Chancery Orders Production of Records for Periods Prior to Stock Ownership

This post is from Francis G.X. Pileggi of Eckert Seamans Cherin & Mellott, LLC. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Court of Chancery issued a decision last week of both practical and theoretical importance for corporate lawyers. The opinion is Melzer v. CNET Networks, Inc., and there are at least three reasons why this case is noteworthy.

First, the court held that Section 220 of the Delaware General Corporation Law, which is the statutory basis on which stockholders can demand books and records of a company, enables plaintiffs under certain circumstances to receive documents for a period prior to their stock ownership. In order to allow a pleading to be prepared with details of alleged “systemic and sustained” lack of oversight by the board (the well-known Caremark standard), the Court allowed the plaintiffs to access materials prepared before they became stockholders.

Second, the case is interesting because it began as a derivative action filed in federal court in California. The California case was dismissed by the federal judge, however, who instructed the plaintiff to avail himself of the provisions of DGCL Section 220. The parties now appear to be headed back to California, where the plaintiff will be able to amend the complaint in light of the discovery authorized in this opinion.

Finally, the case is striking because the defendant admitted that it engaged in the backdating of stock options, which is the factual basis of the underlying claims. In a separate blog post that can be found here, I offer more analysis of those facts and the court’s application of Delaware law to this fascinating case.

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  1. By Delaware Corporate and Commercial Litigation Blog on Monday, September 27, 2010 at 11:16 am

    Chancery Case Summarized on Harvard Blog…

    Here is a short guest post that I was requested to write for The Harvard Law School Corporate Governance Blog as an introduction to my longer discussion of the recent Chancery Court decision in Melzer v. CNET Networks, Inc., here…….

  2. By Delaware Corporate and Commercial Litigation Blog on Monday, September 27, 2010 at 11:19 am

    It’s “Back to Cali” for Company Losing Demand for Records Case Under Section 220…

    In Melzer v. CNET Networks, Inc., 2007 WL 4146237 (Del. Ch., Nov. 21, 2007), read opinion here, the Delaware Chancery Court provides a careful review of the Delaware law relating to a shareholder’s right to demand books and records under DGCL Section …