (Del. Ch. Jan. 9, 2002), for the proposition that a director loses standing to pursue a claim for books and records under Section 220(d) once a director is removed properly from office, the Court held Plaintiff lacked standing to assert any inspection rights against DAG because Plaintiff ceased to be a director in 2003.  Moreover, the Court found no case law that supported limited inspection rights for former directors. 

Plaintiff alternatively argued that the Court should employ its equity powers to grant his demand because, according to Plaintiff, DAG should not be able to name him as a director, execute transactions without his knowledge, and then prevent his investigation, on procedural grounds, after he was removed as a director.  The Court, however, found it was precluded from invoking principles of equity to grant inspection rights when the statute plainly and unambiguously provides that “only current directors have inspection rights under Section 220(d).”

Separately, Plaintiff argued that even if he did not possess inspection rights under Section 220(d), he could do so under a director’s right of equal access to board information.  The Court rejected Plaintiff’s argument for two reasons.  First, “Section 220(d) at least arguably preempts a director’s common law right to inspect corporate books and records.”  Second, even if Section 220(d) did not preempt a director’s common law inspection rights, the Court observed that Delaware courts generally apply the equal access rule in the context of an action under 8 Del. C. § 225 or some other litigation in which the former director is pursuing or defending substantive claims and possesses the right to pursue discovery as a litigant.  Because Plaintiff was not a sitting director owing fiduciary duties to DAG, did not challenge his removal as a director and was not pursing a legal claim against the Company in which the documents sought might be relevant, the Court found Plaintiff had failed to allege any basis for applying the equal access rule in this action.

The full opinion is available here.

Topics:  Board of Directors, Books & Records, Compliance, Directors, Recordkeeping Requirements, Section 220 Request, Shareholder Litigation, Shareholders

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates, Constitutional Law 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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