Did Records Action Get Benefit of the Doubt?

A pension fund has told the Delaware Supreme Court its records inspection action was wrongly dismissed because the judge assumed the suit's sole purpose was to gather ammunition for a later shareholder lawsuit against officials of Jos. A. Bank Clothiers.

In support of its appeal the Norfolk County Retirement System says the Delaware Chancery Court judge did not give it the benefit of the doubt as to whether it had stated a valid reason to examine JABC's books and records.

Instead, Vice Chancellor Donald Parsons wrongly assumed that Norfolk's only reason for seeking access was to search for evidence of corporate misconduct that could flesh out a separate shareholder derivative action, the appellant contends.

The question for the high court is whether a trial judge is entitled to make the judgment that an ulterior motive, rather than a shareholder's stated purpose, is the real reason for a books-and-records action.

In Delaware and states that follow its lead on corporate governance matters, shareholders may access board minutes, correspondence and other company records if they can demonstrate a legitimate purpose, such as looking for evidence to support suspicions of wrongdoing.

However, the request may be denied if the court finds no reason to suspect wrongdoing.

Here, Vice Chancellor Parsons ruled in February that after a committee of independent directors found no evidence that JABC's stock price tanked because the officers hid a glut of inventory from the shareholders, the pension fund was only entitled to see the same information the committee used to reach that conclusion.

The pension fund had claimed it needed to find out whether JABC officers and directors concealed business problems that led the company to suddenly downgrade its financials.

When Norfolk made its request for company information, JABC supplied it with the documents and testimony that the committee had amassed, but the fund said that was not enough.

In his February ruling Vice Chancellor Parsons said there was no reasonable prospect that the pension fund could find enough support for charges against the JABC officials because of the committee findings. Further, he said another shareholder had already tried and failed to sustain a suit against the officers in Maryland.

On appeal, Norfolk charges that Vice Chancellor Parsons wrongly found no chance that a new shareholder suit would succeed.

The appellant says it had stated that a lawsuit was not the primary reason for its books-and-records action, but the judge improperly drew the exact opposite conclusion, even though he was required to give Norfolk the benefit of the doubt.

"While it is true that Norfolk's investigation could lead to the filing of a derivative suit, Norfolk's actual first stated purpose does not mention the possibility of filing a derivative suit," the appellant says in its reply brief.

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The fund is represented by Seth Rigrodsky and Brian Long of Rigrodsky & Long in Wilmington, Del.; and Robert Kornreich and Carl Strine of Wolf Popper LLP in New York.JABC is represented by Joel Friedlander and Sean Brennecke of Bouchard Margules & Friedlander in Wilmington and James Dunbar and Kristen Strain of Venable LLP in Towson, Md.