January 17, 2018

Books & Records: Corwin Doesn’t Matter in Section 220 Action

Boards have enjoyed a lot of success in the Delaware courts invoking the Corwin doctrine to foil post-closing fiduciary duty claims. But a recent Chancery Court decision shows that there are some limits to the doctrine’s scope. In Lavin v. West Corp. (Del. Ch.; 12/17), the Court rejected efforts by the defendant West Corporation to use Corwin to support a motion to dismiss a books & records demand.

The Section 220 action arose in connection with West’s sale to Apollo Global Management. West contended that the inspection demand was invalid because the deal was approved by a fully-informed vote of its stockholders, and that any fiduciary duty lawsuit (other than one for waste) would lack merit.  This Shearman & Sterling memo says that Vice Chancellor Slights wasn’t persuaded by that argument:

The Court rejected West’s argument and wrote, “[s]imply stated, Corwin does not fit within the limited scope and purpose of a books and records action in this court.” The Court reiterated that, the purpose of a books and records action is to investigate potential claims prior to filing a formal complaint which will eventually be subject to merits-based defenses (e.g., a Corwin defense).

Vice Chancellor Slights noted that Delaware courts have long encouraged stockholders to use Section 220 requests to gather information before filing complaints that will be subject to heightened pleading standards and that where a plaintiff has shown a credible basis from which the court can infer mismanagement, waste or wrongdoing, the plaintiff should not be deprived of the ability to use a books and records action to enhance the quality of the plaintiff’s future pleadings.

The Court determined that the factual record showed a “credible basis” to infer potential wrongdoing and a lack of disinterestedness for purposes of the Section 220 request. The Court pointed to, among other things, “some evidence” that West’s directors and officers knew that a sale of West’s business segments in separate transactions would have provided greater value to stockholders than a sale of the whole company, but that two private equity sponsors that had the right to elect half of the board may have pushed the board to pursue a sale of the whole company to obtain a prompt liquidation of their investment. Accordingly, the Court ordered West to produce certain of its books and records pursuant to the Section 220 request.

Ultimately, the plaintiffs’ victory may turn out to be a fleeting one – the Vice Chancellor noted that answering West’s Corwin defense in any subsequent litigation with facts supporting a reasonable inference that the vote was uninformed or coerced would be “no easy task.”

John Jenkins