The Delaware Court of Chancery recently held that a shareholder was not entitled to inspect records concerning alleged violations of the Foreign Corrupt Practices Act (FCPA) because the shareholder was barred from pursuing further derivative litigation, and the documents sought were unnecessary to make a demand on the board.
Between 2007 and 2008, defendant Parker Drilling Company disclosed that the United States Department of Justice (DOJ) and Securities and Exchange Commission were investigating the company for possible FCPA violations. In 2010, Parker disclosed the results of its internal investigation, which led to an initial shareholder demand as well as the filing of various derivative suits in Texas state and federal courts. One of these cases (the Freuler Action) was later dismissed with prejudice for failure to demonstrate demand futility.
Parker announced in 2013 that it had reached a settlement with the DOJ and SEC. The same year, a special committee formed by Parker recommended that the company not pursue action against the individuals mentioned but not identified by name in the settlement papers. Plaintiff Fuchs Family Trust (Fuchs), one of the derivative plaintiffs in Texas state court, then made a demand that Parker reveal who the individuals were whose conduct led to the settlement.
The court found that Fuchs’ purposes in making the demand were not proper. First, applying Texas law of issue preclusion, the court held that the dismissal of the Freuler Action barred any new derivative action, so the demand could be denied as a matter of law. Second, the court found that Fuchs had no need for the identities of the individuals described in the settlement to make a demand on the board; Fuchs already had the information provided in the settlement papers, and could “request further action against the wrongdoers without knowing their identities.”
Fuchs Family Trust v. Parker Drilling Co., C.A. No. 9986-VCN (Del. Ch. Mar. 4, 2015).