Delaware Court of Chancery.

Companies looking to avert books-and-records demands cannot rely on the Corwin doctrine to invoke the business judgment rule in order to stymie Section 220 actions, Delaware's Court of Chancery has ruled for the first time.

In a 38-page opinion, Vice Chancellor Joseph R. Slights III said the state Supreme Court's 2015 ruling in Corwin v. KKR Financial Holdings would not “stand as an impediment” for shareholders who have stated a proper purpose for accessing corporate documents.

“Simply stated, Corwin does not fit within the limited scope and purpose of a books-and-records action in this court,” he wrote in the Dec. 29, 2017, decision.

The ruling came as a win for Mark Lavin, an investor in telecommunications company West Corp., who sought to investigate board actions involving West's 2017 sale to Apollo Global Management.

In court documents, Lavin alleged that West's board had favored the $23.50-per-share cash sale of the entire company over a more valuable sale of West's individual business segments. The deal with Apollo, Lavin said, had allowed West's directors and senior management to reap personal benefits that, he said, would not have been available had the company gone the other route.

West's attorneys moved to dismiss the suit under Corwin, which invokes business-judgment protections when a majority of fully informed, disinterested and uncoerced shareholders approve a corporate transaction. Under that framework, they said, Lavin could only challenge the merger on the grounds of waste, which he had not stated as a basis for his demand.

Lavin, on the other hand, argued that applying Corwin in books-and-records litigation would distract from the fundamental question of whether there is a credible basis to suspect potential wrongdoing by a company's directors.

In his ruling, Slights said West's position would distort the purpose of books-and-records litigation and undermine Delaware law, which encourages stockholders to use the “tools at hand” to gather information before filing complaints that will be subject to heightened pleading standards.

“Any contrary finding would invite defendants improperly to draw the court into adjudicating merits defenses to potential underlying claims in order to defeat otherwise properly supported Section 220 demands,” he said.

“Equally compelling, the court should not (and will not here) prematurely adjudicate a Corwin defense when to do so might deprive a putative stockholder plaintiff of the ability to use Section 220 as a means to enhance the quality of his pleading in a circumstance where precise pleading, under our law, is at a premium.”

Slights did, however, limit the scope of production from the 13 categories Lavin initially sought to the five that most related to the purpose for his demand. Randall J. Baron, who represented Lavin, said he and his client would review the documents before deciding whether to file a class action.

“From our perspective, we are actually doing it the way the court wants us to do it,” by using book-and-records litigation to investigate allegations of corporate wrongdoing, said Baron a partner with Robbins Geller Rudman & Dowd.

An attorney for West declined to comment on Tuesday.

Lavin was represented by Baron, David T. Wissbroecker and Christopher H. Lyons of Robbins Geller; Peter B. Andrews, Craig J. Springer and David M. Sborz, of Andrews & Springer and W. Scott Holleman, of Johnson Fistel.

West was represented by Walter C. Carlson, Nilofer Umar and Elizabeth Y. Austin of Sidley Austin and Kevin R. Shannon, Christopher N. Kelly and Daniel M. Rusk of Potter Anderson & Corroon.

The case was captioned Lavin v. West.