King v. VeriFone Holdings, Inc.

Supreme Court of Delaware · Corporations

CorporationsDerivative litigationBooks and records inspectionDemand futilitySection 220proper purposedemand futilityderivative suit

Facts

King, a VeriFone stockholder, first filed a derivative action in California federal court alleging breaches of fiduciary duty and corporate waste arising from misstated financial results and internal control problems. The federal court dismissed that complaint without prejudice for failure to plead particularized facts excusing demand, and suggested that King use a Delaware Section 220 action to obtain additional facts. King then demanded inspection of certain records; the only unresolved item was the Audit Committee Report from VeriFone's internal investigation. He filed this Section 220 action seeking that report and related materials to help plead demand futility in an amended derivative complaint.

Issue

Whether a stockholder who filed a derivative action before using Section 220 is, for that reason alone, legally precluded from later pursuing a Section 220 books-and-records inspection. More specifically, the question was whether King's earlier derivative filing meant he lacked a proper purpose under Section 220.

Rule

Under Delaware law, a stockholder has a proper purpose under Section 220 when seeking books and records to obtain facts needed to plead demand futility in a to-be-amended derivative complaint, where the earlier-filed derivative complaint was dismissed on demand-futility-related grounds without prejudice and with leave to amend. Filing the derivative action first may be imprudent, but it does not by itself bar a later Section 220 action.

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Nina Patel owns shares of Harbor Grid Systems, a Delaware corporation headquartered in Seattle. She filed a derivative suit in federal court in Oregon alleging board oversight failures, and the court dismissed the complaint without prejudice for failure to plead demand futility with particularity, expressly granting leave to amend; Nina then filed a Delaware books-and-records action seeking board committee materials to help replead demand futility.

Does Nina have a proper purpose for the Delaware inspection demand?

Explanation. The majority rejected a bright-line rule that filing a derivative action first automatically defeats proper purpose. When an earlier derivative complaint was dismissed on demand-futility-related grounds without prejudice and with leave to amend, inspection to gather particularized facts for an amended complaint is a proper purpose reasonably related to stockholder interests.