In the recent decision of CHC Investments LLC v. Firstsun Capital Bancorp, C.A. No. 2018-0610-KSJM (Del. Ch. Jan. 24, 2019), the Court of Chancery dismissed a books and records action brought pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”), in light of a parallel pending plenary action. The Court stated that seeking inspection under Section 220 of the DGCL to investigate pending claims is problematic for a number of reasons.
First, Vice Chancellor McCormick noted that plenary and Section 220 complaints are “inherently contradictory”, because by filing a plenary complaint, a stockholder represents that it has sufficient information to file the action. On the other hand, to commence a books and records action to support a plenary claim, “a stockholder must represent that the information is necessary to its plenary claims.” Slip op. at 7.
Second, using “Section 220 inspections to investigate pending plenary claims undermines well-established discovery law”, as “discovery rules dictate what information relevant to its claims the stockholder may receive and when the stockholder may receive that information.” Slip op. at 7.
However, notwithstanding the above points, “in special circumstances”, a books and records demand has been granted while a plenary action is pending. Slip op. at 8. Such special circumstances include where a plenary action has been dismissed but with leave to amend, (King v. VeriFone, 12 A.3d 1140 (Del. Jan. 28. 2011)), or when a plaintiff must comply with a statute of limitations and the “timing pressures are caused by the defendant, or, at least, not caused by the plaintiff.” Slip op. at 9 (citing Khanna v. Covad Communications Group, Inc., C.A. No. 20481-NC, 2004 WL 187274 (Del. Ch. Jan. 23, 2004)).
Here, the Court found that plaintiff failed to demonstrate that special circumstances existed, and therefore granted defendant’s motion to dismiss the books and records complaint.
Key Takeaway: This decision reinforces the notion that a books and records action, when brought to obtain information to support a potential plenary action, should be adjudicated prior to filing the plenary action itself. Absent special circumstances, the books and records action may be subject to dismissal.