Eric Brandfonbrener Partner

In 2006 a record number of unhappy shareholders fought in Delaware courts to enforce their demands to inspect corporations' books and records. What caused this dramatic increase? Delaware courts frequently chastised shareholders for failing to use this powerful fact-gathering tool before bringing derivative suits. Many states, including Washington and Delaware, also recently expanded shareholders' statutory inspection rights.

In this Update we highlight two recent Delaware cases, Polygon and Shamrock, that identify important defenses available to corporations responding to inspection demands, and provide practical advice.

In a decision with potentially far-reaching effects, the United States Court of Appeals for the Second Circuit recently toughened the standard for granting class certification under Rule 23 of the Federal Rules of Civil Procedure. In In re Initial Public Offering Securities Litigation, No. 05-3349-cv (Dec. 5, 2006), the court reversed an order granting class certification in six consolidated securities fraud actions brought by thousands of investors against major investment banks alleging that they had inflated market prices and received secret commissions when underwriting IPOs. This decision may affect all areas of law influenced by class actions, including employment, antitrust, consumer protection and product liability.

In a decision generally protective of directors and officers, a Seattle federal district court recently held that shareholders who seek to bring derivative claims under Washington law must meet requirements similar to those imposed under Delaware law. In re Cray, Inc., 431 F. Supp. 2d 1114 (W.D. Wash. 2006).

In a significant decision favorable to defendants in securities fraud lawsuits, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S. Ct. 1503 (2006), the United States Supreme Court has unanimously decided to close a loophole that plaintiffs' lawyers have used to bring securities fraud lawsuits in state court. This loophole existed as a result of how some appellate courts had interpreted the language of the Securities Litigation Uniform Standards Act of 1998 (SLUSA).

The pattern is familiar. A public company makes some positive announcements about a product. After some time passes, the company announces bad news about the product, leading to a decline in the stock price.