Barnes v. Telestone Tech. Corp., C.A. No. 8513-VCG (Del. Ch. July 10, 2013) (Glasscock, V.C.)
In this letter opinion, the Court of Chancery dismissed an action under Section 220 of the Delaware General Corporation Law to inspect a corporation’s books and records where the Plaintiff’s demand failed to provide documentary evidence of beneficial ownership of the corporation’s stock, as required by the statute. The Court found that the Plaintiff’s affidavit, submitted with the demand and attesting to his beneficial ownership, was insufficient documentary evidence of beneficial ownership, even when corroborated by additional evidence produced after the suit was filed. The Court suggested, however, that a brokerage statement or other independent proof would satisfy the statute if submitted with the demand.
Plaintiff, a purported stockholder of defendant, Telestone Technologies, Corp. (“Telestone”), had sought by written demand to inspect the books and records of Telestone pursuant to Section 220. Plaintiff attached to the demand a sworn affidavit affirming his status as a stockholder of Telestone. Telestone did not respond to the letter, and when Plaintiff’s second letter to Telestone went unanswered, Plaintiff filed suit in the Court of Chancery. Telestone moved to dismiss for failure to state a claim. Citing Central Laborers Pens. Fund v. News Corp., 45 A.3d 139, 145 (Del. 2012) for the proposition that a court must first determine whether a plaintiff has satisfied the form and manner requirements for a books and records demand under Section 220, the Court assessed whether Plaintiff had provided proof of beneficial ownership of Telestone stock when he submitted the demand. The Court found no meaningful distinction between the case before it and Central Laborers, where the plaintiff had also provided a sworn affidavit as proof of beneficial ownership. As in that case, the Court found Plaintiff’s affidavit failed to satisfy the beneficial ownership requirement. The Court distinguished such an affidavit from a brokerage statement or “similar independent proof of beneficial ownership,” implying that such documents would satisfy the statute. The Court acknowledged that Plaintiff had attempted to ameliorate the defect in his demand when, in response to the motion to dismiss, he produced an account statement that evidenced his ownership of Telestone stock. The Court explained, however, that a plaintiff’s demand must be in proper form before litigation is initiated and such ameliorative efforts, consequently, could not cure failures in the pre-suit demand. While Plaintiff asked the Court to overlook this noncompliance on the grounds that he had proceeded pro se, the Court reasoned it had no discretion to overlook the form and manner requirements set by statute and dismissed the action for failure to comply with those requirements.