Del. Supreme Court Reverses Chancery Ct., Notes Court's Wide Authority Under 220

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By Michael Greene

Dec. 23 — Under certain circumstances, a Delaware corporation can require a stockholder to consent to a forum selection provision as a condition for inspecting books and records, according to a Dec. 23 Delaware Supreme Court ruling.

The Supreme Court found that the Delaware Chancery Court can use its broad discretion to impose this type of restriction because there is nothing in the plain text of DGCL § 220(c) that limits the court otherwise.

“In restricting a stockholders ability to use corporate books and records in certain ways, Delaware case law has consistently reflected the underlying principle that the stockholders inspection right is a ‘qualified' one,'” the court noted.

“Accordingly, the Court of Chancery has wide discretion to shape the breadth and use of inspections under [Delaware General Corporation Law] § 220 to protect the legitimate interests of Delaware corporations.”

Because the chancery court never analyzed whether the requested restrictions were within its discretion, the Supreme Court reversed and remanded the books and records action.

Inspection Request

In the underlying case, the plaintiff stockholder sent a litigation demand letter requesting that United Technologies “investigate, address, remedy, and commence proceedings” against certain officers and directors for claims that arose out of a 2012 investigation by the U.S. Department of Justice.

United Technologies agreed to allow the plaintiff to inspect most the requested documents on the condition that he first sign a confidentially agreement, but the plaintiff refused because it contained a provision requiring him to bring any lawsuit arising out of the inspection in Delaware.

Subsequently, the plaintiff filed a §220 action in the Delaware Chancery Court seeking access to the books and records without any usage restrictions.

Broad Authority

The high court held that the chancery court erred in concluding that it lacked the statutory authority to impose the defendant's requested restriction.

The court found that there was no textual or precedent-based reason that the lower court could not impose this type of restriction.

The Delaware Supreme Court rejected the lower court's basis for denying this type of restriction: there are other mechanisms for limiting the forum in which a lawsuit may be brought—such as a bylaw or charter provision.

“Section 220(c) of the DGCL gives broad discretion to the Court of Chancery to condition a books and records inspection,” the Supreme Court opined, noting that “Delaware courts have viewed whether to impose a condition or limitation on an inspection as inherently ‘case-by-case' and ‘fact specific.'”

Accordingly, the chancery court could have used its “wide discretion” to allow this type of restriction.

Factors to Weigh

The Supreme Court, however, declined to determine whether the chancery court should exercise its discretion to grant the novel restriction in this case because it never analyzed any relevant considerations.

However, the Supreme Court did cite several factors for the chancery court to weigh, including: “(i) the fact that [plaintiff] seeks to file claims arising out of the same corporate conduct that was already the subject of derivative litigation in the Court of Chancery and this Court; (ii) United Technologies' legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the courts of this state; (iii) United Technologies' adoption of a forum selection bylaw that represents a non-case-specific determination by its board of directors that internal affairs litigation involving the company should proceed in a single forum; and (iv) the investment the corporation has already made (which comes at a cost to its stockholders) in defending not only the prior derivative litigation in the Court of Chancery, but also this § 220 action.”

Additionally, the court noted that the chancery court could give weight to the fact that the plaintiff was unable to articulate any reason why he needed to file a lawsuit in another forum and that he had not shown that his rights would be unreasonably restricted by the requested limitation.

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