Louisiana Municipal Police Employees’ Retirement System v. Lennar Corp., C.A. No. 7314-VCG (Del. Ch. Oct. 5, 2012).
Issue Presented: Whether newspaper articles announcing a federal investigation of the company, together with prior lawsuits that were settled without an admission of fault, satisfy the requisite threshold of “some evidence” to establish a credible basis of wrongdoing needed to allow a books and records demand under DGCL Section 220 to proceed.
Short Answer: Not under the facts of this case.
Why this Opinion is Notable: One reason this case is noteworthy is due to its juxtaposition with the recent decision in South v. Baker, highlighted here, which explained why a Caremark claim would almost always fail unless it was preceded by a books and records demand under DGCL Section 220 in order to obtain sufficient facts to investigate the claim before filing a plenary reaction. This case is also notable for its brevity. At a mere 12-pages long, the length of the opinion is positively short for the typical opinion from the Delaware Court of Chancery and for that reason alone this ruling should win recognition for its pithiness.
Much has been written on these pages about attempts by shareholders to obtain books and records based on DGCL Section 220, see, e.g., here, including a law review article addressing the paucity or lack of authority on the intersection of Section 220 and electronically stored data.
This matter involves a demand by the plaintiff (“LAMPERS”) for books and records from Lennar Corp. pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”). LAMPERS sought to investigate, in its capacity as a Lennar stockholder, possible mismanagement of Lennar in connection with compliance by Lennar of labor and immigration law. The suspicions of LAMPERS were based on two articles published in The Wall Street Journal revealing that the U.S. Department of Labor was conducting an industry-wide investigation of labor practices of numerous home-building companies, including Lennar, as well as several employee suits against Lennar between 2007 and 2009 that were settled without an admission of fault.
Atypical for summary proceedings under Section 220, the procedural posture of this case was a motion for summary judgment under Rule 56.
Because the Court found that the newspaper articles and old employee suits did not provide the necessary “credible basis” from which the Court could infer that further investigation was warranted to explore possible mismanagement, the Court granted the motion for summary judgment.
In the recent Delaware Court of Chancery decision in South v. Baker, highlighted here, the Court explained why it is likely that a Caremark claim will be dismissed unless it was preceded by a Section 220 demand for books and records so that a proper investigation can be completed prior to filing a Caremark claim. This case involves a dismissal based on summary judgment for the defendant, of a Section 220 demand which ostensibly was made as part of an effort to obtain information about a potential Caremark claim and also to obtain information about directors in order to determine whether pre-suit demand was futile. Because the Section 220 claim was not allowed to proceed, the plaintiff would have a difficult time surviving a motion to dismiss its Caremark claim based on the analysis in the recent South v. Baker decision.
Nonetheless, for Section 220 purposes, this opinion provides a helpful “compact” summary of the prerequisites for a successful demand for books and records under Section 220. Mere newspaper articles and old lawsuits settled without an omission of liability, do not suffice to satisfy these standards.
The Court explained in an efficient manner the well-known statutory requirements that stockholders seeking to inspect books and records of a company must comply with the form and manner requirements of Section 220, and they must demonstrate a “proper purpose” for the demand. However, the reality is not quite that simple. The statute defines proper purpose as “a purpose reasonably related to such person’s interest as a stockholder.” Once a plaintiff has identified a proper purpose, it has the burden to “show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation.” That standard has been explained to require a plaintiff to establish “some evidence” of possible wrongdoing.
Although the Court found that the proper purpose requirement of Section 220 was satisfied in this case because it was based on the desire to investigate potential mismanagement, the Court found that the second prerequisite of establishing a “credible basis” from which the Court could conclude that investigation is warranted, was not satisfied. The Court explained at page 7 of the slip opinion that the mere statement of a purpose to investigate possible general mismanagement, without more, does not satisfy the Section 220 prerequisite. Nor does mere suspicion suffice. However, a stockholder does not need to prove mismanagement actually occurred. Rather, the shareholder must make a credible showing, “through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing.” Relying on a prior decision, the Court interpreted case law suggesting that negative news articles alone are an insufficient basis on which to justify a Section 220 demand. The Court also distinguished prior cases that involved newspaper articles and settled lawsuits as not being sufficient, by themselves, to support an inference based on the facts presented in this matter. Likewise, several lawsuits that were settled several years earlier, without an admission of liability, cannot satisfy the requirement that “some evidence” of mismanagement be presented.