Harborline Logistics: Demand Futility and a Section 220 Demand
Harborline Logistics, Inc. is a Delaware corporation with five directors. Its CEO, Daniel Reyes, owns 42% of the stock. In March 2023, Harborline bought a warehouse from Reyes's brother for $18 million. An appraisal commissioned months later valued the warehouse at $11 million. Before the vote, Reyes recused himself. The remaining four directors approved the purchase after a 30-minute meeting. Two of those directors have served on the board for 14 and 11 years and describe Reyes as a close personal friend; the third received $60,000 per year in consulting fees from a Harborline supplier; the fourth was appointed six months earlier. Marisol Quinn has owned 100 shares since 2019. She sends a written demand under 8 Del. C. § 220 for board minutes, the appraisal, and the investment banker's presentation. Harborline refuses, saying she has not shown a proper purpose and acted in bad faith. Marisol files a derivative suit without first making a litigation demand.
1. Should the Court of Chancery excuse Marisol's failure to make a litigation demand? Apply the current Delaware demand-futility framework to each director.
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Delaware applies the three-part test from United Food & Commercial Workers Union v. Zuckerberg. The court asks, director by director, whether the director (i) received a material personal benefit from the alleged misconduct, (ii) faces a substantial likelihood of liability on any claim, or (iii) lacks independence from someone who did. Demand is excused only if at least half the board is disabled.
Reyes is interested, but he recused and owns 42%, not a majority; control is not established on these facts. The two long-tenured friends: friendship alone, without allegations of a relationship so close that it would affect judgment, does not defeat independence. The consultant's $60,000 comes from a supplier, not from Reyes, and does not show the director is beholden to him. The new director has no conflict. Thus fewer than three of five directors are disabled. Demand is not excused, and the complaint is vulnerable to dismissal under Court of Chancery Rule 23.1.
2. What is the proper scope of Marisol's § 220 demand, and does the company's bad-faith objection change the analysis?
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A stockholder's desire to investigate mismanagement is a proper purpose; she need not show actionable wrongdoing. Once a proper purpose is stated with reasonable specificity, the company bears the burden of showing an improper purpose or bad faith. The court will limit production to records that are necessary and essential to the stated purpose. Board minutes, the appraisal, and the banker materials are likely within scope if tied to the warehouse purchase, but Marisol cannot demand every document the company possesses.
The company's conclusory 'bad faith' assertion does not defeat the demand without supporting facts. A § 220 action is separate from the derivative suit; her failure to make a litigation demand does not bar the records action.
3. How would the analysis change if Marisol had made a litigation demand and the board refused it?
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Making a litigation demand concedes the board's independence for demand-futility purposes. The board's refusal is then reviewed under the business judgment rule unless Marisol pleads facts showing wrongful refusal, such as a refusal by conflicted directors or a refusal made without good-faith investigation. She could not later argue that demand was excused. The board may form a special committee, obtain advice, and document its process. A refusal after a reasonable investigation is difficult to overturn, so the demand decision is a strategic trade-off rather than a procedural formality.