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April 29 — Litigation over whether companies must hand over internal documents to shareholders can become hotly contested legal battles that stretch out longer than a year.
According to a Bloomberg BNA review of books and records cases over the past three years, almost 70 percent of the lawsuits—140 actions out of the 206 complaints filed—have taken more than three months to resolve. A fifth of the lawsuits—14 out of 71 cases in 2013 and 15 out of 73 cases in 2014—took over a year.
Such actions have been described by the Delaware courts as “tools at hand” to help shareholders clear the demand-futility hurdle for derivative cases.
While the longer processes are costing both shareholder plaintiffs and defendant corporations time and money, the plaintiffs especially are hurt by the delay, their attorneys told Bloomberg BNA.
“When you put it all together—the delay in getting to a ruling and then getting your documents, the costs of proceedings more complex than needed, the narrow scope of documents you can get and the possibility that defendants can now litter the record with their own side of the story—books and records actions can evolve from the `tools at hand' to a `Trojan horse,'” said Mark Lebovitch, a New York-based partner at Bernstein Litowitz Berger & Grossmann LLP who heads his firm's corporate governance litigation practice.
A representative from the Delaware courts didn't immediately respond to a request for comment.
Books and records lawsuits are summary proceedings that shouldn't take more than a few months, attorneys told Bloomberg BNA.
Under Delaware law, shareholders have the right to inspect a company’s books and records to investigate potential wrongdoing and for other legitimate purposes. If the company refuses an inspection demand, the shareholder can initiate a lawsuit to compel the inspection. Such actions are taken under Sections 220, 18-305 and 17-305 of the Delaware General Corporation Law or pursuant to a stockholder agreement.
Under state law, shareholders that bring derivative lawsuits on behalf of their companies must show they made a pre-litigation demand on the company's board, unless doing so would be futile. Delaware judges have urged shareholder plaintiffs to use books and records inspections and other tools to meet the demand-futility requirement.
According to Bloomberg BNA's review, there were:
Moreover, of the 62 cases filed in 2015, at least 19 actions have taken more than six months so far.
In the review, a case is considered resolved if it was dismissed or consolidated into another action.
As the Delaware courts have become more demanding about the specificity of derivative complaints, it has put pressure on books and records actions, Lawrence Hamermesh, a professor at Widener University Delaware Law School, told Bloomberg BNA.
Issues can emerge over the adequacy of the purpose, the scope of the demand, and whether the company can impose conditions on the inspection, Hamermesh said. Sometimes these lawsuits can drag on partly because of litigation negotiations, he said. “I'm sure the court of chancery does what it can,” but it is sometimes challenging to avoid issues that can lengthen the proceedings.
Companies that litigated books and records actions that have lasted over a year include Wal-Mart Stores Inc. , Citigroup Inc. , lululemon athletica Inc. , ITT Educational Services Inc. , and AbbVie Inc. .
Plaintiff attorneys that spoke with Bloomberg BNA said corporate defendants are purposely dragging out books and records lawsuits, making them needlessly expensive and burdensome for shareholders.
“Sometimes you'll get a defendant that wants to delay, delay, delay, and sometimes they have been successful,” Megan D. McIntyre, a director at Grant & Eisenhofer PA, told Bloomberg BNA.
One major concern about protracted books and records cases is that while they drag on, other shareholder plaintiffs could file a lawsuit over the same matter in another jurisdiction, the attorneys said. When the plaintiff's books and records action finally comes to an end, its subsequent derivative lawsuit could end up being dismissed on the grounds that other plaintiffs already have litigated the issue.
McIntyre also noted that her firm recommends that clients use books and records demands to gather facts before accusing somebody of misconduct. In the meantime, other law firms jump right into a breach of fiduciary case, putting her firm in a difficult position if the books and records lawsuit takes too long, she said.
This state of affairs undermines what the Delaware Supreme Court wanted, which is to encourage the “use of the tools” at hand, said McIntyre, whose firm represented the shareholders who sued Wal-Mart in its books and records dispute. That litigation took more than two years to resolve.
Lebovitch told Bloomberg BNA that Delaware forum selection bylaws may exacerbate the problem because they can be strategically utilized. He said that boards can unilaterally waive such provisions to allow an inferior out-of-state derivative suit to proceed, while bogging down other more viable lawsuits in Delaware through lengthy books and records actions.
On the other hand, defense attorneys told Bloomberg BNA that the length of books and records actions aren't an issue.
“I wouldn’t say there is a problem with the speed at which books and records actions proceed,” Jordan Eth, a San Francisco-based partner at Morrison & Foerster LLP, said.
Eth, who co-chairs his firm's Securities Litigation, Enforcement, and White-Collar Criminal Defense Group, noted that Delaware courts are flexible in meeting litigants' demands. He also suggested that 60 to 90 days is quick in the legal world. Sometimes companies will get a letter demanding an inspection and may not hear from the other side for months, he said.
Similarly, Martin S. Lessner, a Wilmington, Del.-based partner at Young Conaway Stargatt & Taylor LLP, told Bloomberg BNA that many books and records disputes are resolved quickly. Books and records lawsuits seeking to investigate misconduct for a potential derivative action are more complicated cases, Lessner said.
Lessner, who practices in the areas of corporate and commercial litigation, also said the chancery court is sensitive to litigants' needs. Parties present schedules and the court resolves scheduling disputes. The court doesn't have a mechanical calendar that says how long a case should take, he said.
While the length of the litigation isn't a problem, defense attorneys are concerned over the growing number of inspection demands and the scope of such requests. They also noted that companies can get multiple demand letters based on the same issue.
For a relatively low price, plaintiffs can exact a financial toll on companies, Eth said. “They can be expensive and intrusive and often done to set the company up for a lawsuit that will also be expensive and intrusive.”
However, Lessner said that books and records demands may be better than the alternative of companies facing more derivative lawsuits. To the extent that books and records cases act as a filter to ensure that only meritorious derivative actions are later filed, that can be better for defendant corporations, he said.
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