On December 23, 2014, the Delaware Supreme Court reversed a Chancery Court decision that it lacked authority to limit the use of information obtained through a books and records inspection under Section 220 of the Delaware General Corporation Law to legal action in a Delaware court. United Technologies Corp. v. Treppel (Del. December 23, 2014). Books and records inspections are frequently a precursor to derivative litigation, and in those situations—which generally do not include challenges to M&A transactions—the decision may enable corporate defendants to have choice of forum issues resolved in a Delaware court rather than through motions to dismiss in the other jurisdiction in which a case may be brought.

The United Technologies litigation grew out of a demand by Mr. Treppel, a United Technologies stockholder, that the company investigate and pursue potential claims against certain officers and directors arising from violations of export control laws that had been the subject of settlements with the United States Department of Justice and State Department. The board rejected Mr. Treppel’s demand and he responded with a Section 220 inspection request seeking to evaluate the board’s decision. United Technologies was willing to provide most of the requested material, but insisted on a confidentiality agreement requiring that any litigation arising out of the inspection be brought in a Delaware court. Unwilling to agree to such a condition, Mr. Treppel commenced an action in the Chancery Court to obtain books and records access without usage restrictions. The Chancery Court concluded that Mr. Treppel had established a proper purpose for inspection and that it lacked authority to restrict his use of the material obtained through the inspection to litigation in the Delaware courts. Writing for the Supreme Court en banc, Chief Justice Strine held that “because the plain text of Section 220 provides broad power to the Court of Chancery to condition a books and records inspection, the court erred in determining that it lacked authority under the statute to impose the requested restriction” and remanded so that the Chancery Court could consider whether such a condition was appropriate in this case. In his opinion, Chief Justice Strine identified factors that the Chancery Court could consider in determining whether to impose the usage restriction requested by United Technologies, including the company’s interest in having the underlying issues of Delaware law determined by the Delaware courts and its adoption of a forum selection by-law requiring that internal affairs litigation be brought in the Delaware courts.

Although the validity of United Technologies’ forum selection by-law was not directly before the Court, Chief Justice Strine’s opinion leaves little doubt as to his view that the United Technologies board had the statutory power to adopt the by-law, that it serves legitimate corporate interests and such a by-law need not be adopted on a “clear day”—the United Technologies by-law was adopted after the events that Mr. Treppel sought to investigate and while the books and records litigation was pending.