Central Laborers Pension Fund v. News Corporation, C.A. No. 6287-VCN (Del. Ch. Nov. 30, 2011) (Noble, V.C.)

In this letter opinion, the Court of Chancery granted defendant’s motion to dismiss a Section 220 action, which was filed shortly after the commencement of a derivative action wherein plaintiff made certain allegations with respect to defendant’s proposed acquisition of Shine Group Ltd (“Shine”).  In its opinion, the Court concluded that, as a general matter, following the filing of a derivative action and prior to the judicial disposition of a motion to dismiss, a stockholder may not demonstrate a proper purpose for invoking Section 220 absent special circumstances. 

Following the announcement that defendant would acquire Shine, plaintiff made a demand to inspect defendant’s books and records purportedly to investigate potential breaches of fiduciary duty associated with the proposed transaction in order to determine whether making a demand on the News Corporation board of directors was necessary prior to filing a derivative action.  After delivering its Section 220 demand, but prior to commencing the instant Section 220 action, plaintiff filed a derivative action against defendant and its board of directors.  Thereafter, defendant moved to dismiss the Section 220 action pursuant to Section 12(b)(6) on the grounds that the near simultaneous filing of the derivative action refuted any claim of a proper purpose for plaintiff’s inspection demand.  The Court first noted that the filing of plaintiff’s derivative action suggested that plaintiff already had sufficient information to support its entire fairness claims and its allegations of demand futility.  See Baca v. Insight Enters., Inc., 2010 WL 2219715, at *4 (Del. Ch. June 3, 2010) (“[T]he stockholder who serves a post-plenary action Section 220 demand contradicts his own certification that he already possessed sufficient information to file a complaint.”).  Vice Chancellor Noble further noted that Section 220 was not adopted, and generally should not be used, as a substitute for litigation discovery. 

Plaintiff, for its part, invoked a recent Delaware Supreme Court opinion, King v. Verifone Holdings, Inc., 12 A.3d 1140 (Del 2011), in support of its Section 220 action.  In that case, the Supreme Court found that a derivative plaintiff whose complaint had been dismissed (with leave to amend) for failure to plead demand futility successfully was not, by virtue of the fact that a derivative action had been filed, precluded from prosecuting a later filed Section 220 action.  Under those circumstances, the Supreme Court found that it was “a proper purpose under Section 220 to inspect books and records that would aid plaintiff in pleading demand futility in a to-be-amended complaint in a plenary derivative action, where the earlier-filed plenary complaint was dismissed on demand futility related grounds without prejudice and with leave to amend.”  The Court of Chancery distinguished that case from the instant facts, noting that unlike in Verifone, the plaintiff’s derivative action had not been dismissed and there had been no judicial action that would suggest a need for further pleadings or fact finding to support a purpose for inspection of defendant’s books and records.   Because plaintiff’s pending derivative action necessarily reflected its view that it had sufficient grounds to allege both demand futility and to make its substantive claims, plaintiff could not demonstrate a proper purpose for pursuing its books and records action.  Accordingly, the Court of Chancery dismissed the Section 220 action.

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