DGCL §220 Books and Records Request Improper as Stockholder Demonstrates Proper Purpose but is Unable to Show Loss or Harm to Corporation

Feb 17 2015

A Final Master’s Report recommended that the Chancery Court deny a plaintiff’s motion for summary judgment and grant the defendant’s cross-motion for summary judgment, relating to plaintiff’s demand to inspect a Delaware corporation’s books and records to investigate possible mismanagement, waste and breaches of fiduciary duty.

In October 2012, the plaintiff, Mr. Walther, made a demand to inspect the books and records of ITT Educational Services, Inc. (“ITT”) under Section 220 of the Delaware General Corporation Law (“DGCL”). The Section 220 request stemmed from ITT’s public disclosures and a Majority Committee Staff Report (“Committee Report”) issued by the U.S. Senate Health, Education, Labor and Pensions Committee relating to ITT’s compliance with federal Title IV student loan eligibility requirements and its student loan default rates.

Both ITT’s public disclosures and the Committee Report indicated that ITT’s eligibility for Title IV, which govern an entity’s eligibility for federal student loans, was in jeopardy due to its higher than permitted default rate of its students. Walther sought to investigate whether this high default rate, which put ITT’s primary revenue source in jeopardy, was a result of mismanagement, waste, and breaches of fiduciary duties at ITT.

In the Draft Report submitted to the Court by the Master in Chancery, the Master initially recommended that the Court grant Walther’s motion for summary judgment for four of the five requested categories of books and records, finding that he had satisfied the DGCL §220 requirement of demonstrating a “proper purpose” that was reasonably related to his interest as a stockholder. The Master found that, as a matter of law, Walther presented sufficient evidence to make a credible showing that there was mismanagement, waste, and breaches of fiduciary duties at ITT because ITT’s own public disclosures and the Committee Report led to an inference that ITT had failed to adequately prepare for the new Title IV requirements related to the permitted level of default rates of student loans.

However, in this Final Report, the Master modified the Draft Report and recommended the Court grant summary judgment in favor of ITT because, even though there was sufficient evidence presented to support a DGCL §220 demand, Walther had not shown that he could bring a “Caremark” claim as there was no loss or harm to ITT. ITT’s official student loan default rates, which were released in the interim, were well below the threshold determining Title IV eligibility, and, as a result, ITT was not in jeopardy of losing its Title IV eligibility. Although Walther alleged other damage done to ITT (such as reputational damage), the Master stated it was mere speculation on Walther’s part and to grant the inspection request on that basis could result in “indiscriminate fishing expeditions.”

Walther v. ITT Educational Services, Inc., C.A. No. 8273-MA (February 10, 2015)