Klein v. Ellison

Background

The plaintiffs filed an administrative motion asking the court to extend the deadline for filing an amended complaint. In an earlier order, the court dismissed their claims under Section 14(a) of the Securities Exchange Act with permission to amend. It also dismissed their state-law claims without prejudice to reasserting them in the Delaware Court of Chancery. The court gave the plaintiffs 30 days to file an amended complaint.

The plaintiffs wanted to make a shareholder inspection demand under Section 220 of the Delaware Code to Oracle Corporation and Oracle America, Inc., which the opinion calls “Oracle.” They said the requested books and records would help them amend their Section 14(a) claims. They asked the court to postpone the amendment deadline until 30 days after Oracle produced the records. The defendants opposed the request, arguing that the discovery stay in the case barred the demand.

Court’s Analysis

The Private Securities Litigation Reform Act, a federal securities law, requires that discovery and other proceedings be stayed in a private securities action while a motion to dismiss is pending. The court held that this stay applies to shareholder derivative suits asserting federal securities claims. The stay continues until the court determines that the complaint is legally sufficient.

The plaintiffs argued that a Section 220 books-and-records demand is not discovery in the federal action. The court rejected that argument. It reasoned that delaying the case to allow the inspection would conflict with the purpose of the federal discovery stay, which is to require securities complaints to stand or fall based on information plaintiffs already had before filing.

The court also relied on Delaware law, under which a stockholder must show a proper purpose for a Section 220 demand. It explained that using such a demand to get around the federal stay is not a proper purpose unless three safeguards exist: the plaintiff is not involved in the federal case, the plaintiff’s lawyer is not involved in the federal case, and the plaintiff agrees not to share the information with the plaintiff or lawyer in the federal case. The court found that none of those safeguards was present because the plaintiffs and their lawyers were the same people involved in this action and had not agreed to keep the information separate.

Disposition

The court concluded that extending the amendment deadline for the proposed Section 220 demand would be futile because the demand was improper under Delaware law and was unlikely to succeed. It denied the plaintiffs’ administrative motion. The amended-complaint deadline, which had been paused while the motion was considered, remained July 6, 2021. The order disposed of docket entry 74.