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Chancery Approves Incorporation of Reference Condition in Section 220 Litigation
Books and records actions are heralded as the “tools at hand” for litigators pursuing shareholder claims against a corporation. In fact, the Delaware Court of Chancery has been critical of litigants who failed to take advantage of a shareholder's right to request the books and records of a corporation prior to commencing litigation against the corporation. See, e.g., Thermopylae Capital Partners v. Simbol, 2016 WL 368170, at *17 (Del. Ch. Jan. 29, 2016). And while many shareholders have utilized Section 220's summary proceeding to get a corporation's books and records, Delaware courts have approved certain conditions on the use of those records. As discussed below, the Court of Chancery recently approved a company's proposed incorporation condition, assuring the company that all the documents it produces pursuant to a books and records demand will be incorporated, even if not explicitly referenced, in any subsequent litigation where the plaintiff relies on any of the records produced by the company.
Background
In The City of Cambridge Retirement System v. Universal Health Services, the shareholder plaintiff demanded certain books and records of Universal Health Services, Inc. (UHS) to investigate corporate wrongdoing for purposes of a potential derivative action. While UHS contested the scope of the demand, it offered to produce certain documents subject to a confidentiality agreement. UHS's proposed confidentiality agreement included an incorporation-by-reference provision, which stated, “the stockholder agrees that the complaint in any derivative lawsuit that it files relating to, involving or in connection with the Inspection demand or any confidential inspection material, shall be deemed to incorporate by reference the entirety of the brooks and records of which inspection is permitted.” The shareholder plaintiff refused, and filed an action seeking to compel the inspection of UHS's books and records.
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