The Paradox of Delaware's 'Tools at Hand' Doctrine: An Empirical Investigation

Abstract

Much has been written on the subject of abusive shareholder litigation. The last decade has witnessed at first an increase and then a dramatic spike in such suits, primarily suits filed in connection with mergers and acquisitions. Delaware courts are known for not just their deep experience in corporate law suits but as being doctrinal innovators. One such innovation occurred in Rales v. Blasband, 654 A.2d 927 (Del. 1993), establishing the “tools at hand” doctrine, whereby before considering whether to grant a motion to dismiss the court admonishes the shareholder-plaintiff to resort to shareholder inspection rights accorded by the Delaware General Corporation Law so as to gather facts necessary for the complaint to survive the pretrial motion. On its face, the doctrine reflects a balanced approach to the competing claims that shareholder litigation is necessary to address and discourage managerial misconduct and the belief the suits are vexatious being brought to garner an extortionate settlement. In this paper, we empirically examine how Rales has dramatically changed the composition of suits in which shareholders seek to exercise their inspection rights. We compare the composition, outcomes, and related questions surrounding such suits maintained 1981-1994 with the post-Rales period 2004-2016. We not only find that post-Rales suits entail substantially more suits involving “books and records” requests but in tracing the results of those requests we find that plaintiff suits maintained after using the tools at hand enjoy better outcomes than where no inspection was sought. Our data also supports the belief that such books and records litigation is something of a surrogate for a trial on the underlying claims of wrongdoing. We also find that many instances in which the tools at hand is pursued there is no follow-on shareholder suit. Thus, our data supports the positive social benefits of Delaware’s innovative tools at hand doctrine. Nonetheless, in the concluding section we bring bad news. Increasing qualification of owners – partners, members and stockholders – inspection rights through private ordering described here raises concern that the potential benefits of the tools at hand doctrine will not be fully realized. We also reason that the Delaware Supreme Court’s decision in California State Teachers Ret. Sys. v. Alvarez, 179 A.3d 824 (Del. 2018) likely eviscerates the tools at hand. Alvarez holds that the Delaware litigant’s suits is precluded by an earlier decision by another jurisdiction that a derivative suit initiated by a different shareholder than was prosecuting the Delaware action lacked standing to sue. We reason that Alvarez is a powerful disincentive for Delaware litigants to pursue the tools at hand as the time expended in pursuing that right may enable competing slothful lawyers to take their chances with a less developed complaint in a sister jurisdiction’s courts on the same claim.

Keywords: Class Action Suits, Corporate Directors, Corporate Governance, Corporate/Securities Law, Delaware Court, Delaware Law Suits, Empirical Analysis, Fiduciary Principles, Litigation, Multi-Jurisdictional Shareholder Class Action Law Suits