Understanding and Mitigating the Risks Involved When Stockholder Books and Records Actions Are Asserted Outside of Delaware

About the Authors:

Matthew D. Stachel is an associate in the Corporate Litigation Group of the Wilmington, Delaware, law firm of Potter Anderson & Corroon LLP. The opinions expressed in this article are those of the author and do not necessarily reflect the views of Potter Anderson & Corroon LLP or its clients. The author would like to express his appreciation to Michael A. Pittenger for his comments on this article.

When a stockholder of a Delaware corporation litigates in Delaware to compel the inspection of the corporation’s books and records pursuant to 8 Del. C. § 220(c), such an action must be asserted in Delaware’s Court of Chancery – not any other Delaware trial-level court – due to a statutory provision vesting exclusive jurisdiction in the Court of Chancery. With seeming increased frequency, however, books and records actions pursuant to Section 220(c) are being asserted in jurisdictions outside of Delaware. The reasons why stockholders and their counsel choose to assert such actions outside of Delaware likely vary. The primary motivations may stem from the perception that it is less expensive, more convenient, and more efficient to bring such actions in another forum. For example, most stockholders of Delaware corporations do not reside in Delaware and thus may believe litigating in a more convenient forum will be less costly. In addition, the stockholders’ counsel may perceive a forum outside of Delaware as more convenient because counsel may be more familiar with the rules, procedures, and practices of that forum. Stockholders and their counsel may also believe it to be more efficient to litigate a books and records claim in another forum where that claim is asserted in addition to other claims in a broader action commenced outside of Delaware.

In many instances, however, federal and state courts outside of Delaware have concluded that the statute’s exclusive jurisdiction provision divests those courts of subject matter jurisdiction to determine stockholder books and records actions under Section 220(c). While unlikely that Section 220(c) was intended to be read this broadly, Delaware corporations and their stockholders should carefully consider the ramifications of this body of case law. At the same time, they should consider the risks involved in litigating a books and records action under Section 220(c) outside of Delaware, including the risks involved where such actions are not dismissed for lack of subject matter jurisdiction. 

When books and records actions under Section 220(c) are instituted outside of Delaware, litigants face two distinct risks. The first risk is that time and resources will be wasted if the action asserted outside of Delaware is ultimately dismissed for lack of subject matter jurisdiction, as many courts outside of Delaware have done. Even assuming a court outside of Delaware concludes it has subject matter jurisdiction, the second risk is that the parties may lose the procedural and substantive advantages of litigating a books and records action under Section 220(c) before the Court of Chancery. Among those advantages are the summary treatment afforded to books and records actions, a well-developed body of case law concerning Section 220(c) inspection rights, and the Court of Chancery’s familiarity both with that body of law and with books and records actions in general. The cumulative effect of these advantages is that litigating Section 220(c) actions in Delaware generally provides greater procedural and substantive certainty. 

Practitioners counseling Delaware corporations and stockholders should carefully consider these risks and steps to mitigate them. As one means of mitigating these risks, Delaware corporations may wish to adopt forum selection bylaws, which would require all Section 220(c) actions (and other internal affairs matters) to be asserted in Delaware. 

A Brief Historical Background of Section 220(c) 

Section 220(c) provides that under certain circumstances a stockholder of a Delaware corporation may compel the corporation to permit the stockholder to inspect corporate books and records. The statute also vests “exclusive jurisdiction” in the Court of Chancery to adjudicate any such actions. But this was not always the case. Before 1967, stockholder books and records actions were governed by the common law and asserted in the Delaware Superior Court. When asserting such actions, the stockholder plaintiffs sought a writ of mandamus – a remedy at law – compelling the corporation to permit inspection of its books and records. Because Delaware maintains separate courts of law and equity, the Court of Chancery’s jurisdiction is limited to those situations in which a party asserts an equitable right, seeks an equitable remedy, or pursues relief under a statutory grant of jurisdiction. The Court of Chancery, therefore, historically did not have subject matter jurisdiction to consider common law stockholder books and records actions. 

All of that changed in 1967 when Delaware’s General Assembly comprehensively revised the General Corporation Law of the State of Delaware. The revisions included the codification of stockholder common law inspection rights in 8 Del. C. § 220(c). As part of that codification, Section 220(c) specified that “[t]he Court of Chancery is hereby vested with exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought.” (Emphasis added.) The new statutory grant of exclusive jurisdiction provided the Court of Chancery with subject matter jurisdiction to decide what had formerly been actions at law. 

Section 220(c)’s exclusive jurisdiction provision thus appears to have been designed as an intrastate reallocation of subject matter jurisdiction necessitated by Delaware’s maintenance of separate courts of law and equity. Whether the General Assembly intended to deprive courts outside of Delaware of the ability to hear books and records actions under Section 220(c) is not directly addressed in the statute or in Delaware case law. 

In Johnston v. Caremark RX, Inc., the Court of Chancery addressed the import of a similar statutory grant of exclusive jurisdiction under 8 Del. C. § 145(k). The parties disputed whether the Court of Chancery should dismiss or stay a later-filed Delaware action regarding advancement and indemnification rights under 8 Del. C. § 145 in deference to arbitration and litigation first commenced in Alabama. The plaintiff asserted that the Court of Chancery had exclusive jurisdiction over actions arising under Section 145(k), which is similar to Section 220(c)’s exclusive jurisdiction provision. Because the plaintiff had already asserted Section 145 claims in an Alabama court, the defendants argued that the Alabama court should retain jurisdiction and simply apply Delaware law. The Court of Chancery agreed with the defendants, reasoning that Delaware “clearly d[id] not have exclusive jurisdiction over [the dispute].” The Court of Chancery explained that Section 145(k) does, however, provide it with jurisdiction “exclusive of any other Delaware court . . . when it is appropriate to hear [such disputes] in Delaware.” Moreover, the Court of Chancery reasoned that, “[w]hile Delaware certainly has a compelling interest in its General Corporate Law, other states are capable of applying Delaware law.” 

Construction of Section 220(c) by Many Courts Outside of Delaware 

A significant number of both federal and state courts outside of Delaware have held, or otherwise indicated, that Section 220(c)’s exclusive jurisdiction provision divests all courts besides the Delaware Court of Chancery of subject matter jurisdiction over a books and records action. The chief rationale of those cases adopting this position is that the plain language of Section 220(c) requires such suits to be asserted in the Court of Chancery. 

For example, in Foti v. Western Sizzlin Corp., (2004 WL 2848398), a Virginia Circuit Court held, on a motion to dismiss, that it lacked subject matter jurisdiction to consider a books and records claim under Section 220(c) because “the Delaware Court of Chancery has exclusive jurisdiction to order inspection under [Section 220].” Relying solely on the plain language of Section 220(c), the court further reasoned that “neither the Constitution of Virginia nor the [Virginia] General Assembly grant[ed] authority to supercede” the exclusive jurisdiction restriction imposed by the Delaware statute. The court also explained that “[j]ust as decisions of one state’s highest court, interpreting the laws of that jurisdiction, become controlling authority in all other State and Federal courts, comity suggests that limitations one state’s legislature places on its own laws be universally acknowledged.” 

In the 10 years since Foti was decided, courts outside of Delaware have reached similar conclusions in at least six other written opinions. Those decisions have applied similar reasoning to conclude or otherwise suggest that Section 220(c)’s exclusive jurisdiction provision divests them of subject matter jurisdiction over such actions. 

Construction of Section 220(c) by Other Courts 

Notwithstanding the growing trend, some courts outside of Delaware have held, or otherwise indicated, that Section 220(c)’s exclusive jurisdiction provision does not prevent those courts from hearing a books and records action pursuant to that statute. In Anderson v. Children’s Corner, Inc., (2011 WL 925442), for example, a Connecticut Superior Court held that Section 220(c)’s exclusive jurisdiction provision did not divest it of subject matter jurisdiction. In that case, the defendant moved to dismiss the plaintiff’s Section 220(c) action, arguing that the Court of Chancery was vested with exclusive jurisdiction over such actions. Acknowledging a split among courts considering the issue, the Connecticut court explained that the exclusive jurisdiction provision only affected the ordering of jurisdiction among Delaware courts. The Connecticut court reasoned that, prior to 1967, the jurisdiction to order inspections of corporate books and records under Section 220 was vested in two separate Delaware courts: the Superior Court and the Court of Chancery. In 1967, however, the Court of Chancery was granted exclusive jurisdiction “so matters could be resolved expeditiously by one trial-level court.” “[I]n light of the statutory history of the creation of [the exclusive jurisdiction] language,” the Connecticut court declined to find that “the Delaware legislature was divesting sister states [of] jurisdiction to hear a claim under the statute[,]” but rather, “[w]as seeking to address the relationship between the state’s two trial-level courts.” The Connecticut court also distinguished Foti by holding that, unlike in Virginia “where subject matter jurisdiction may only be conferred on the courts by the constitution or general assembly, the jurisdictional principle of Connecticut presumed that the [Connecticut] Superior Court has jurisdiction [over the claim].” 

Over two years later, in Carbone v. Nxegen Holdings, Inc., (2013 WL 5781103), another Connecticut Superior Court disagreed with Anderson and held that the plain language of Section 220(c) divested it of subject matter jurisdiction over a stockholder’s Section 220(c) claim. The Carbone court reasoned that the Anderson court failed to conduct a “proper statutory analysis” by relying exclusively on “Delaware statutory history and committee reports” without identifying the statutory construction rules it was applying or “try[ing] to determine the meaning of the statute based on the language of the statute alone.” The Carbone court explained that the statutory history and committee reports should not have been considered because of the unambiguous “legislative intent manifested in the language of Section 220(c),” which “requires this court to conclude that a Delaware corporation’s shareholder may only use § 220 in the Delaware Court of Chancery.” The Carbone court nevertheless concluded that Connecticut law should be applied to the dispute and cou3ld provide the plaintiff with the right to inspect some corporate books and records. 

Practical Suggestions for Delaware Corporations and Their Stockholders 

Given the many opinions issued by courts outside of Delaware concluding that Section 220(c)’s exclusive jurisdiction provision divests courts outside of Delaware of subject matter jurisdiction, Delaware stockholders and corporations face a significant risk of wasted resources and time when such claims are asserted outside of Delaware because they may be dismissed for lack of subject matter jurisdiction. Such non-merits dismissals of Section 220(c) actions do not benefit Delaware corporations or their stockholders. 

Even if a court outside of Delaware concludes that Section 220(c) does not divest it of subject matter jurisdiction, the Delaware corporation and its stockholders may risk losing many of the procedural and substantive advantages of litigating a books and records action in the Court of Chancery. A key procedural feature of litigating Section 220(c) actions in Delaware is their summary nature. Section 220(c) explicitly provides that “[t]he Court may summarily order the corporation to permit the stockholder to inspect the corporation’s [books and records].” The Court of Chancery thus accords books and records actions summary treatment, which ordinarily means that discovery and other pre-trial proceedings are accelerated and trial on the merits often will be held within 60–90 days after the filing of the complaint. At least one court outside of Delaware, (Synchron, Inc., 757 So.2d at 565–66), has signaled that it would not treat a Section 220 action as a summary proceeding in the same manner as the Court of Chancery, even if it had subject matter jurisdiction. 

When a books and records action is litigated outside of Delaware, Delaware corporations and stockholders also risk losing the substantive advantages of litigating such an action before the Court of Chancery. Those advantages include the Court of Chancery’s familiarity with Section 220(c) actions in general and with the well-developed body of case law concerning Section 220(c) inspection rights. This works to ensure that the Court of Chancery is well positioned to provide meaningful expedited treatment of books and records actions and also helps to ensure predictability of outcomes, facilitating the frequent settlement of such actions and the resulting cost-savings to all parties. 

Practitioners advising stockholders of Delaware corporations should carefully consider the benefits of asserting books and records claims in Delaware and the risk of having such claims dismissed on non-merits grounds in a proceeding outside of Delaware. Indeed, in light of the procedural and substantive advantages of litigating books and records actions under Section 220(c) in the Court of Chancery, as noted above, many of these actions are amicably resolved soon after a complaint is filed. As a result, stockholders asserting these claims in Delaware could reduce the risk of wasted time and resources from either a non-merits dismissal or a less expedited procedural track towards resolution.

Practitioners advising Delaware corporations should also consider that having stockholders assert books and records actions exclusively in Delaware fosters substantive and procedural certainty – aiding in the efficient resolution of books and records disputes. As one way of ensuring books and records actions are asserted in Delaware, practitioners should consider encouraging their clients to adopt forum selection bylaws, which would require Section 220(c) actions (and other matters involving internal corporate governance) to be asserted in Delaware. Both Delaware courts and courts outside of Delaware have upheld and enforced such bylaws, which help to provide Delaware corporations with the certainty that actions asserted by stockholders relating to the internal affairs of the corporations will be asserted in Delaware.

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