Central Laborers Pension Fund v. News Corporation
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EFiled: Nov 30 2011 4:48PM EST Transaction ID 41154258 Case No. 6287-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE 417 SOUTH STATE STREET DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179 JOHN W. NOBLE VICE CHANCELLOR November 30, 2011 Geoffrey C. Jarvis, Esquire Grant & Eisenhofer, P.A. 1201 N. Market Street Wilmington, DE 19801 Re: Blake Rohrbacher, Esquire Richards, Layton & Finger, P.A. 920 N. King Street Wilmington, DE 19801 Central Laborers Pension Fund v. News Corporation C.A. No. 6287-VCN Date Submitted: August 11, 2011 Dear Counsel: action to inspect certain books and records of Defendant News Corporation Del. C. announced that it would acquire Shine Group L Central Laborers, a News Corp. stockholder, set forth in a demand letter that its purposes for making demand to inspect those books and records were to investigate potential breaches of fiduciary duty in connection with the Proposed Central Laborers Pension Fund v. News Corporation C.A. No. 6287-VCN November 30, 2011 Page 2 Transaction and to determine whether making a demand on the News Corp. board was necessary before commencing a derivative action on behalf of News Corp. to challenge the Proposed Transaction. Central Laborers, joined by another plaintiff, filed a derivative action against claiming that the Proposed Transaction is the outcome of an unfair process and at an unfair price 1 Shortly after filing the Derivative Action, Central Laborers commenced the 220 Action. News Corp. has moved to dismiss the 220 Action under Court of Chancery Rule 12(b)(6) because the simultaneous filing of the Derivative Action refutes any claim of a proper purpose for its inspection demand.2 As a general matter, by 1 Amalgamated Bank & Central Laborers Pension Fund v. News Corp., C.A. No. 6285-CC (Del. Ch.). This action was later consolidated with a related action; the current consolidated derivative action is styled , C.A. No. 6285-VCN (Del. Ch.). 2 When considering a motion to dismiss under Court of Chancery Rule 12(b)(6), the Court pt all well-pleaded factual allegations in the Complaint as true, accept even vague draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del. 2011). The facts are not in dispute, and, despi would be appropriate, it is difficult to discern any benefit from such an effort. Central Laborers Pension Fund v. News Corporation C.A. No. 6287-VCN November 30, 2011 Page 3 filing its derivative complaint, Central Laborers acknowledged reason than if, for no other that it had sufficient information to support its substantive allegations and its allegations of demand futility that would excuse prior demand on the News Corp. board both necessary to go down the path chosen by it to challenge the Proposed Transaction. In short, the stockholder plaintiff who files a Section 220 action immediately after its derivative action is acting inconsistently.3 At stake, however, is more than inconsistent pleading. This Court routinely stays discovery in derivative actions while non-frivolous motions to dismiss are resolved.4 Derivative actions impinge upon the ability of directors to manage the affairs of the corporation; they also impose substantial compliance costs on the must establish a proper purpose for the inspection, 8 Del. C. § 220(c), and a proper purpose is 8 Del. C. § 220(b). 3 See, e.g., Baca v. Insight Enters., Inc., 2010 WL 2219715, at *4 (Del. Ch. June stockholder who serves a post-plenary action Section 220 demand contradicts his own 4 See, e.g., Brehm v. Eisner, 746 A.2d 244, 266 (Del. 2000); Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 9.02[b][3], at 9to dismiss the complaint for failure to make a Central Laborers Pension Fund v. News Corporation C.A. No. 6287-VCN November 30, 2011 Page 4 corporation. Section 220 was not adopted as a substitute for litigation discovery; instead, in this context, it serves to enable potential derivative plaintiffs to obtain the necessary information in advance of filing their derivative action.5 Although there may be special circumstances that would warrant the pursuit of a books and records action at the same time as the related derivative action,6 those circumstances do not exist here, and Central Laborers does not point out any unusual conditions that would support a deviation from the general rule. Central Laborers, however, invokes a recent decision of the Delaware Supreme Court, King v. Verifone Holdings, Inc.,7 to support the filing of the 220 Action immediately after the filing of the Derivative Action. The Supreme Court held that a derivative plaintiff whose complaint had been dismissed for failure to plead demand futility successfully was not, on account of the mere fact 5 See, e.g., King v. Verifone Holdings, Inc., 12 A.3d 1140, 1146courts have strongly encouraged stockholder-plaintiffs to utilize Section 220 before filing a derivative action, in order to satisfy the heightened demand futility pleading requirements of Court of Chancery Rule 23.1. . . . By first prosecuting a Section 220 action to inspect books and records, the stockholder-plaintiff may be able to uncover particularized facts that would establish 6 (filing driven by time limitations). 7 12 A.3d 1140 (Del. 2011). , 2004 WL 187274, at *4 (Del. Ch. Jan. 23, 2004) Central Laborers Pension Fund v. News Corporation C.A. No. 6287-VCN November 30, 2011 Page 5 8 That case arose out of circumstances materially different from those associated with the 220 Action and the Derivative Action. The Derivative Action has not been dismissed; no judicial action has occurred that would suggest a need or a reason for further pleadings or efforts to gather important facts to support a cognizable books and records. It was, in Verifone, the judicial determination that the allegations were not sufficient coupled with the judicially-granted leave to amend that eliminated the inconsistency that one may find in the simultaneous filing of two related actions, as happened here. Verifone cannot fairly be read as manifesting of action. simultaneous filing of both a derivative action and a Section 220 To the contrary, the Supreme Court clearly expressed its view that dismissal of a Section -plaintiffs plenary derivative complaint [is] still pending and the plenary court ha[s] not granted the 8 Id. at 1141. Central Laborers Pension Fund v. News Corporation C.A. No. 6287-VCN November 30, 2011 Page 6 9 In short, once the derivative action is filed, and until the judicial processing of the dismissal motion reaches the point where a recasting of the allegations has been authorized, the stockholder may not, as a general matter, demonstrate a proper purpose for invoking Section 220. The Supreme Court summarized the substance of its holding: The result we reach here affirms long-standing Delaware precedent which recognizes that it is a proper purpose under Section 220 to inspect books and records that would aid the plaintiff in pleading demand futility in a to-be-amended complaint in a plenary derivative action, where the earlier-filed plenary complaint was dismissed on demand futility-related grounds without prejudice and with leave to amend. That holding should not be read as an endorsement by this Court of proceeding in that way.10 int brings it within the harbors mapped by the Supreme Court. Nothing in Verifone would authorize it to use the tools of Section 220 while actively pursuing a simultaneously-filed plenary derivative action at its early stages.11 9 Verifone, 12 A.3d at 1148. See also Beiser v. PMC-Sierra, Inc., 2009 WL 483321 (Del. Ch. Feb. 26, 2009). 10 Verifone, 12 A.3d at 1150. 11 One of the concerns expressed by the Supreme Court in Verifone restrictions that find no support in the text of Section 220. Verifone, 12 A.3d at 1151. In Verifone, the Supreme Court concluded that the opportunity given to the shareholder to amend Central Laborers Pension Fund v. News Corporation C.A. No. 6287-VCN November 30, 2011 Page 7 -pending derivative action necessarily reflects its view that it had sufficient grounds for alleging both demand futility and its substantive claims without the need for the assistance afforded by Section 220, it is, at this time, unable to tender a proper purpose for pursuing its efforts to inspect the books and records of News Corp.12 Accordingly, the 220 Action is dismissed. IT IS SO ORDERED. Very truly yours, /s/ John W. Noble JWN/cap cc: Register in Chancery-K the complaint in the derivative action in the face of dismissal satisfied the statutory proper purpose standard. In contrast, it is the proper purpose standard that limits Central Laborers in the 220 Action. Until its implicit representation that it has sufficient facts for its pleadings in the Derivative Action is rejected (or, perhaps, seriously called into question) by the Court handling the Derivative Action, it simply cannot identify that proper purpose that is consistent with the statutory standard. 12 With this conclusion, it is not necessary to address the additional grounds for dismissal posited by News Corp.
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