Amalgamated Bank v. NetApp, Inc., C.A. No. 6772-VCG (Del. Ch. Feb. 6, 2012) (Glasscock, V.C.)
In this memorandum opinion, which followed a bench-ruling in favor of a plaintiff stockholder seeking books and records under Section 220 of the General Corporation Law of the State of Delaware, the Court of Chancery denied plaintiff’s motion to compel the production of additional documents from the defendant corporation. Finding that the plaintiff had lost its opportunity to further amend its derivative action complaint in California state court, the Court of Chancery held plaintiff’s stated purpose of seeking information sufficient to meet the pleading requirements in its substantive action no longer proper and, therefore, its Section 220 action mooted.
Plaintiff Amalgamated Bank, as trustee of Longview LargeCap 500 Index Fund and Longview LargeCap 500 Index VEBA Fund, filed a derivative action in California state court against current and former directors of NetApp, Inc., a Delaware corporation. The defendant directors in the California action moved to dismiss on the grounds, in part, that Amalgamated had failed to plead demand futility under Delaware Chancery Court Rule 23.1. Amalgamated amended its complaint and the defendants moved to dismiss again on the same grounds. In response to the second motion, Amalgamated obtained the California court’s leave to amend a second time. Relying on the Delaware Supreme Court’s opinion in King v. Verifone Holdings, Inc., 12 A.3d 1140 (Del. 2011), Amalgamated requested that the California court allow it time to pursue a “narrowly tailored” books and records demand to help cure the deficiencies in its pleading before submitting its second amended complaint. In King, the Supreme Court held that a derivative plaintiff whose complaint had been dismissed for failure to plead demand futility successfully was not, per se, precluded from prosecuting a later filed Section 220 action. Rather, the Supreme Court held, it is “a proper purpose under Section 220 to inspect books and records that would aid plaintiff in pleading demand futility in a to-be-amended complaint in a plenary derivative action, where the earlier-filed plenary complaint was dismissed on demand futility related grounds without prejudice and with leave to amend.” Tentatively granting the defendants’ dismissal motions, the California court gave Amalgamated 60 days, or until September 15, 2011, to amend.
Promptly following the California court’s ruling, Amalgamated made its demand to inspect NetApp’s books and records. NetApp rejected the demand, and Amalgamated filed suit in the Court of Chancery. Before the matter moved to trial, the California court’s September 15 deadline arrived and Amalgamated filed its second amended derivative complaint. The defendants once again moved to dismiss and the California court set a hearing for February 2012, with the assumption that Amalgamated might seek to amend a third time on the basis of information derived from its then-ongoing 220 action.
The Delaware action proceeded to trial in November 2011. In a bench ruling following trial, the Court, relying on King, found plaintiff’s stated purpose to be proper and ruled that the scope of the demand would be limited to information that might enable Amalgamated to amend its complaint so as to plead demand futility and overcome the California motions to dismiss. NetApp thereafter produced documents in response to the demand. On December 20, however, Amalgamated moved for leave to file a motion to compel under seal. On January 3, 2012, the motion for leave was granted and, the following day, Amalgamated filed its motion to compel the production of additional documents. Briefing on the motion to compel was completed in late January and an argument held on February 1—the same day briefing on the California defendants’ motions to dismiss was completed and submitted to the California court.
In denying the motion to compel, the Court of Chancery held that Amalgamated’s purpose for seeking documents from NetApp—to amend its complaint in the California action so that it might plead facts sufficient to show demand futility and overcome defendants’ motions to dismiss—had been mooted as the motions to dismiss were fully briefed and submitted for the California court’s decision. The window for any amendment anticipated by the California court had, in the Vice Chancellor’s estimation, “now closed.” To this end, the Court found Amalgamated’s continued reliance on King misplaced. Even accepting Amalgamated’s contention that it could still seek leave to amend its derivative pleading, the Court of Chancery held that “King stands for the limited proposition that when a plaintiff has been granted leave to amend its complaint a plaintiff may have a proper purpose for demanding [corporate] records. When that leave to amend no longer exists, the plaintiff’s proper purpose is extinguished.” Because there was no indication that Amalgamated presently possessed leave to amend its California pleading, despite the “theoretical possibility” it could again obtain such leave, the Court denied the motion to compel.