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Central Laborers Pension Fund v. News Corp.: Delaware Supreme Court Affirms Dismissal of Section 220 Books and Records Request for Failure to Strictly Comply With the Statutory "Form and Manner" Requirements

June 5, 2012

In Central Laborers Pension Fund v. News Corp., No. 682, 2011 (Del. May 29, 2012), the Delaware Supreme Court affirmed the Court of Chancery’s dismissal of the plaintiff’s complaint, which sought to enforce a demand for inspection of books and records under Section 220 of the Delaware General Corporation Law (“Section 220”). The Supreme Court based its decision on the plaintiff’s failure to attach to its demand documentary evidence of its beneficial ownership of News Corporation’s (“News Corp.”) stock and stressed that stockholders seeking inspection of books and records must strictly comply with the “form and manner” requirements of Section 220.

On March 7, 2011, plaintiff Central Laborers Pension Fund (“Central Laborers”) sent to News Corp.’s general counsel a demand letter for inspection of certain books and records related to News Corp.’s then-pending acquisition of Shine Group Ltd. (the “Shine Transaction”). The Shine Group Ltd. is an international television production company that had been formed in 2001 by Elizabeth Murdoch, the daughter of News Corp.’s founder and CEO, Rupert Murdoch. Central Laborers asserted that the purpose of its demand was to investigate potential breaches of fiduciary duty or other wrongdoing in connection with the Shine Transaction. The demand letter further stated that Central Laborers wanted to “determine whether a presuit demand is necessary or would be excused prior to commencing any derivative action on behalf of the Company.”

On March 16, 2011, Central Laborers, along with another stockholder plaintiff, filed a verified derivative complaint (the “Derivative Complaint”) in the Court of Chancery challenging the Shine Transaction and asserting claims for breach of fiduciary duty against each member of News Corp.’s board. The Derivative Complaint alleged that demand on the News Corp. board was excused because the directors had shown an unwillingness or inability to challenge Rupert Murdoch’s purported control over News Corp.

Approximately one hour after the filing of the Derivative Complaint, Central Laborers filed another complaint (the “Section 220 Complaint”) in the Court of Chancery seeking to enforce its demand letter pursuant to Section 220. The Section 220 Complaint alleged that one of the primary purposes for the requested inspection was “to investigate possible breaches of fiduciary duty” and, ultimately, “to determine whether a presuit demand is necessary or would be excused prior to commencing any derivative action on behalf of the Company” (emphasis added).

News Corp. moved to dismiss the Section 220 Complaint on the grounds that: (1) the demand letter was not accompanied by evidence of Central Laborers’ beneficial stock ownership; (2) the filing of the Derivative Complaint refuted Central Laborers’ purported purpose for seeking the inspection (i.e., investigating whether to pursue a derivative claim and determining whether demand on the News Corp. board was excused); and (3) the scope of the inspection sought was overbroad. The Court of Chancery granted the motion to dismiss on the second ground. The Court of Chancery reasoned that “[b]ecause Central Laborers’ currently-pending derivative action necessarily reflects its view that it had sufficient grounds for alleging both demand futility and its substantive claims without the need for assistance afforded by Section 220, it is, at this time, unable to tender a proper purpose for pursuing its efforts to inspect the books and records of News Corp.” The Court of Chancery did not reach the other grounds for dismissal argued by News Corp.

On appeal, Central Laborers asserted that the Court of Chancery decision constituted error in two regards: (1) the time to evaluate whether a stockholder has a proper purpose is when the inspection demand is made, and such proper purpose cannot be mooted by the subsequent filing of a derivative action; and (2) even if an otherwise proper purpose can be impacted by the subsequent filing of a derivative action, such proper purpose exists so long as the documents sought by the plaintiff could be used to amend the derivative complaint. Thus, according to Central Laborers, a Section 220 demand should be deemed to have a proper purpose despite the stockholder’s filing of a derivative action, so long as leave to amend in the derivative action had not been explicitly precluded. For its part, News Corp. asked that the Supreme Court affirm the judgment of the Court of Chancery on the grounds expressed by that Court and on the alternative basis that Central Laborers failed to attach evidence of its beneficial ownership of News Corp. stock to its demand letter.

The Supreme Court affirmed the judgment on the alternative ground that Central Laborers had failed to comply with the “form and manner” requirements of Section 220 by not accompanying its demand with evidence of its beneficial ownership. The Court stressed that the express statutory requirements of Section 220 must be strictly followed by a stockholder seeking an inspection of books and records. Absent compliance with the statutory requirements, the Court held that “the stockholder has not properly invoked the statutory right to seek inspection, and consequently, the corporation has no obligation to respond.” Accordingly, the Court rejected Central Laborers’ argument that it had cured the defect in its demand when Central Laborers submitted evidence of beneficial ownership of News Corp. stock along with its brief in opposition to the motion to dismiss in the Court of Chancery. The Supreme Court explained that such subsequent action could not satisfy the statutory requirement that the demand “shall … be accompanied by documentary evidence of beneficial ownership of the stock.” Because Central Laborers had failed to submit a procedurally proper demand letter, the Supreme Court found that it was unnecessary and would be inappropriate to express a view on whether the Derivative Complaint affected the propriety of the purpose set forth in the demand letter.