In Schoon v. Troy Corp., 2006 WL 1851481 (Del. Ch. June 27, 2006), plaintiff Richard Schoon, a director of Troy Corporation (“Troy”), commenced an action under Section 220(d) of Delaware’s General Corporation Law, which establishes a director’s right to inspect the books and records of a corporation. Schoon alleged that Troy wrongfully denied his request—in his capacity as a director—for inspection of Troy’s books and records. Troy is a privately- held corporation, and Schoon was elected to the Board of Directors of Troy (the “Board”) by Steel Investment Company (“Steel”), the holder and owner of approximately 95 percent of the Series B common stock of Troy (the “Series B”), which represented approximately 33 percent of the outstanding capital stock of Troy. As the holder of the Series B, Steel is entitled to elect one member to the fivemember Board.

Specifically, in August 2005, Schoon requested that Troy provide him with certain documents and updates “to fulfill his fiduciary duties as a director of Troy.” Troy offered to produce all of the records demanded if Schoon performed the inspection of the books and records at Troy’s headquarters and executed a confidentiality agreement that prohibited Schoon from sharing information with Steel. Schoon objected to these conditions. Troy insisted that these conditions were necessary because Steel should not be permitted to circumvent Section 220(b) of the Delaware General Corporation Law, which establishes a stockholder’s right to inspect and copy the books and records of a corporation, by obtaining information from Schoon that Schoon received under Section 220(d). Ultimately, Schoon filed this action. In addition to Schoon’s action under Section 220(d), Steel commenced an action under Section 220(b), which sought information similar to the information sought by Schoon. The action commenced by Schoon and the action commenced by Steel were consolidated.

During a one-day trial, Troy argued that Schoon’s request for inspection was not made in good faith to fulfill his fiduciary duties as a director of Troy, but rather, was based upon an improper purpose – i.e., Troy claimed that Schoon’s request was made at the behest of Steel and that Steel intended to use the requested information to facilitate the sale of Troy stock held and owned by Steel to third parties, which included competitors of Troy. In support of its argument, Troy asserted various facts including the fact that Steel authorized and approved a commission to Schoon of up to $500,000 if Schoon was able to sell Steel’s shares on or before December 2005. After the trial, the Delaware Court of Chancery held post-trial argument and, after argument, denied Schoon’s request for relief. In its written decision, the Court summarized its holding regarding Schoon:

To summarize, the court found that Troy established at trial that Schoon’s request for inspection of the company’s books and records was not for a proper purpose reasonably related to his position as a director. Rather, Schoon’s request for inspection of Troy’s books and records was made in consultation with and at the direction of Steel to obtain information for Steel so that it could sell its equity stake in Troy. Most telling, Steel authorized and approved a commission to Schoon of up to $500,000 if Schoon was able to sell Steel’s shares in Troy by December 2005. Therefore, it is clear that Schoon’s request for inspection of Troy’s books and records was made when he had a financial incentive to assist Steel in selling its shares at the highest price attainable. Due to this undisclosed conflict of interest, the court cannot find that Schoon’s request was made for a purpose related to his directorial duties, and therefore did not grant any relief to Schoon.

Although holding that Schoon’s request for information was not “made for a purpose related to his directorial duties,” the Court also held that Steel demonstrated a “proper purpose” at trial and was entitled to the information that Steel requested subject to a confidentiality order that the Court entered after receiving competing proposed orders from the parties:

The court is cognizant of Troy’s legitimate concern that it will be harmed if its competitors are permitted access to its proprietary and confidential business information. Therefore, in determining the proper inspection relief, the court must balance the stockholder’s statutory right to inspect the corporation’s books and records with the corporation’s legitimate interest to safeguard its highly confidential information from its competitors. With this problem in mind, the court will now turn to the parties’ competing proposed confidentiality orders and prescribe the necessary limitations and conditions.

After the Delaware Court of Chancery’s decision, Schoon filed a motion for reargument on the issue of whether Schoon had a proper purpose for seeking to inspect the books and records of Troy. The Court denied the motion (2006 WL 2162036), but clarified its holding and stated:

Trial in this consolidated action was delayed due to the parties’ efforts to resolve their dispute amicably and a related stay of the litigation. As it happened, this delay served to moot Schoon’s request, as all parties recognize. Thus, at the time of the post-trial argument, Schoon’s counsel represented there was no part of Schoon’s request that was “still viable.” In other words, by the time of trial and post-trial argument, Schoon’s complaint was moot.

In light of this fact, the court’s views expressed at the June 8 hearing about Schoon’s purpose in making his demand, and the recapitulation of those views at pages 3-4 of the Memorandum Opinion are mere dicta and do not constitute judicial findings that could have preclusive effect in any other litigation between the parties