C.A. No. 3893-VCL (February 26, 2009) (Lamb, V.C.)
The Court of Chancery granted defendant’s motion to dismiss in this books and records action, finding that plaintiff was merely attempting to circumvent a stay of discovery in a simultaneous federal lawsuit and, therefore, had failed to state a proper purpose as required under Section 220 of the DGCL.
The plaintiff had originally filed a derivative complaint against the defendant in federal district court that was twice dismissed for failure to adequately plead demand futility. At the time of the second dismissal, the district court granted the plaintiff leave to amend his complaint once more but kept in place the stay of discovery imposed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The plaintiff then filed this books and records action, asserting the investigation of possible mismanagement as one of his purposes. The Court of Chancery refused to accept this purpose on its face, stating that a plaintiff may not merely state a generally accepted proper purpose in a conclusory manner but must also state what it will do with such information, i.e. provide the Court with an end to which that investigation may lead. While a plaintiff would normally utilize this information to aid in the filing of a subsequent lawsuit, the Court of Chancery found that the plaintiff could not possibly assert such a reason, having already filed his federal derivative claim some 20 months prior, and concluded that plaintiff’s only true reason for needing this information was to aid in the federal action through discovery that had already been foreclosed by the PSLRA.
Noting that the PSLRA was intended to reduce abusive litigation practices in certain federal lawsuits and prevent plaintiffs from fleeing to state court to obtain discovery, the Court of Chancery stated that it would allow Section 220 actions to proceed in the face of a PSLRA mandated stay of discovery only where (1) the 220 plaintiff was not currently involved in the federal action, (2) the 220 plaintiff’s counsel was not currently involved in the federal action, and (3) the 220 plaintiff agreed to enter a confidentiality agreement preventing him from sharing the information obtained with the plaintiff or his counsel in the federal action. With none of the three criteria applying to the plaintiff, the Court of Chancery refused to allow the plaintiff to circumvent the PSLRA and granted defendant’s motion to dismiss.
The full opinion is available here