Think Twice Or More

The Delaware Court of Chancery recommends that a request for attorneys’ fees be denied

“[L]awyers should think twice, three times, four times, perhaps more before. . . moving for fees under the bad faith exception.” Coughlin v. S. Canaan Cellular Invs., LLC, 2012 WL 2903924, at *2 (Del. Ch. July 6, 2012) (first alteration in original) (internal quotation marks omitted) (quoting Katzman v. Comprehensive Care Corp., C.A. No. 5892-VCL, at 13 (Del. Ch. Dec. 28, 2010) (TRANSCRIPT)). Parties also should be mindful that “[a]n unwarranted motion for fee shifting under the bad faith exception can itself justify a finding of bad faith and fee shifting.” Id.

Neither party litigated this action in bad faith, and I therefore recommend that Plaintiff’s request for an award of attorneys’ fees be denied. This is a final report pursuant to Court of Chancery Rule 144. The stay of exceptions entered under the Chancellor’s assignment letter is hereby lifted.

The Delaware action sought inspection of corporate books and records

The Court held a paper trial on February 20, 2024. At trial, All.Health asserted that Plaintiff’s stated purpose for seeking books and records—to satisfy his fiduciary duties as a director—was not his actual purpose, and that Plaintiff actually sought inspection for several other, improper purposes: to obtain All.Health’s intellectual property for GluCare and himself; to aid GluCare and All.Health’s competitors; to gain an advantage in ongoing litigations against the Company; and to publicly malign the Company to destroy its reputation. All.Health further argued that the scope of Plaintiff’s demand was overbroad and the Court should impose certain conditions on any inspection. Id. at 16:7-18.

Winning isn’t the only thing

But winning on the merits does not automatically entitle a Section 220 plaintiff to fees; again, fee shifting is appropriate in the rare event that a party has litigated vexatiously or otherwise acted in subjective bad faith. To support a finding of bad faith here, Plaintiff argues that “[t]he Company has excluded [Plaintiff] from Board meetings for more than two years,” “stonewalled or sought to impose burdensome conditions on the inspection,” and more recently, “threatened to remove [Plaintiff] from the Board . . . .” Mot. ¶ 28.4 Plaintiff does not identify any specific conduct reflecting an “abuse of process that is manifestly incompatible with justice” or “an attempt to game the system.” Donnelly, 2019 WL 5446015, at *6. Plaintiff also claims the Court “found All.Health’s opposition to [Plaintiff]’s director inspection rights was not justified” and “unsupported by evidence and based on ‘speculation and mistrust.’” Mot. ¶ 29. Although the Court concluded that All.Health failed to meet its burden to prove its improper purpose defense, the Company’s “argument[s] w[ere] not frivolous, and [its] failure to satisfy its burden of proof on [a] fact issue d[oes] not support a finding of bad faith.” Myers, 2023 WL 6380449, at *3

(Mike Frisch)