King v. VeriFone Holdings, Inc.
12 A.3d 1140
Del.2011Background
- King filed a California derivative action on VeriFone holdings seeking fiduciary-duty relief and related claims following a 2007 restatement.
- VeriFone restated earnings for three quarters in 2007, triggering stock decline and regulatory scrutiny.
- California federal court dismissed King's derivative complaint for failure to plead demand futility, but with leave to amend.
- The California court suggested King obtain books and records via Delaware Section 220 to develop facts for pleading futility.
- King then sought a Delaware Section 220 inspection for the Audit Report; VeriFone moved to dismiss for lack of a proper purpose due to prior derivative filing.
- Court of Chancery dismissed, adopting a bright-line rule that filing a derivative action first precludes later Section 220 relief; King appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether first filing a California derivative action precludes a later Section 220 action | King argues the preclusion rule is unsupported and that Section 220 may be used to gather facts to plead demand futility. | VeriFone contends the prior election to sue in California bars subsequent Section 220 relief. | King had a proper purpose; preclusion rule rejected. |
| Whether Section 220 can be used to aid pleading demand futility in an amended derivative action | King maintains 220 is appropriate to obtain necessary facts for amended pleading. | VeriFone maintains 220 relief was improper given the prior derivative filing. | Proper purpose to inspect to aid demand futility pleading recognized. |
| Whether the Court of Chancery's bright-line preclusion rule aligns with Section 220 policy | King asserts the rule is inconsistent with Delaware precedent and §220 policy. | VeriFone argues the rule prevents wasteful duplication of litigation. | Rule rejected; Delaware policy supports flexible use of §220, not automatic preclusion. |
Key Cases Cited
- In re Walt Disney Co. Derivative Litig., 731 A.2d 342 (Del. Ch. 1998) (use of §220 to develop facts for later pleading demand futility)
- Ash v. McCall, 2000 WL 1370341 (Del. Ch. 2000) (endorses §220 as a tool to obtain information for pleadings (official reporter not available))
- Melzer v. CNET Networks, Inc., 934 A.2d 912 (Del. Ch. 2007) (proper purpose to inspect to plead demand futility in amended complaint)
- West Coast Mgmt. & Capital LLC v. Carrier Access Corp., 914 A.2d 636 (Del. Ch. 2006) (lacks proper purpose where prior action dismissed without leave to amend)
- In re CNET Networks, Inc. S'holder Derivative Litig., 934 A.2d 922 (Del. Ch. 2007) (context for use of §220 to develop facts for demand futility)