Saito v. McKesson HBOC, Inc.
2002 Del. LEXIS 379, 806 A.2d 113, 2002 WL 1302958 (2002)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A stockholder's statutory right to inspect corporate books and records for a proper purpose, such as investigating corporate wrongdoing, is not limited by the date the stockholder purchased stock and extends to all necessary documents in the corporation's possession, custody, or control, including those created by third parties or by a subsidiary.
Facts:
- On October 17, 1998, McKesson Corporation entered into a merger agreement with HBO & Company (HBOC).
- Three days later, on October 20, 1998, Noel Saito purchased shares of McKesson stock.
- In January 1999, the merger was completed, creating McKesson HBOC, Inc., with HBOC becoming a wholly-owned subsidiary.
- Between April and July 1999, McKesson HBOC announced a series of massive financial restatements, reducing previously reported revenues by $827.4 million.
- The restatements were attributed to accounting irregularities at HBOC that occurred prior to the merger.
- Saito sought to inspect McKesson HBOC's books and records to investigate potential wrongdoing by the boards of directors related to their failure to discover the accounting issues before consummating the merger.
Procedural Posture:
- Noel Saito, a shareholder, was a plaintiff in a derivative action, Ash v. McCall, filed in the Delaware Court of Chancery against McKesson HBOC's directors.
- The Court of Chancery granted the defendants' motion to dismiss the complaint but suggested that the plaintiffs use § 220 to obtain records to replead their claims.
- Saito then filed this separate § 220 action in the Court of Chancery, seeking to inspect McKesson HBOC's books and records.
- After a trial, the Court of Chancery found Saito had a proper purpose to investigate wrongdoing but limited the scope of inspection, denying access to pre-purchase documents, third-party advisor documents, and documents of the subsidiary, HBOC.
- Saito, as appellant, appealed the Court of Chancery's decision limiting the scope of his inspection to the Delaware Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a stockholder's statutory right under 8 Del. C. § 220 to inspect corporate records for a proper purpose extend to documents that (1) predate the stockholder's ownership, (2) were created by third-party advisors, and (3) originated from a wholly-owned subsidiary but are in the parent corporation's possession?
Opinions:
Majority - Berger, Justice.
Yes. A stockholder who demonstrates a proper purpose for inspection is entitled to access all documents in the corporation's possession, custody, or control that are necessary to satisfy that purpose. The scope of inspection is not automatically limited by the date of the stockholder's stock purchase, the source of the documents, or their origin in a subsidiary. The court reasoned that (1) the statutory standing requirement for bringing a derivative suit does not define the temporal scope of inspection rights under § 220, as pre-purchase records may be essential to understanding post-purchase wrongdoing or for non-litigation purposes like proxy fights. (2) The source of documents is irrelevant; if third-party advisor reports are in the corporation's possession and are necessary to investigate board oversight, they must be produced. (3) While stockholders of a parent cannot generally inspect a subsidiary's records, this rule does not apply to subsidiary documents that have been provided to the parent and are in its possession.
Analysis:
This decision significantly broadens the practical power of a stockholder's inspection right under Delaware's § 220. It decouples the scope of a pre-suit investigation from the stricter standing requirements of derivative litigation, particularly the contemporaneous ownership rule. The ruling establishes a functional 'possession, custody, or control' standard, preventing corporations from shielding relevant documents simply because they were created by third parties or a subsidiary. This strengthens § 220 as a primary tool for stockholders to investigate mismanagement and gather facts before filing a complaint, encouraging more focused and well-pled derivative actions.
