A possible new pre-requisite to filing a derivative complaint – conducting a books and records inspection
In a recent Delaware case from June 3, 2010, the Delaware Court of Chancery held that when a books and records inspection request is made after a derivative action is filed, the request cannot be made for a “proper purpose,” as required, and therefore the inspection need not occur. A “proper purpose” is required in order to conduct a books and records inspection.See post on Conducting a Books and Records Inspection.
In this recent case, the Delaware Court of Chancery found that “[b]y filing the Federal Derivative Action, [Derivative Plaintiff] and his counsel certified that they had sufficient facts to pursue the Federal Derivative Action in good faith and in accordance with the applicable pleading standards.” Baca v. Insight Enterprises, Inc., CIV.A. 5105-VCL, 2010 WL 2219715 (Del. Ch. June 3, 2010). And, because “[t]he [books and records inspection] demand letter sought to investigate the matters [Derivative Plaintiff] already put at issue in the Federal Derivative Action” a derivative plaintiff “does not act with a proper purpose,” as required, when he “attempts to use [the inspection] to investigate matters . . . already put at issue in a  derivative action.” Id. In other words, by making a books and records request after a derivative claim is filed, a derivative plaintiff cannot be acting with the required “proper purpose” because making such a request contradicts the derivative plaintiff’s own certification that he/she already possessed sufficient information to file a complaint.
In sum, if you are considering filing a derivative complaint, make sure you have thoroughly considered your pre-suit investigation, which frequently includes conducing a books and records inspection.
UPDATE: On January 28, 2011, the Delaware Supreme Court reveresed the Delaware Court of Chancery’s decision that found a lack of proper purpose in part because the books and records inspection case was filed after a derivative suit was filed. Read the January 28, 2011 opinion here.
Matthew McKinney, as owner and host of this site, cannot and does not warrant the accuracy or reliability of the information presented on or through this site. The information on this website does not constitute legal advice and readers should not rely on it to solve problems; Further, you should seek licensed counsel before taking any action. Any information provided on this site is presented “As Is” for your personal curiosity and enjoyment. It is not meant to be relied upon for legal advice, counsel, or for any other purposes. Such information does not take the place of a lawyer. Rules and laws differ by jurisdiction and the information contained within this website may not apply in your jurisdiction. The appearance of articles, listings, or ads, by or for professionals, on this site, does not constitute an endorsement. In all cases, you are responsible for determining the quality of services, information, and/or advice provided by professionals through, or as a consequence of, your use of this site. Neither Liability nor responsibility shall arise to any person or entity with respect to loss or damage caused (or alleged to be caused), directly or indirectly, by information posted on this website, or by reason of contact with a professional listed on, or posting information to, this site. No attorney-client relationship is formed by viewing this website and practice is limited to jurisdiction where lawyers are admitted. The information furnished on the website is only general and not a substitute for personalized legal advice. Legal advice cannot be given without full consideration of all relevant information relating to the individual(s) situation. Laws can change daily and new laws may, and likely will, affect the accuracy of the information herein. The information herein may be outdated and replaced by new law.
If you are seeking representation, please read the following notice before sending an e-mail:
Sending an e-mail will not make you a client. Until an agreement regarding representation is reached with you, anything you send will not be confidential or privileged. Before representation can occur, a lawyer will first take you through the conflict of interest procedure and see that you are put in touch with the lawyer best suited to handle your matter.
If you proceed with an e-mail, you confirm that you have read and understood this notice.