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Graulich v. Dell Inc., C.A. No. 5846-CC (Del. Ch. May 16, 2011) (Chandler, C.)

May 16, 2011

In this memorandum opinion, the Court of Chancery granted defendant Dell Inc.’s (“Dell”) motion for judgment on the pleadings after determining that the plaintiff failed to state a proper purpose for a books and records demand under Section 220 of the General Corporation Law of the State of Delaware. The plaintiff brought the demand to investigate possible corporate wrongdoing with respect to Dell’s sale of OptiPlex computer systems between 2003 and 2005 so that plaintiff could initiate “an appropriate suit” in the event that evidence of wrongdoing was discovered. Chancellor Chandler found that plaintiff did not have a proper purpose for demanding inspection under Section 220 because the plaintiff would be procedurally barred from bringing either a derivative or a direct suit based on the wrongdoing the plaintiff sought to investigate. First, plaintiff lacked standing to bring suit derivatively or directly because he was not a stockholder of Dell at the time of the alleged wrongdoing. Second, even if plaintiff had standing to pursue claims relating to the OptiPlex systems, any such claim would be barred by the applicable statute of limitations. Third, any such claims would also be barred by claim preclusion.

Chancellor Chandler noted that stockholders “must do more than state, in a conclusory manner, a generally accepted proper purpose” for demanding the inspection of corporate books and records. In other words, plaintiff “must state a reason for the purpose, i.e., what it will do with the information or an end to which that investigation may lead.” Citing West Coast Management & Capital, LLC v. Carrier Access Corp., 914 A.2d 636 (Del. Ch. 2006), the Chancellor observed that if “a books and records demand is to investigate wrongdoing and the plaintiff’s sole purpose is to pursue a derivative suit, the plaintiff must have standing to pursue the underlying suit to have a proper purpose.” Here, the Court noted that plaintiff had only one stated purpose — to investigate potential wrongdoing to pursue potential derivative claims. Chancellor Chandler indicated that plaintiff could have purported to seek to investigate corporate mismanagement for any of the proper purposes articulated by the Delaware Supreme Court in Saito v. McKesson HBOC, Inc., 806 A.2d 113 (Del. 2002), but found that plaintiff’s only stated purpose in his “poorly-worded complaint” was to pursue a possible derivative claim. Because it was undisputed that plaintiff did not acquire his shares until February 2007, well after the alleged wrongdoing, the Court held that plaintiff lacked standing to bring suit based on the facts articulated in his demand. Moreover, the Chancellor noted that although plaintiff did not state an intent to pursue direct claims, he would similarly lack standing in that case.

The Court also held that plaintiff’s claims were time-barred under Delaware’s three-year statute of limitations that applies to stockholder derivative suits for alleged breaches of fiduciary duty. Chancellor Chandler noted that although recent Court of Chancery precedent recognized that the statute of limitations may be tolled under the doctrines of fraudulent concealment or equitable tolling, neither of these doctrines applied to the case at hand. The Court found that plaintiff failed to allege any evidence of fraudulent concealment by Dell’s board of directors relating to the OptiPlex situation, and noted that plaintiff was put on inquiry notice in November 2005, if not earlier, when Dell publicly filed its Form 10-Q for the third quarter of 2005 disclosing problems with the OptiPlex systems and the resulting effects on Dell’s financials. Additionally, Chancellor Chandler held that plaintiff’s claims were barred by claim preclusion. In April 2007, certain Dell stockholders filed a derivative suit in Texas (the “Texas Action”) asserting claims against certain Dell officers and directors for “breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, [and] unjust enrichment,” explicitly referring to problems relating to the OptiPlex systems. In April 2009, the parties to the Texas Action agreed to a Stipulation of Settlement, which provided for a broad release of claims. Chancellor Chandler found that the underlying facts alleged in the Texas Action covered the same core facts plaintiff purported to investigate in his demand, and the settlement of the Texas Action explicitly precluded plaintiff from bringing suit based on the released claims. For the foregoing reasons, the Court found that plaintiff failed to state a proper purpose under Section 220 and entered judgment on the pleadings in favor of the defendant.

The full opinion is available here