Fuchs Family Trust v. Parker Drilling Company ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
FUCHS FAMILY TRUST, :
:
Plaintiff, :
:
v. : C.A. No. 9986-VCN
:
PARKER DRILLING COMPANY, :
:
Defendant. :
MEMORANDUM OPINION
Date Submitted: November 12, 2014
Date Decided: March 4, 2015
Joel Friedlander, Esquire and Christopher Foulds, Esquire of Friedlander & Gorris,
P.A., Wilmington, Delaware; Benny C. Goodman III, Esquire, Laurie L. Largent,
Esquire, and Christopher D. Stewart, Esquire of Robbins Geller Rudman & Dowd
LLP, San Diego, California; and Joe Kendall, Esquire and Jamie J. McKey,
Esquire of Kendall Law Group, LLP, Dallas, Texas, Attorneys for Plaintiff.
Srinivas M. Raju, Esquire and Robert L. Burns, Esquire of Richards, Layton &
Finger, P.A., Wilmington, Delaware, and Samuel W. Cooper, Esquire and
Christie A. Mathis, Esquire of Paul Hastings LLP, Houston, Texas, Attorneys for
Defendant.
NOBLE, Vice Chancellor
I. BACKGROUND
Based in Houston, Texas, Defendant Parker Drilling Company (“Parker” or
the “Company”) is a Delaware corporation providing drilling and drilling-related
services. As an issuer under the federal securities laws, Parker is subject to the
Foreign Corrupt Practices Act (the “FCPA”).1 The FCPA prohibits covered
companies from bribing foreign officials and requires those companies to adopt
and maintain preventive internal controls and accounting records.
On August 9, 2007, Parker disclosed that the United States Department of
Justice (the “DOJ”) had requested information regarding the Company’s use of a
freight forwarding and customs agent. The DOJ was concerned about FCPA
compliance and had apparently requested similar information from several other
companies. Early the next year, Parker disclosed that the Securities and Exchange
Commission (the “SEC”) had demanded the same information. Soon thereafter,
the Company acknowledged that both agencies were investigating potential FCPA
violations relating to Parker’s business in Kazakhstan and Nigeria, and that the
Company was conducting its own internal investigation.
In 2010, Parker disclosed (the “2010 Disclosure”) that its internal
investigation “ha[d] identified issues relating to potential non-compliance with
applicable laws and regulations, including the FCPA, with respect to operations in
1
Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. § 78dd-1, et seq.
1
Kazakhstan and Nigeria.”2 In response, a stockholder made demand on Parker’s
board (the “Stockholder Demand”) to take action “to remedy breaches of fiduciary
duties by the directors and certain officers of the Company . . . .”3 The board
formed a special committee (the “Special Committee”) to evaluate the Stockholder
Demand and determine an appropriate course of action.
Also soon after the 2010 Disclosure, various stockholders filed derivative
actions in Texas state courts. These actions, one filed by Plaintiff Fuchs Family
Trust (“Fuchs”), were consolidated and restyled In re Parker Company Derivative
Litigation (the “State Court Derivative Action”).4 Plaintiffs in the State Court
Derivative Action alleged that Parker’s directors and executives had breached their
fiduciary duties by failing to implement and maintain internal controls to comply
with laws, including the FCPA. The plaintiffs pleaded that demand on Parker’s
2
Joint Exhibit (“JX”) 5.
3
JX 7. Fuchs objected to consideration of the contents of the Stockholder
Demand, as well as several SEC filings, on hearsay grounds. In the Pre-Trial
Stipulation and Order (the “Pre-Trial Order”), Fuchs admitted that the Company
received the Stockholder Demand and that Parker later reported that it had decided
not to take action. ¶¶ 8; 32. The Stockholder Demand establishes that Parker
received that request, rather than the truth of any assertions therein. Further,
“[d]espite the fact that a SEC filing may constitute hearsay with respect to the truth
of the matters asserted therein, courts may consult these documents to ascertain
facts appropriate for judicial notice under D.R.E. 201.” In re Santa Fe Pac. Corp.
S’holder Litig., 669 A.2d 59, 70 n.9 (Del. 1995). That a stockholder made demand
on Parker’s board, and that the board refused to pursue action, has been
established. Regardless, these facts are not necessary for resolving this matter.
4
JX 11.
2
board was futile because the members faced a substantial likelihood of liability for
breaching their duties of loyalty.
Parker moved to dismiss the State Court Derivative Action, asserting that
plaintiffs had inadequately pleaded demand futility. The court dismissed the action
without prejudice, after which the plaintiffs filed an amended petition. Parker
again moved to dismiss on substantially the same basis as its first motion. The
court dismissed the amended petition, again without prejudice.5
While this litigation was ongoing, another stockholder derivative action (the
“Freuler Action”) was lodged in the United States District Court for the Southern
District of Texas (the “Texas federal court”). The Freuler Action also addressed
the Company’s FCPA-related issues. As with the State Court Derivative Action,
Parker moved for dismissal based on plaintiff’s failure to plead demand futility
sufficiently. The court dismissed the Freuler Action, allowing the plaintiff (the
“Freuler Plaintiff”) opportunity to replead.6 The court subsequently dismissed an
5
JX 31 (July 23, 2012, Order In re Parker Drilling Co. Deriv. Litig., Master File
No. 2010-34655, 61st Dist. Ct., Harris Cnty., Tex.).
6
JX 16 (Opinion and Order, Freuler v. Parker, Jr., CA H-10-3148 (S.D. Tex.
June 30, 2012) (“First Federal Court Dismissal”)).
3
amended complaint with prejudice for failure to demonstrate demand excusal.7
The United States Court of Appeals for the Fifth Circuit affirmed the dismissal.8
On February 15, 2013, Parker announced that it had reached an agreement in
principle to settle the DOJ and SEC investigations. Two months later, the
Company settled with the agencies, entering into a three-year deferred prosecution
agreement (“DPA”) with the DOJ and a civil settlement with the SEC (together,
the “Settlement”). Parker agreed to pay $15.85 million in fines, penalties and
disgorgement, consented to a permanent injunction against FCPA violations, and
adopted new internal controls to bring the Company into compliance with the
FCPA’s books and records provisions. The DPA noted Parker’s cooperation with
the investigation and its extensive remediation.9 Further, Parker has “end[ed] its
business relationships with [the] officers, employees, or agents primarily
responsible for the corrupt payments.”10
The papers accompanying the Settlement (the “Resolution Papers”)
described a bribery scheme (the “Nigerian Bribing Scheme”), that violated the
FCPA, stemming from Parker’s operations in Nigeria between 2001 and 2004.
Parker admitted that two senior executives, identified only as “Executive A” and
7
JX 19 (Opinion and Order of Dismissal, Freuler v. Parker, Jr., CA H-10-3148
(S.D. Tex. Mar. 14, 2012) (“Second Federal Court Dismissal”)).
8
JX 37 (Opinion, Freuler v. Parker Jr., Case No. 12-20260 (5th Cir. Mar. 11,
2013)).
9
JX 41, ¶ 4.
10
Id.
4
“Executive B”, had funneled $1.25 million in bribes to Nigerian officials through a
partner (“Outside Legal Counsel”) at the law firm retained by the Company (the
“Law Firm”).
By July 29, 2013, the Special Committee had finished assessing the
Stockholder Demand. The Special Committee recommended that the Company
not pursue action against the individuals named in the Stockholder Demand, and
the board accepted this recommendation.
On November 15, 2013, Fuchs sent an inspection demand (the “Inspection
Demand”), pursuant to 8 Del. C. § 220, to Parker’s board.11 The letter described
the misconduct disclosed in the Resolution Papers and stated that inspection was
sought for “(1) investigating possible mismanagement and breaches of fiduciary
duties; and (2) investigating violations of law by the current and former officers
and directors of the Company in connection with Parker’s violations of the
[FCPA].”12
On December 3, 2013, Parker rejected the Inspection Demand, which had
requested eight separate categories of documents. Parker cited technical defects
and expressed its belief that Fuchs had failed to state a proper purpose or a credible
basis for inspection.13 Fuchs has since narrowed the scope of its demand to
11
JX 52. Fuchs had requested inspection pursuant to Texas law on June 10, 2013.
12
Id. at 1.
13
JX 54.
5
“[d]ocuments sufficient to identify Executive A, Executive B, Law Firm and
Outside Counsel.”14 It “seeks to assess the options, with the aid of counsel, for
potential litigation and/or to demand that the Company take action.”15 Fuchs’s
inspection demand action was tried on a paper record.16
II. ANALYSIS
“Stockholders of Delaware corporations enjoy a qualified common law and
statutory right to inspect the corporation’s books and records.”17 “Any
stockholder, in person or by attorney or other agent, shall, upon written demand
under oath stating the purpose thereof, have the right . . . to inspect for any proper
purpose . . . [t]he corporation’s . . . books and records . . . .” 18 In order to exercise
this powerful right, “a stockholder has the burden of proof to demonstrate a proper
purpose by a preponderance of the evidence.”19
A proper purpose is defined as one “reasonably related to such person’s
interest as a stockholder.”20 A desire to investigate wrongdoing or mismanagement
is a proper purpose; however, such investigation “must be to some end. Delaware
14
JX 72, at 5.
15
Id. at 1.
16
This memorandum opinion sets forth the Court’s findings of fact and
conclusions of law.
17
Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).
18
8 Del. C. § 220(b)(1).
19
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).
20
8 Del. C. § 220(b).
6
law does not permit section 220 actions based on an ephemeral purpose, nor will
this court impute a purpose absent the plaintiff stating one.”21
When a stockholder’s stated purpose is to investigate wrongdoing or
mismanagement, it must establish a credible basis to support an inference that
waste or mismanagement occurred.22 This relatively minimal burden allows
stockholders to exercise a valuable right while protecting corporations from
demands based on mere suspicion or curiosity.23
A. Fuchs’s Stated Purposes
Fuchs’s stated purposes have evolved over time. In its first demand letter,
sent on November 15, 2013, Fuchs described its intentions as “(1) investigating
possible mismanagement and breaches of fiduciary duties; and (2) investigating
violations of law by the current and former officers and directors of the Company
in connection with Parker’s violations of the [FCPA].”24 In the Complaint, filed
July 31, 2014, Fuchs expressed a desire to “investigat[e] corporate wrongdoing and
mismanagement for potential litigation.”25 Then, on November 4, 2014, after both
parties had filed opening pre-trial briefs, Fuchs sent to Parker an updated demand
21
W. Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 646
(Del. Ch. 2006).
22
Seinfeld, 909 A.2d at 122.
23
Id. at 123.
24
JX 52, at 1.
25
Compl. ¶ 31.
7
letter, explaining its intention to “assess the options, with the aid of counsel, for
potential litigation and/or to demand that the Company take action.”26
A Section 220 action is not for the merely curious. There must be some
purpose that would benefit the corporation and its stockholders, and not just the
idiosyncratic notions of one stockholder. Fuchs has not been as constant and as
focused on its ultimate objective as one might expect.27 It has (at various times)
identified two ends to where its investigation might lead: (i) a derivative action or
(ii) a demand on Parker’s board.28 However, collateral estoppel would bar Fuchs
26
JX 72, at 1.
27
Indeed, during his deposition, Fuchs’s sole trustee and manager could not
identify those objectives, beyond deferring to the guidance of counsel. JX 68
(Dep. Tr. of Paul Joseph Fuchs, Oct. 16, 2014) 105-06.
28
“[T]o warrant relief from this court, a demand for books and records must be
sufficiently specific to permit the court (and the corporation) to evaluate its
propriety.” Norfolk Cnty. Ret. Sys. v. Jos. A. Bank Clothiers, Inc., 2009 WL
353746, at *11 (Del. Ch. Feb. 12, 2009), aff’d, 977 A.2d 899 (Del. 2009). The
only end goals Fuchs has identified in its Complaint and demand letters are
derivative litigation and board demand. Section 220 requires a stockholder to state
its purpose in its written demand. That Fuchs has vaguely referenced “in a
conclusory manner, [other] generally accepted proper purpose[s]” is of no effect in
this case. See, e.g., W. Coast Mgmt. & Capital, 914 A.2d at 646. “[U]nless a
demand in itself unspecific as to purpose can in some way successfully be given an
expanded reading viewed in the light of surrounding circumstances . . . a vague
demand without more must a fortiori be deemed insufficient.” Norfolk Cnty. Ret.
Sys., 2009 WL 353746, at *11 (quoting Weisman v. W. Pac. Indus., Inc., 344 A.2d
267, 269 (Del. Ch. 1975)). “[I]t may be safely assumed that neither the
corporation nor the Court will be required or inclined to engage in speculation as to
the stated purpose for the demand . . . .” Donald J. Wolfe, Jr. & Michael A.
Pittenger, Corporate and Commercial Practice in the Delaware Court of
Chancery, § 8.06[e][2], at 8-141 (2014). Here, the surrounding circumstances do
8
from pursuing further derivative litigation. While Fuchs may demand that Parker
take action in relation to the past FCPA violations, the documents it seeks are
unnecessary for that course of action.29
B. The Scope of Fuchs’s Demand
While Fuchs initially requested eight categories of documents, it
subsequently narrowed the scope of its demand. The Complaint requests
documents sufficient to identify Executives A and B and Outside Legal Counsel.30
In its pre-trial opening brief, Fuchs reaffirmed: “Plaintiff only seeks four pieces of
not warrant reading the reasons behind Fuchs’s purpose beyond those it has
specifically identified.
29
The Section 220 demand that Fuchs made before initiating this litigation
apparently was defective when made because it did not demonstrate ownership of
Parker stock. Parker identified this shortcoming in its answer. See Answer ¶ 6
(“[Fuchs’s demand] includes a Statement of Account showing only that an
unidentified account held stock in the Company, which the Statement of Account
states was purchased on April 16, 2009.”). A week before trial, Fuchs updated its
demand and provided documentation that Parker concedes is sufficient evidence of
ownership. A demand’s compliance with the technical requirements of Section
220 is measured as of the time of the demand. See, e.g., Cent. Laborers Pension
Fund v. News Corp., 45 A.3d 139, 145 (Del. 2012) (“The requirements in section
220 protect ‘corporations from improper demands by requiring that evidence of
beneficial ownership be both furnished with the demand and provided under oath.”
(emphasis in original) (quoting Seinfeld v. Verizon Commc’ns Inc., 873 A.2d 316,
317 (Del. Ch. 2005)); Barnes v. Telestone Techs. Corp., 2013 WL 3480270, at *2
(Del. Ch. July 10, 2013) (explaining that stockholders must “provid[e]
documentary evidence of stock ownership at the time the plaintiff made its initial
demand to the company.”). Parker no longer pushes this argument and stipulated
that Fuchs is a stockholder, perhaps because Fuchs could simply make a new
demand and substantially the same issues would require consideration in the short
term anyway.
30
Compl. ¶¶ 4; 26.
9
information—documents sufficient to identify the persons and entities identified in
[the DPA] as ‘Executive A,’ ‘Executive B,’ ‘Law Firm,’ and ‘U.S. Outside
Counsel.’”31
On November 4, 2014, just eight days before trial, Fuchs issued a
supplemental inspection demand, to provide, in part, sufficient proof of its
beneficial ownership of Parker stock.32 In addition to requesting documents
sufficient to identify the anonymous wrongdoers, Fuchs attempted to broaden its
demand (shortly before trial and after briefing had commenced) to include any
report prepared by Parker’s board, or any committee thereof, concerning
investigation of the Nigerian Bribing Scheme, and all documents relied upon by
the board or any committee thereof.33
Given the circumstances, Fuchs’s late attempt to expand its inspection must
be rejected.34 “Strict adherence to the section 220 procedural requirements for
31
Pl.’s Corrected Opening Pre-Trial Br. 13.
32
JX 72.
33
This was Fuchs’s only new request. See Pre-Trial Order ¶ 42 (“[The
November 14, 2014, letter] added a new request.”).
34
In the Pre-Trial Order, Fuchs stated its intention to move to supplement its
Complaint either before trial or in conformity with the evidence presented at trial.
¶ 45. In an amendment to the Pre-Trial Order, approved by the Court on the day of
trial, Parker stated: “Defendant objects to any such amendment or supplement on
any basis, including based on evidence present at trial, except consents to the
amendment of or supplement to the pleadings to include the November 4, 2014
inspection demand.” The amendment purported to alter only one paragraph in the
Pre-Trial Order.
10
making an inspection demand protects the right of the corporation to receive and
consider a demand in proper form before litigation is initiated.”35 Parker’s right to
consider Fuchs’s demand properly would be substantially impaired by forcing it to
adapt its response and defense to Fuchs’s evolving requests.36 The scope of
In paragraph 44.H. of the Pre-Trial Order, Parker characterized one of the issues
to be litigated as: “Whether [Fuchs’s] purported supplemental demand letter sent
only eight days before trial . . . and sent only two days before Defendant’s
answering pre-trial brief was due, supports denying [Fuchs’s] inspection requests
as further evidence of the undue burden placed on Defendant by [Fuchs].” At trial,
Parker argued that Fuchs’s shifting document requests were burdensome and that
the Special Committee’s work had been public knowledge well before Fuchs’s
November 4, 2014, letter. Thus, although Parker consented to the admission of
that letter into the pleadings, it did not waive its argument that Fuchs’s expansion
of its requests shortly before trial was inappropriate.
35
Barnes, 2013 WL 3480270, at *2 (emphasis in original) (quoting Cent. Laborers
Pension Fund, 45 A.3d at 146). Even beyond concerns related to Section 220’s
requirements, forcing Parker to defend against issues raised only a week before
trial would be at odds with fundamental fairness.
36
Fuchs suggests that it requested the board or Special Committee report late
because it only recently became aware of its existence. Given the circumstances
here, the Court is not moved to employ any discretion it might have to allow
Fuchs’s late addition. That the Special Committee was evaluating the Stockholder
Demand has been public knowledge since 2010. JX 8. That the committee had
engaged counsel, evaluated the demand, and recommended that Parker not pursue
the action contemplated by the Stockholder Demand has been public knowledge
since 2013. JX 51.
Fuchs could have sought documents related to that process when it initiated this
action. Parker, which has not been properly afforded time to consider this belated
request, has indicated that production of a special committee report would raise
issues of privilege. Whether a request for that report would have been appropriate
had Fuchs initially sought it through this action cannot now be determined.
Fuchs’s demands also include what it describes as a “catch all,” including “all
information referred to in this letter that is within the legal possession, custody or
control of Parker, including, but not limited to, such information that is within the
possession, custody or control of Parker’s subsidiaries and outside legal counsel,
11
Fuchs’s demand is thus limited to documents sufficient to identify Executives A
and B, Law Firm, and Outside Legal Counsel.
C. Collateral Estoppel Bars Further Derivative Litigation
“[I]nvestigating the possibility of pursuing a derivative action based on
perceived wrongdoing by a corporation’s officers or directors represents a proper
purpose for a Section 220 demand.”37 However, if claim or issue preclusion would
bar future derivative action, a Section 220 demand may be denied as a matter of
law.38 Here, the Texas federal court has already dismissed with prejudice the
Freuler Action for failure to plead demand futility. That judgment prevents Fuchs
from relitigating that issue.
This Court must “give a federal judgment the same force and effect as it
would be given under the preclusion rules of the state in which the federal court is
sitting.”39 In this case, Texas law controls. A party asserting “collateral estoppel
must establish that (1) the facts sought to be litigated in the second action were
fully and fairly litigated in the first action; (2) those facts were essential to the
accountants and consultants.” JX 52, at 6; JX 72, at 5. Fuchs represents that this
“catch all” was intended to avoid a hyper-technical reading of its inspection
demand. The language does not appear to request any category of documents
independently. Anyway, such a request lacks the requisite “rifled precision” to
support the demand.
37
Norfolk Cnty. Ret. Sys., 2009 WL 353746, at *6.
38
Id.
39
Pyott v. La. Mun. Police Empls.’ Ret. Sys., 74 A.3d 612, 616 (Del. 2013).
12
judgment in the first action; and (3) the parties were cast as adversaries in the first
action.”40
Strict mutuality of parties is not required; “[t]o satisfy the requirements of
due process, it is only necessary that the party against whom the doctrine is
asserted was a party or in privity with a party in the first action.”41 Further, “the
unique nature of derivative litigation logically leads to a finding of privity between
all shareholder plaintiffs.”42 Therefore, Fuchs is in privity with the Freuler Action
Plaintiff.43
Fuchs argues that the facts and legal theories underlying its case, including
the allegations supporting demand futility, differ from those considered in the
Freuler Action. However, the Freuler Action Plaintiff and Fuchs alleged breaches
of fiduciary duties against Parker’s directors and officers based on the same
underlying operative facts, i.e., Parker’s FCPA-related issues. That the two
40
John G. & Marie Stella Kenedy Mem’l Found. v. Dewhurst, 90 S.W.3d 268, 288
(Tex. 2002).
41
Sysco Food Servs., Inc. v. Trapnell, 890 S.W.2d 796, 802 (Tex. 1994) (emphasis
in original).
42
Hanson v. Odyssey Healthcare, Inc., 2007 WL 5186795, at *5 (N.D. Tex.
Sept. 21, 2007) (applying Texas law).
43
Fuchs argues that Parker has failed to prove that the Freuler Action Plaintiff was
a Parker stockholder while maintaining the Freuler Action. However, it is clear
that the Freuler Action was litigated on the basis that the plaintiff was a
stockholder. The Freuler Action Plaintiff verified his status as a stockholder in his
first amended complaint. JX 23. His lawyer filed the verification to the second
amended complaint because the plaintiff was unavailable. JX 28. The record
appears clear that Parker would establish that the Freuler Action Plaintiff was
indeed a Parker stockholder when he pursued litigation in Texas.
13
plaintiffs may have offered somewhat different theories for demand futility does
not deprive the Freuler Action of preclusive effect. “[T]he doctrine [of collateral
estoppel] will not be set aside for failure of a representative to invoke all possible
legal theories or to develop all possible resources of proof, but rather only in light
of representation so grossly deficient as to be apparent to the opposing party.”44
Despite Fuchs’s rhetoric, its legal theory appears similar to that advanced in
the Freuler Action. In Fuchs’s own words: “Plaintiff here alleged liability based
on the directors’ personal failure to cause Parker Drilling to adopt books and
records and other policies necessary for compliance with the FCPA despite a
known legal duty to do so . . . .”45 The Texas federal court characterized one of the
Freuler Action Plaintiff’s claims as: “[Parker’s officers and directors] failed to
establish and maintain internal controls to ensure compliance with the FCPA,
federal securities laws, and accounting regulations . . . .”46 While the two
plaintiffs’ theories need not be identical for collateral estoppel to apply, they are at
least similar.
44
Hanson, 2007 WL 5186795, at *5.
45
Pl.’s Pre-Trial Answering Br. 17.
46
First Federal Court Dismissal. In dismissing with prejudice the Freuler Action
following repleading, the Texas federal court noted: “Because the Court finds that
Plaintiff’s response reiterates his same, insufficient, conclusory or erroneous
allegations, the Court does not summarize them.” Second Federal Court
Dismissal.
14
Fuchs’s only truly plausible argument against collateral estoppel is that the
Texas federal court dismissed the Freuler Action with prejudice before Parker
publicly admitted to the Nigerian Bribing Scheme and disclosed the scheme’s
underlying facts in the Resolution Papers. Parker notes that it entered into the
Settlement prior to oral argument in the Fifth Circuit Court of Appeals, which
affirmed the dismissal with prejudice. The Freuler Action Plaintiff could have
filed a motion for reconsideration before the Texas federal court.47 The decision
not to pursue that strategy was not “grossly deficient,” and is a tactical choice
binding on Fuchs.
More fundamentally, the existence of the Settlement and Resolution Papers
would not have materially affected the Texas federal court’s decision on demand
futility. In dismissing the Freuler Action, that court noted:
Once again, Plaintiff offers a variety of irrelevant facts and
unsupported conclusions and again he strings together improper
inferences, all based on the one fact he has: the on-going FCPA
investigation of Parker Drilling. From this one fact, Plaintiff links
together the following presumptions: because there is an investigation,
there must have been violations of the law; because the law must have
been violated, there must have been deficiencies in the internal
controls; because there must have been internal control deficiencies, a
majority of the defendants must have known of the deficiencies and
deliberately chosen to do nothing about them.48
47
See FED. R. CIV. P. 60(b) (“[T]he court may relieve a party or its legal
representative from a final judgment, order, or proceeding for . . . newly
discovered evidence . . . or any other reason that justifies relief.”).
48
JX 19, at 3-4.
15
The Settlement would have closed the first inferential gap in the failed chain
of reasoning, i.e., the Texas federal court could have concluded that there had been
legal violations. However, the Settlement would not have allowed the court to
infer that “a majority of the defendants must have known of the deficiencies and
deliberately chosen to do nothing about them.” The Settlement and related
disclosures represent the only “new facts” that Fuchs contends would be relevant
in pleading demand futility. These facts alone cannot support every inferential step
that the Texas federal court indicated would have been necessary to hold that
demand is futile. Therefore, the facts are not material to that decision, and Fuchs is
bound by that court’s judgment on the issue of demand futility.
The Freuler Action Plaintiff presumably could have made a Section 220
demand before filing either its initial or amended complaint. It did not do so, and
its case was dismissed with prejudice. This Court has observed that a prior
plaintiff’s decision against making a Section 220 demand before pleading demand
futility does not prevent collateral estoppel.49 Here, where Fuchs itself proceeded
with the same strategy in the State Court Derivative Action, it should not be heard
49
See Pyott, 74 A.3d at 618 (noting that there is no irrebutable presumption of
inadequate representation when a stockholder files a derivative action without first
bringing a books and records action).
16
to complain that such a decision alone rendered the Freuler Action Plaintiff an
inadequate representative of its interests.50
Because Fuchs cannot pursue further derivative litigation in this context,
pursuit of such action is not a proper purpose.51
D. The Information Fuchs Seeks is Not Necessary to Make a Demand
on Parker’s Board
As an initial observation, it is worth noting that Parker’s board has already
done much of what one might expect in relation to its past FCPA violations. The
Settlement commended Parker for its response to the FCPA investigations,
50
To the extent that Fuchs argues that Parker’s current directors (a majority of
whom joined the board after the last events described in the Resolution Papers)
breached duties based on their response to the conduct underlying the Settlement,
there is no credible basis to support an inference of wrongdoing. As discussed,
infra Section II.D, Parker’s board seemingly dealt with the problem in good faith.
Stockholders cannot satisfy [the credible basis] burden merely by
expressing disagreement with a business decision. When a business
judgment forms the basis for a request for books and records, a
stockholder must show a credible basis for an inference that
management suffered from some self-interest or failed to exercise due
care in a particular decision.
Deephaven Risk Arb Trading Ltd. v. UnitedGlobalCom, Inc., 2004 WL 1945546, at
*5 (Del. Ch. Aug. 30, 2004). Fuchs’s only criticism of the current board is that it
did not adequately pursue action against those responsible for the Nigerian Bribing
Scheme. That (i) there was wrongdoing and (ii) Fuchs perceives the board’s
response as inadequate does not establish a credible basis to infer wrongdoing by
the board. A holding otherwise would conflate the actions of different actors and
eviscerate the credible basis requirement. Further, Parker has ended its business
relationships with Executives A and B; there is no credible basis for investigating
Parker’s current officers.
51
Because collateral estoppel applies, Parker’s argument that potential derivative
litigation would be time barred will not be considered.
17
including (i) its cooperation, including its extensive internal investigation, (ii) its
extensive remediation, including terminating business relationships with officers,
employees, and agents primarily responsible for the bribery scheme, (iii) its
improvement of, and continuing commitment to improve, its internal controls, and
(iv) its continuing cooperation with the DOJ in future investigations. 52 Parker’s
board also formed the Special Committee that considered the Stockholder Demand
and apparently pursued action against Outside Legal Counsel.53
Parker’s range of effort appears reasonable, but it cannot be characterized as
exhaustive. A board’s apparent good faith effort to deal with a problem does not
deprive a stockholder of its inspection rights; ultimately, this is Parker’s primary
defense. Fuchs has referenced making a demand on Parker’s board, and has thus
stated a proper purpose.
However, “[e]ven if a plaintiff demonstrates a proper purpose, that plaintiff
is not entitled to inspect all the documents that he or she believes are relevant or
even likely to lead to information relevant to that purpose.” 54 “The scope of
inspection . . . [is] limited to those documents that are necessary, essential and
52
JX 41, at ¶ 4.
53
Aff. of John Edward Menger, ¶ 3. Although Fuchs objected to this affidavit
because it did not have the opportunity to examine the affiant, whether it is
admitted or not is not material to this decision.
54
Norfolk Cnty. Ret. Sys., 2009 WL 353746, at *6.
18
sufficient to the stockholder’s purpose.”55 A requesting stockholder bears the
burden of proving that the books and records sought are essential to accomplish its
purpose.56
This is not a case where Fuchs’s demand could be dismissed as vague or
overly broad. However, while its requests are specific and limited, Fuchs does not
need the identities (already known to the board) of Executives A and B, Outside
Legal Counsel, and the Law Firm in order to make a demand on the board.
Through the Resolution Papers, Fuchs knows details about the Nigerian Bribing
Scheme, as well as the steps Parker has taken to remediate those issues. Fuchs can
request that Parker’s board take further action against the wrongdoers without itself
knowing their identities.57 Fuchs already has sufficient information to pursue this
course of action; the production it seeks is not necessary and essential.
55
Id. (quoting Marathon P’rs, L.P. v. M&F Worldwide Corp., 2004 WL 1728604,
at *4 (Del. Ch. July 30, 2004)).
56
Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 569 (Del. 1997).
57
Cf. Kaufman v. CA, Inc., 905 A.2d 749, 753 (Del. Ch. 2006) (“[W]hen a books
and records action is brought with the goal of evaluating a possible derivative suit,
the books and records that satisfy the action are those that are required to prepare a
well-pleaded complaint. Of course, this means that Section 220 is not meant as a
replacement for discovery under Rule 34.”). While the information Fuchs seeks
would be necessary to pursue derivative litigation, it is not necessary to make
demand on Parker’s board.
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III. CONCLUSION
Given the circumstances of this case, Fuchs has failed to establish that it is
entitled to the books and records it seeks under 8 Del. C. § 220. It is barred from
pursuing further derivative litigation and the documents it seeks are unnecessary to
make a demand on Parker’s board. Given that those are the two purposes that
Fuchs has articulated, judgment will be entered in favor of Parker.
20