As discussed in prior posts, in order to prevail in a books and records inspection action, the petitioning party must demonstrate a “proper purpose” for making such demand. Moreover, when the purpose is to investigate alleged wrongdoing by a board, a “credible basis” to infer such wrongdoing must exist. [Click here for a post discussing a Delaware Chancery decision supporting this widely-accepted proposition, Southeastern Transportation Authority v. Abbvie, Inc., C.A. No. 10374-VCG (Del. Apr. 15, 2015).]
The recent decision by the Delaware Court of Chancery, Beatrice Corwin Living Irrevocable Trust v. Pfizer, C.A. No. 10425-JL (Del. Ch. Aug. 31, 2016, corrected Sept. 1, 2016) upheld this maxim. There, the Court considered whether a plaintiff’s stated purpose was proper in connection with inspecting claims of wrongdoing.
The action was brought by the trustees of a trust to inspect books and records of a public company for the purpose of valuing the trust’s shares and investigating possible mismanagement. The plaintiffs asserted that the company violated accounting and disclosure laws by failing to calculate and disclose a particular deferred tax liability.
Former Master, and current Superior Court Judge, the Honorable Abigail LeGrow, found that plaintiffs have shown no credible basis to infer mismanagement or wrongdoing by the board. The Court found that an obvious defense to the purported claim existed—the board’s reliance on an audit firm for a complicated accounting issue—and thus denied inspection.