In Espinoza v. Hewlett-Packard Co., read opinion here, the Delaware Supreme Court yesterday affirmed the Court of Chancery’s denial of a request under DGCL Section 220 for a report regarding the investigation relating to the ouster of former Hewlett Packard CEO Mark Hurd. Highlights of prior Chancery decisions in this matter are available here. Professor Larry Hamermesh of the Widener University School of Law provides an overview of the case here.
This Delaware Supreme Court Opinion provides a pithy overview of the prerequisites for successfully seeking books and records under DGCL Section 220. Although the decision of the Court of Chancery was affirmed, it was affirmed for different reasons. The Court of Chancery determined that Espinoza was not entitled to the investigative report prepared for the board by outside counsel (“the Report”). The Court of Chancery decided that the report was protected by both the attorney/client privilege and the work/product immunity doctrine. However the Delaware Supreme Court determined that Espinoza was not entitled to the Report because it was not “essential to his stated purpose,” and that it was not necessary to address the privilege issue.
This case demonstrates why Section 220 cases can be less than predictable. In this case, it was uncontested that as the Court described it: “as a matter of law, Espinoza has stated a proper shareholder purpose under Section 220 – – to investigate possible wrongdoing. Nor is it contested that he made the required factual showing of a credible basis to infer possible mismanagement.” See footnote 14. Although the entitlement to inspection relief was not an issue, the issue that remained was the specific “scope of relief to which Espinoza is entitled – – ‘specifically, whether he has established the right to inspect the Report.’”
That is, the remaining prerequisite that was necessary for Espinoza to satisfy in order to prevail in this Section 220 case was the burden to “show that the specific books and records he seeks to inspect are ‘essential to the accomplishment of the stockholder’s articulated purpose for the inspection.’” See footnote 15.
The Court explained that a document is “essential” for Section 220 purposes if, “at a minimum, it addresses the crux of the shareholder’s purpose, and if the essential information the document contains is unavailable from any other source.” See footnotes 16 and 17. The Court further explained that: “whether or not a particular document is essential to a given inspection purpose is fact specific and will necessarily depend on the context in which the shareholder’s inspection demand arises. In making that scope of relief determination, our Courts must circumscribe orders granting inspection with rifled precision.’” (emphasis in original). See footnote 18.
The Court explained that the “essentiality” requirement was not met in this case based in large measure on the representations that the Court accepted from Hewlett Packard that the Report did not contain any details on which the board relied to determine that the CEO should be discharged. That is, the Court relied on the representation of Hewlett Packard that the Report did not address the issue of whether the CEO could be dismissed “for cause.” Due to those representations, the Court did not find that an in camera review was necessary. See footnote 20.
The Court explained at footnote 23 why the “essentiality” inquiry should precede the analysis of the applicability of the attorney/client privilege or work product protections because the issue of essentiality will determine the scope of inspection of relief to which a plaintiff is entitled under Section 220, and “if the documents are not essential, both attorney/client privilege and work product issues become academic.”
For commentary on the challenges that shareholders face in Section 220 cases, we refer the reader to a postscript to a summary of a relatively recent Section 220 case available here.