United Techs. Corp. v. Treppel

• Decision Date: 23 December 2014
• Docket Number: No. 127, 2014,127, 2014
• Citation: 109 A.3d 553
• Parties: United Technologies Corp., a Delaware corporation, Defendant–Below, Appellant, v. Lawrence Treppel, Plaintiff–Below, Appellee.
• Court: United States State Supreme Court of Delaware

109 A.3d 553

United Technologies Corp., a Delaware corporation, Defendant–Below, Appellant

v.Lawrence Treppel, Plaintiff–Below, Appellee.

No. 127, 2014

Supreme Court of Delaware.

Submitted: December 3, 2014

Decided: December 23, 2014

William M. Lafferty, Esquire, D. McKinley Measley, Esquire, Morris Nichols Arsht & Tunnell LLP, Wilmington, Delaware; William Savitt, Esquire (argued ), Ryan A. McLeod, Esquire, Anitha Reddy, Esquire, Wachtell, Lipton, Rosen & Katz, New York, New York, for Appellant.

Blake A. Bennett, Esquire, Cooch and Taylor, P.A., Wilmington, Delaware; Felipe J. Arroyo, Esquire (argued ), Brian J. Robbins, Esquire, Julia M. Williams, Esquire, Robbins Arroyo LLP, San Diego, California, for Appellee.

Before STRINE, Chief Justice; HOLLAND, RIDGELY, and VALIHURA, Justices; COONIN, Judge,^* constituting the Court en Banc.

STRINE, Chief Justice:

I. INTRODUCTION

United Technologies Corp., a Delaware corporation, appeals from a judgment by the Court of Chancery holding that the court did not have the authority to impose a specific condition on a books and records inspection under § 220(c) of the Delaware General Corporation Law (DGCL). United Technologies had sought to restrict the use of any information garnered from an inspection by a shareholder, Lawrence Treppel, to legal action in a Delaware court. The Court of Chancery denied the corporation's request, determining that such a limitation “is not the type of restriction that 220(c) seeks to impose.”¹ On appeal, United Technologies argues that the court does have the authority, under the statute itself and the line of cases interpreting it, to impose the requested limitation, and the court erred by not doing so in this case. Because the plain text of § 220 provides broad power to the Court of Chancery to condition a books and records inspection, the court erred in determining that it lacked authority under the statute to impose the requested restriction. We therefore reverse on that issue and remand so that the Court of Chancery can consider in the first instance whether, in its discretion, it should impose such a restriction based on the specific facts in this case.

II. BACKGROUND²

On August 22, 2012, Lawrence Treppel, a United Technologies shareholder since at least 2002,³ sent the company a litigation demand letter, demanding that it “investigate, address, remedy, and commence proceedings against certain officers and directors.”⁴ Treppel's claims arose out of a June 2012 investigation by the U.S. Department of Justice into violations of federal law by United Technologies in exporting software to the Chinese government for use in a military helicopter. United Technologies ultimately signed a Deferred Prosecution Agreement with the Justice Department, in which it agreed to pay $20 million and implement remedial compliance measures. The company also agreed to pay $55 million as part of a consent agreement with the State Department for making false statements about those transactions.

Treppel was not the first United Technologies stockholder to take legal action after the misconduct was revealed; stockholder Harold Grill separately sent a § 220 inspection demand in July 2012. Grill's request was approved by the company, and the results of his inspection led to a derivative action filed in the Court of Chancery on November 5, 2012. In June 2013, the Court of Chancery dismissed Grill's suit because he had not first made a litigation demand on the board, nor had he adequately shown that demand was excused.⁵ This Court summarily affirmed in December 2013.⁶ Treppel claims that he was not aware of Grill's suit when he sent his own demand letter under § 220.⁷

While Grill's suit was pending, United Technologies' board considered Treppel's letter. The board eventually rejected his demand, writing in a letter in December 2012 that it had determined that litigation was “not in the best interests of the Company.”⁸ The letter contained only two paragraphs, and did not provide any additional explanation for the board's decision. Treppel responded in March 2013, seeking to use his inspection rights under § 220 to “evaluate” the board's decision to reject his litigation demand.⁹

United Technologies agreed to allow Treppel to inspect most of his requested documents, but insisted that he first sign a confidentiality agreement. The company's proposed confidentiality agreement contained a provision requiring that “any claim, dispute, controversy or causes of action ... arising out of, relating to, involving or in connection with” the inspection be brought in a Delaware court.¹⁰ Treppel refused to bind himself to suing in Delaware.¹¹ After several unsuccessful rounds of negotiation between the parties, Treppel filed a § 220 action in the Court of Chancery seeking access to United Technologies' books and records without any usage restrictions. When Treppel filed his claim, the company's bylaws did not contain a forum selection clause establishing Delaware as the proper forum for disputes, but the board adopted such a provision on December 11, 2013, while Treppel's suit was pending.¹²

United Technologies responded to Treppel's claims in the Court of Chancery with two separate but related arguments: first, that Treppel's intention to use information from his inspection to file suit outside of Delaware negated his proper purpose under § 220(b). Alternatively, United Technologies argued that even if Treppel's purpose was proper, the Court of Chancery should limit the use of information gained from a books and records inspection to legal action in a Delaware court, using its authority under § 220(c) to prescribe limitations or conditions in connection with granting the inspection. Treppel contended in response that the proposed restriction was unreasonable, but did not argue that it was per se beyond the court's statutory authority.¹³

During his October 2013 deposition, Treppel refused to explain his opposition to the Delaware provision in United Technologies' original confidentiality agreement, citing attorney-client privilege.¹⁴ United Technologies pointed out before the Court of Chancery and again on appeal that Treppel had previously been a plaintiff in three other shareholder suits against different companies, none of which were brought in the corporation's state of incorporation or even his own home state of California. Two of the three were Delaware corporations.¹⁵ Treppel testified during his deposition that he could not provide any “non-privileged” explanation for choosing to file in those other states.¹⁶

Although the parties' trial briefing focused primarily on whether Treppel's purpose was proper under § 220(b),¹⁷ the Court of Chancery seemed more focused on whether it had the authority under § 220(c) to restrict a stockholder's use of books and records to any legal action in a Delaware court.¹⁸ During the trial, the Court of Chancery expressed particular concerns about the implications of setting such a limitation.¹⁹

Accordingly, in its post-trial bench opinion, the Court of Chancery ruled that United Technologies was not entitled to the restriction it sought. The Court of Chancery determined that the limit “is not the type of restriction that 220(c) seeks to impose. There is a mechanism for limiting which forum a suit may be brought in to enforce corporate interests, and that is through either a charter or bylaw provision.”²⁰ The Court of Chancery also held that Treppel's purpose for inspecting United Technologies' books and records—inquiring into the board's decision to deny his litigation demand—was proper.²¹

On appeal, United Technologies argues that the Court of Chancery erred in limiting its own authority to impose the requested restriction, and that the company is entitled to the restriction in this case. The corporation has not appealed the Court of Chancery's determination that Treppel's stated purpose for an inspection was proper. Treppel argued that the Court of Chancery properly exercised its discretion to reject United Technologies' requested restriction. But at oral argument, Treppel conceded that the Court of Chancery does have the authority under § 220 to impose such a restriction.²²

III. ANALYSIS

A. The Court of Chancery Has Broad Authority Under § 220(c) to Limit the Use of Corporate Books and Records

We review de novo a trial court's conclusions of law, including its interpretation of a statute.²³ But any factual findings are entitled to a “high level” of deference.²⁴

Section 220(c) of the DGCL gives broad discretion to the Court of Chancery to condition a books and records inspection: “The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.”²⁵ Because of the breadth of this discretion, Delaware courts have viewed the determination of whether to impose a condition or limitation on an inspection as inherently case-by-case and “fact specific.”²⁶

Beyond noting that there were other mechanisms for restricting suits to Delaware, including the forum selection bylaw that United Technologies eventually adopted, the Court of Chancery did not point to any textual or precedential reason that it could not impose a restriction on the use of information gained through a books and records inspection.²⁷ Nor does Treppel argue that there is any basis for limiting the Court of Chancery's discretion in this manner.²⁸

Indeed, as Treppel acknowledges, the ability to limit the use of information gathered from an inspection—not just the scope of the inspection itself—has long been recognized as within the Court of Chancery's discretion.²⁹ Indeed, “Delaware courts have repeatedly ‘placed reasonable restrictions on shareholders'—inspection rights in the context of suit brought under 8 Del. C. 220.’ ”³⁰ In some cases, inspections have been denied entirely if the plaintiff's “proper purpose” for seeking books and records could not be effectuated because,...