As part of the ongoing refinement of Section 220 of the Delaware Corporate Code, the Delaware Supreme Court holds that a derivative lawsuit in California Federal Court does not bar a subsequent Section 220 claim. 
In King v. Verifone Holdings, Inc. (No. 330, 2010, Del. Supr. January 28, 2011), the Delaware Supreme Court reversed a Court of Chancery decision that had precluded shareholders from utilizing a Section 220 proceeding to gain inspection of the company’s books and records.  The plaintiffs’ derivative lawsuit in federal court in California had been dismissed without prejudice for failure to allege facts sufficient to excuse a pre-suit demand.  The California federal court granted the plaintiffs leave to amend the complaint, suggesting that they utilize 8 Del. Code §220 to obtain the necessary particularized facts.  The Delaware Chancery Court, however, held that the initiation of the action in California violated the public policy-based rule that requires plaintiffs to utilize Section 220 prior to filing a derivative action.  In reversing, the Delaware Supreme Court noted that while the Chancery Court’s rule describes the preferred procedure for prosecuting derivative suits, Section 220 merely requires a “proper purpose.”   Provided that plaintiff’s original suit has been dismissed without prejudice and with leave to amend the complaint, a proper purpose may be found in that the Section 220 request may result in obtaining the particularized facts necessary to survive a motion to dismiss for failure to adequately plead demand futility.  The Court suggested that the policy goal of preventing a plaintiff from bringing suit prematurely and without adequate investigation might be served instead by denying the plaintiff “lead plaintiff” status,  by dismissing the complaint with prejudice and with no leave to amend, or by granting leave to amend one time, conditioned on the plaintiff paying the defendant’s attorney’s fees for the initial motion to dismiss. (Link to Supreme Court opinion: http://courts.delaware.gov/opinions/download.aspx?ID=149820)