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United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014)

December 23, 2014

In this en banc opinion, the Delaware Supreme Court held that the Court of Chancery has the discretionary authority under Section 220(c) of the Delaware General Corporation Law (the “DGCL”) to prohibit the inspecting stockholder’s use of information resulting from such inspection in any legal proceeding other than legal actions in a Delaware forum.

In August 2012, Lawrence Treppel (“Treppel”), a stockholder of United Technologies Corp., a Delaware corporation (“United Technologies”), sent United Technologies a litigation demand letter in connection with an investigation by the U.S. Department of Justice into violations of federal law by United Technologies.   In December 2012, United Technologies’ board rejected Treppel’s demand.

In March 2013, Treppel made a books and records inspection demand under Section 220 of the DGCL to evaluate United Technologies’ board’s decision to reject his litigation demand.  United Technologies agreed to allow Treppel to inspect most of his requested documents subject to his execution of a confidentiality agreement that included a requirement that any legal action arising out of, relating to, involving, or in connection with Treppel’s inspection be brought in a Delaware court.  After the parties were unable to come to agreement on the terms of inspection, Treppel filed a Section 220 action in the Court of Chancery.  United Technologies argued, among other things, that Treppel’s use of information gained from the inspection should be limited to actions in a Delaware court.

In its post-trial bench opinion, the Court of Chancery held that it lacked the statutory authority to impose an exclusive forum use limitation under Section 220(c), and held that Treppel had a proper purpose and was entitled to inspection.  United Technologies appealed.

The Delaware Supreme Court reversed, holding that the Court of Chancery erred in holding that it lacked the authority to impose the proposed limitation.  The Supreme Court focused on the plain language of Section 220(c) of the DGCL, which provides that a court may, “in its discretion, prescribe any limitations or conditions with reference to the inspection.”  The Supreme Court also noted that “the ability to limit the use of information gathered from an inspection–not just the scope of the inspection itself–has long been recognized as within the Court of Chancery’s discretion.”

The Supreme Court remanded the matter to the Court of Chancery to determine, in its discretion, whether to impose the exclusive forum limitation.  The Supreme Court noted that, in considering how to exercise its discretion in this case, the Court of Chancery was entitled to give weight to, among other factors, (1) the fact that Treppel seeks to file claims arising out of the same corporate conduct that was already the subject of derivative litigation in the Court of Chancery and the Supreme Court, (2) United Technologies’ legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by a Delaware court, (3) United Technologies’ adoption of a forum selection bylaw establishing Delaware as the proper forum for disputes, (4) the investment that United Technologies already made in defending the prior derivative litigation and the current Section 220 action, (5) Treppel’s inability to articulate any legitimate reason why he needs to file suit in a forum other than Delaware, and (6) the importance of maintaining Section 220 actions as streamlined, summary proceedings.  The Supreme Court went on to suggest that, in the absence of pre-existing litigation, a court may determine that the possible complications that a forum use restriction might inject into a Section 220 proceeding might not be justified by any substantial interests of the respondent corporation. 

The full opinion is available here