Books And Records

The Court of Chancery of Delaware has issued an opinion on the interaction between the PSLRA’s discovery stay and 8 Del. C. Sec. 220, which allows shareholders to inspect certain books and records of a corporation. In Cohen v. El Paso Corp., 2004 WL 2340046 (Del. Ch. Oct. 18, 2004), the court addressed whether the discovery stay in effect in a federal securities class action brought against El Paso preempted the court from hearing Cohen’s Sec. 220 action.

Although the court conceded that Cohen’s complaint relied on similar facts to those forming the basis of the federal securities fraud claims, it found that nothing supported El Paso’s assertion that Cohen was attempting to aid the class action plaintiffs. Moreover, the records sought by Cohen did not “pertain directly to a federal securities law claim asserted in a pending federal action,” but rather to “state law claims of waste, mismanagement and breach of fiduciary duty.” The court therefore held that the PSLRA did not “operate to preempt or otherwise interrupt Cohen’s Sec. 220 action.”

Holding: Motion to stay or dismiss denied.

Quote of note: “Neither the PSLRA nor SLUSA prevents a state court from considering a books and records demand, or similar state corporate law claims, merely because one of the parties to the state action is protected by a PSLRA automatic discovery stay in an unrelated federal securities class action.”

Addition: An open question (or so it would appear) is whether El Paso might have more success arguing to the federal judge presiding over the securities class action that he/she should stay the Section 220 action pursuant to SLUSA, which states that “a court may stay discovery proceedings in any private action in state court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgements, in an action subject to a stay of discovery pursuant to [the PSLRA].”

Thanks to Jesse Weiss for sending the opinion to The 10b-5 Daily.

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