Inspect First or Forever Remain Curious. . .

A possible new pre-requisite to filing a derivative complaint – conducting a books and records inspection

If you are considering filing a derivative claim (an action on behalf of the business that is usually against management) consider conducting a records inspection before filing your complaint.

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.  

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About Matthew McKinney

Attorney focused on civil and commercial litigation.
This entry was posted in Business Owner, Director, Litigation, Shareholder and tagged , , , , , , , , . Bookmark the permalink.

3 Responses to Inspect First or Forever Remain Curious. . .

  1. Pingback: January 28, 2011 Books and Records Inspection Opinion | Business and Corporate Disputes

  2. Pingback: 5 Things You Need to Know Before Filing a Complaint Involving a Business. | Business and Corporate Disputes

  3. Pingback: Books and Records Inspection | Business and Corporate Disputes

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