In this memorandum opinion, the Court of Chancery granted defendant’s motion for summary judgment, denying a books and records inspection pursuant to 8 Del. C. § 220 because plaintiff failed to provide a credible basis from which the Court could infer the possibility of ongoing mismanagement.
Plaintiff Louisiana Municipal Police Employees’ Retirement System made a Section 220 demand for the inspection of books and records of defendant Lennar Corporation (the “Company”), one of the nation’s largest homebuilders. With its inspection demand, plaintiff sought to investigate potential Caremark claims relating to compliance with labor, tax, and immigration law. In support of its demand, plaintiff cited two newspaper articles that described a nationwide governmental investigation by the Department of Labor (the “DOL”) into potential employee misclassification violations under the Fair Labor Standards Act. The articles noted that the investigation targeted the homebuilding industry (as well as other industries) and reported that the five largest homebuilders, including the Company, had received requests for information from the DOL. After the Company rejected plaintiff’s demand on the grounds that it did not provide a credible basis to suggest wrongdoing at the Company, plaintiff filed a complaint to compel inspection. The complaint cited the newspaper articles and, for the first time, eight employee lawsuits alleging labor violations, the most recent of which was filed three years before plaintiff’s complaint. Although plaintiff conceded it lacked standing to pursue claims relating to alleged wrongdoing during the period of the employee lawsuits, plaintiff argued that the lawsuits, together with the articles, suggested that wrongdoing continued until the time of its demand.
The Court explained that a stockholder seeking to inspect the books and records of a corporation must identify a proper purpose for its demand. Although the Court found that plaintiff had stated a proper purpose for its inspection (i.e., investigating ongoing mismanagement concerning compliance with labor laws), plaintiff had not provided credible evidence of mismanagement. The Court, citing case law rejecting the notion that the mere evidence of past lawsuits constitutes credible evidence of current wrongdoing, noted that the employee lawsuits were all settled without any admission of wrongdoing, there was no evidence that similar lawsuits had been filed during the three years preceding plaintiff’s complaint, and there had been no suggestion that the number of lawsuits was disproportionate to the Company’s size. The Court held that the newspaper articles also did not constitute credible evidence of mismanagement because the articles did not directly implicate the Company in wrongdoing, but merely reported that the Company was “one of many companies in many industries caught up in the dragnet of a federal investigation.” Finally, the Court concluded that the lawsuits and articles, even considered together, amounted to no more than speculation that the Company was engaging in worker misclassification. Accordingly, the Court granted the Company’s motion for summary judgment.
The full opinion is available here.