Fuchs Family Trust v. Parker Drilling Co., C.A. No. 9986-VCN (Del. Ch. Mar. 4, 2015) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery denied a stockholder request for inspection of books and records pursuant to 8 Del. C. § 220 (“Section 220”). The Court held, among other things, that the requesting stockholder did not have a proper purpose because the stated purpose of the demand was to investigate potential derivative litigation and the stockholder was barred by collateral estoppel from pursuing another derivative action. Significantly, the Court found that, for collateral estoppel purposes, the plaintiff stockholder could be considered to be in privity with another stockholder who previously brought a derivative action that was dismissed with prejudice.
Defendant Parker Drilling Company (“Parker” or the “Company”), a publicly traded Delaware corporation, provides drilling and drilling-related services. In early 2008, the Company disclosed that the DOJ and SEC were investigating potential Federal Corrupt Practices Act violations in connection with the Company’s operations in Kazakhstan and Nigeria. The Company disclosed in 2010 that its own internal investigation had identified instances of potential non-compliance.
Following the disclosures, various stockholders, including the Fuchs Family Trust (“Fuchs”), the plaintiff in the instant Section 220 action, filed derivative actions in Texas. Those actions were consolidated and ultimately dismissed, without prejudice, for failure to plead demand futility. Another derivative action (the “Freuler Action”) was filed in the United States District Court for the Southern District of Texas. The Texas federal court dismissed the Freuler Action, with prejudice, on the grounds of demand futility after allowing the plaintiff an opportunity to replead.
In early 2013, the Company settled with the DOJ and SEC. The papers documenting the settlement described a bribery scheme whereby two senior executives, identified only as “Executive A” and “Executive B,” had funneled $1.25 million in bribes to Nigerian officials through a partner (“Outside Legal Counsel”) at the law firm retained by the Company (the “Law Firm”).
In December 2013, the Company rejected a demand sent by Fuchs seeking inspection pursuant to Section 220 (the “Inspection Demand”). Fuchs commenced an action under Section 220 to compel inspection, and later narrowed the scope of its Inspection Demand to “[d]ocuments sufficient to identify Executive A, Executive B, Law Firm and Outside Counsel.” The stated purpose of the Inspection Demand was to assess the stockholder’s options with respect to (1) potential derivative litigation and/or (2) making a demand on the Company’s board requesting that the Company take remedial action.
The Court found that Fuchs’s pursuit of further derivative litigation was not a proper purpose for its Inspection Demand. Collateral estoppel precluded Fuchs from pursuing another derivative action because the Freuler Action was dismissed with prejudice for failure to plead demand futility, and Fuchs, as a stockholder of the Company at the time, was in privity with the plaintiff in the Freuler Action. The Court further held that the decision to forgo a Section 220 demand by the plaintiff in the Freuler Action before pleading demand futility was binding on Fuchs and did not preclude application of collateral estoppel.
The Court next turned to Fuchs’s stated purpose of using the requested information to make a demand on the Company’s board to take action against those responsible for the alleged violations of law. The Court concluded that, even if such purpose was generally proper, the documents sought by Fuchs were not essential or necessary to such purpose. The Court explained that the settlement documentation already provided Fuchs with a detailed account of the Company’s potential FCPA violations and the steps taken by the Company to address those issues.