Delaware Supreme Court to Chancery: You Have Broad Powers

Books-and-records litigation does not typically grab headlines. In fact, few cases litigated under Section 220 of the Delaware General Corporation Law result in written opinions authored by the Delaware Supreme Court. Nevertheless, books-and-records litigation is vibrant in Delaware. Books-and-records requests are the “tools at hand” Delaware courts encourage stockholders to use prior to filing derivative litigation. However, a stockholder’s right to a Delaware company’s books and records is not unfettered. Aside from needing to satisfy the preconditions set forth in Section 220, the Delaware Supreme Court recently apprised the Court of Chancery that it is within the Chancery Court’s authority to restrict the use of certain books and records where equitable.

In United Technologies v. Treppel, No. 127, 2014 (Dec. 23, 2014), the Delaware Supreme Court held that the Court of Chancery has the authority to limit the use of books and records provided pursuant to Section 220. The underlying action involved a stockholder, Lawrence Treppel, who issued a books-and-records inspection request under Section 220 upon United Technologies Corp., a Delaware corporation. Treppel had previously issued a litigation demand letter to United Technologies’ board of directors relating to a U.S. Department of Justice investigation of potential federal violations committed by United Technologies. The board rejected Treppel’s litigation demand, which ultimately led to Treppel requesting books and records concerning United Technologies’ evaluation of Treppel’s litigation demand and the board’s refusal to pursue litigation. United Technologies agreed to allow Treppel to inspect most of the documents he requested subject to his execution of a confidentiality agreement, which included a provision requiring any lawsuit arising out of, involving, or in connection with Treppel’s inspection be brought in Delaware. Treppel refused to bind himself to suing in Delaware. Unable to bridge the impasse, Treppel filed his Section 220 lawsuit seeking inspection of United Technologies’ books and records without any usage restriction. It is worth noting that at the time Treppel filed his Section 220 action, United Technologies’ bylaws did not contain a forum selection clause requiring suits against the company be brought in Delaware; however, during the Section 220 litigation, United Technologies’ board adopted such a bylaw.