December 23, 2014
UNITED TECHNOLOGIES CORP., a Delaware corporation, Defendant-Below, Appellant,
LAWRENCE TREPPEL, Plaintiff-Below, Appellee
Submitted: December 3, 2014.
Case Closed January 8, 2015.
Court Below: Court of Chancery of the State of Delaware. C.A. No. 8624-VCG.
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:
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."  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.
On August 22, 2012, Lawrence Treppel, a United Technologies shareholder since at
least 2002, sent the company a litigation demand letter, demanding that it " investigate, address, remedy, and commence proceedings against certain officers and directors."  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. This Court summarily affirmed in December 2013. Treppel claims that he was not aware of Grill's suit when he sent his own demand letter under § 220.
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."  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.
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. Treppel refused to bind himself to suing in Delaware. 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.
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.
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. 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. Treppel testified
during his deposition that he could not provide any " non-privileged" explanation for choosing to file in those other states.
Although the parties' trial briefing focused primarily on whether Treppel's purpose was proper under § 220(b), 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. During the trial, the Court of Chancery expressed particular concerns about the implications of setting such a limitation.
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."  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.
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.
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. But any factual findings are entitled to a " high level" of deference.
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."  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." 
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. Nor does Treppel argue that there is any basis for limiting the Court of Chancery's discretion in this manner.
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. Indeed, " Delaware courts have repeatedly 'placed reasonable restrictions on shareholders' inspection rights in the context of suit brought under 8 Del. C. § 220.'"  In some cases, inspections have been denied entirely
if the plaintiff's " proper purpose" for seeking books and records could not be effectuated because, for example, the plaintiff would lack standing to sue if the inspection warranted further legal action. Mindful of the costs of inspections -- which are ultimately borne by stockholders -- Delaware courts have also been reluctant to grant § 220 relief when there is other pending litigation against the corporation and discovery is thus the more appropriate mechanism for obtaining relevant documents.
In restricting a stockholder's ability to use corporate books and records in certain ways, Delaware case law has consistently reflected the underlying principle that the stockholder's inspection right is a " qualified" one. Accordingly, the Court of Chancery has wide discretion to shape the breadth and use of inspections under § 220 to protect the legitimate interests of Delaware corporations. Because nothing in the text of § 220 itself or Delaware case law in interpreting it limits the Court of Chancery's authority to restrict the use of material from an inspection when those interests are threatened, the Court of Chancery erred in concluding it lacked the statutory authority to impose its own preclusive limitation here.
B. Whether the Court of Chancery Should Grant United Technologies' Requested Restriction is Within the Court of Chancery's Discretion
Because the Court of Chancery held that it did not have the statutory power to impose a restriction of the kind that United Technologies proposed, it never analyzed the considerations relevant to whether it should exercise its discretion to grant the novel restriction that United Technologies sought. Given that reality, we decline United Technologies' invitation to engage in that analysis ourselves on a cold appellate record.
Instead, we believe it is more prudent to have the Court of Chancery consider how to exercise its discretion in the first instance. In approaching that task, the Court of Chancery is entitled to give weight to factors such as: (i) the fact that Treppel seeks to file claims arising out of the same corporate conduct that was already the subject of derivative litigation in the Court of Chancery and this Court; (ii) United Technologies' legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the courts of this state; (iii) United Technologies' adoption of a forum selection bylaw that represents a non-case-specific determination by its board of directors that internal affairs litigation involving the company should proceed in a single forum; and (iv) the investment the corporation has already made (which comes at a cost to its stockholders) in defending not only the prior derivative litigation in the Court of Chancery, but also this § 220 action. These case-specific factors can appropriately be considered by the Court of Chancery because they involve a legitimate concern on United Technologies' part that it and its stockholders could face excessive costs and the risk of inconsistent rulings if Treppel were to file suit elsewhere.
Likewise, the Court of Chancery can give weight to Treppel's inability to articulate any legitimate reason why he needs to file suit in a forum other than Delaware, and his ability to seek a modification of the use restriction under Court of Chancery Rule 60(b) if specific circumstances arise that generate such a need. Further, we note that Treppel has not shown how his rights would be unreasonably restricted by the requested limitation. The Court of Chancery erroneously equated restricting Treppel's use of the information he learns from United Technologies' books and records with an anti-suit injunction. Such an injunction would prevent
Treppel from " prosecuting actions in other states" at the risk of being held in contempt. But even if the court had acceded to United Technologies' request, Treppel would only be restricted from using the fruit of his inspection -- obtained as a result of litigation in a Delaware forum -- in another suit outside Delaware, when United Technologies has already invested substantial resources in addressing not only Treppel's § 220 litigation, but also the related Grill litigation, and the corporation has a forum selection bylaw calling for litigation in Delaware. Being able to use the information from the books and records inspection may generate a practical incentive to file in Delaware, but the restriction would not prevent Treppel from filing elsewhere.
At the same time, the Court of Chancery should also give weight to the importance of maintaining § 220 actions as streamlined, summary proceedings that do not get bogged down in collateral issues, especially given that companies like United Technologies can move to dismiss if a petitioner like Treppel files in an improper forum in violation of a forum selection bylaw. That said, a petitioner in a § 220 action cannot himself cause delay simply by asserting makeweight arguments that a relevant corporate bylaw is facially invalid or inapplicable. Treppel's argument that United Technologies' forum selection bylaw did not apply to him because it was adopted after he bought his shares is inconsistent with the plain operation of the DGCL. We also believe caution is needed because use restrictions under § 220(c) have traditionally been tied to case-specific factors. For example, if a petitioner files for books and records and has a good faith purpose to investigate possible wrongdoing, and there has been no prior litigation in this or other forums, then the Court of Chancery might conclude that there is no reason to impose a use restriction of the kind United Technologies seeks here. In that situation, the Court of Chancery can consider in its discretion whether a forum use restriction is warranted, because the possible complications the restriction injects into the § 220 litigation may not be justified by any substantial interests of the respondent corporation. The absence of
pre-existing litigation would be relevant because the company and its stockholders would not have suffered the costs of defending duplicative litigation, and the petitioner may decide not to pursue any plenary action at all.
As a more general matter, we recognize that the circumstances in which books and records are sought are diverse, and the Court of Chancery should therefore exercise its traditional care in evaluating the factors relevant to the specific application before it in determining on remand whether to impose the requested use restriction.
For the foregoing reasons, the judgment of the Court of Chancery is hereby REVERSED and REMANDED.