The Delaware Court of Chancery published an opinion this week that interpreted a statute that gives stockholders a right to demand the “books and records” of a company, to include the right to demand electronically-stored information not only from the corporation, but also from its directors and officers. Amalgamated Bank v. Yahoo!, Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016). It also addresses the duties of directors in connection with reviewing and approving executive compensation packages. (Plus: it features quotations from a law review article I co-authored on Section 220, as noted below.)
The treasure trove of corporate law jewels in this opinion, weighing in at 74 pages, can easily justify commentary of similar length. Those who want to keep abreast of key Delaware corporate law principles need to make the time to read the opinion in its entirety, but for present purposes I will provide bullet points with highlights.
- Although this decision includes a comprehensive analysis of the prerequisites for demands under Section 220 of the Delaware General Corporation Law (DGCL) regarding the right of a stockholder to obtain books and records of a company, a fuller understanding of this opinion can be be obtained by comparing it to other recent decisions on Section 220, including the recent Delaware Supreme Court ruling in Abbvie which rejected a Section 220 request based on an exculpatory clause in the corporate charter in that case, and which was highlighted on these pages. The Yahoo decision should also be juxtaposed with a decision a day earlier by Vice Chancellor Noble which limited the scope of records that were demanded by a director. See Chammas v. NavLink, Inc., C.A. No. 11265-VCN (Del. Ch. Feb. 1, 2016). The Chammas opinion directly addresses the rights of a director to books and records but is not as expansive in ordering emails or records of individual officers, and does not address ESI as the parties appear to have agreed on that issue. The Yahoo opinion should also be contrasted with the Supreme Court decision in the Wal-Mart case, highlighted on these pages, which required the production of extensive information regarding board deliberations, including an exception to the attorney/client privilege.
- One of the most important reasons why this case is destined to be often cited, and deserves a prominent position in the pantheon of seminal Delaware decisions, is because, to my knowledge, it remains the first Delaware opinion to directly interpret DGCL Section 220 in a manner that explicitly requires the production of electronically stored information (ESI) based on the statutory language. Although the court lists quite a number of Delaware decisions in footnote 42 that have ordered the production of emails in connection with Section 220 requests based on the facts of those cases, as far as I am aware, this is the first Delaware opinion that expressly addresses the obligation of a company pursuant to Section 220 to produce ESI as compared to requiring the production of just emails. But I don’t think that prior cases explicitly interpreted the statute to require ESI production (which is broader than emails).
- This opinion, consistent with it statutory interpretation, rejected the argument by Yahoo that inspection rights under Section 220 are limited to paper records. See page 20. In doing so, I am happy to say that the court in this opinion quoted from a law review article co-authored by yours truly which argued that the court should include ESI as part of the obligation to produce records under Section 220. See 37 Del. J. Corp. L. 163, 165 (2012), highlighted on these pages here.
- Although the Wal-Mart decision referred to above required the production of various emails, that decision as I recall, is fact specific and did not expressly include in the same direct and comprehensive fashion as this opinion, with the detailed analysis and supportive reasoning that this opinion did, an interpretation of Section 220 as requiring ESI (which is broader than email only) to be included in a production of “books and records.”
- Importantly for those needing to understand the scope of Section 220, this opinion also required the production of relevant personal emails by officers and directors to the extent that they were responsive to the demand (i.e., emails on a non-business, personal email account). See footnote 43.
- Although there are hundreds of Delaware decisions interpreting Section 220, many of them highlighted on these pages over the last ten years, this opinion describes the prerequisites of Section 220 and the nuances and scope of Section 220 demands more thoroughly than any other Section 220 opinion that I can recall. If a person interested in learning about Section 220 were to read only one opinion on Section 220, in an effort to understand all of its nuances as requirements, this should be that opinion.
- In connection with its discussion of Section 220, the court also provides advice to directors regarding their fiduciary duties when reviewing and approving an executive compensation proposal. See pages 42 and 43.
- The court also clarifies that the prerequisite of needing a credible basis to allege mismanagement as a threshold requirement for Section 220 is not the same as requiring or assuming that one will prevail on such a claim, nor is the Section 220 standard whether it is reasonably conceivable that one could prevail on such a claim, as in a Rule 12(b)(6) motion.
- Lastly, the court imposed a condition on the production that all the documents that the court ordered Yahoo to produce in this opinion will be incorporated by reference into any plenary complaint that is filed by the plaintiffs.