DealLawyers.com Blog

Books & records demands under Section 220 of the DGCL are becoming more frequent, and Delaware courts have proven willing to expand the boundaries of the inspection rights provided to stockholders under that statute. This Cleary Gottlieb blog says that the Chancery Court’s decision in Pettry v. Gilead Sciences, (Del. Ch.; 11/20), continues this trend, and introduces a new element of risk that companies need to consider when considering their response to these requests – the possibility of an award of attorneys’ fees to the plaintiff. Here’s an excerpt:

In reaching her decision, Vice Chancellor McCormick decried what she viewed as the “massive resistance” by defendant corporations generally to Section 220 demands and criticized what the court viewed as the company’s “overly aggressive defense strategy” in this case as “epitomiz[ing] a trend” of defendants “increasingly treating Section 220 actions as surrogate proceeding[s] to litigate the possible merits of the suit and plac[ing] obstacles in the plaintiffs’ way to obstruct them for employing it as a quick and easy pre-filing discovery tool.”  In light of these concerns, Vice Chancellor McCormick sua sponte granted leave for plaintiffs to seek an order compelling the company to pay their attorneys’ fees in pursuing the Section 220 case.

The memo goes on to say that it is uncertain whether the threat of fee-shifting will be raised in other cases, and that while the Vice Chancellor suggested that fee-shifting might be applied in other cases, her reasoning suggests that the remedy should be limited to fee shifting should be limited to extreme cases where the company assumed an overly aggressive litigation posture – “such as “taking positions for no apparent purpose other than obstructing the exercise of Plaintiffs’ statutory rights.”

– John Jenkins