This Delaware Court of Chancery opinion is notable for denying, after trial, a demand for books and records of a publicly held company for purposes of valuation and to seek documents under Section 220 to investigate alleged mismanagement based on Caremark claims. Beatrice Corwin Living Irrevocable Trust v. Pfizer, Inc., C.A. No. 10425-JL (Del. Ch. Sept. 1, 2016). This opinion provides an excellent explanation and example of a successful defense to a demand by a stockholder for corporate records.
This is the second Section 220 opinion within the span of a few days by former Master in Chancery LeGrow, who is now a Delaware Superior Court Judge, but was appointed to decide these cases as a Vice Chancellor-by-Designation under Del. Const. art. IV § 13(2). The prior case was also highlighted on these pages.
The stockholder seeking books and records under Section 220 in this matter is a trust. The two stated purposes for the demand were both proper purposes but they still did not satisfy the nuanced requirements established by case law which must be satisfied in order for the proper purpose requirement to be met. The purposes for demanding books and records in this case were to investigate mismanagement of alleged Caremark claims for failure to disclose the amount of tax liability for the billions of dollars in revenue that was “located” outside the United States–if the funds were repatriated into the U.S. But the company had no plans to repatriate those funds in the United States, at which time they would be subject to taxation. The company maintained that it had no foreseeable plans to repatriate the funds and therefore there was no need to determine the tax liability. Moreover, they were not required to do so under the applicable accounting standards based in part on their position that to do so was not practicable.
The plaintiff maintained that nonetheless it was a violation of the board’s fiduciary duty of oversight not to determine the amount of potential tax if the funds were repatriated, and they claimed that would have an impact on the valuation. The Court disagreed based on a careful and thoughtful analysis.
The court provided the public policy reasons why it must balance the interests of a stockholder in obtaining books and records with the duties of the board of directors to manage the affairs of the corporation under DGCL § 141. This opinion provides excellent recitations of important principles of corporate litigation and corporate governance involved in Section 220 demands. The many nuances of this common claim as established by case law over the years are explained in lucid fashion.
The sole issue in this case was whether the plaintiff satisfied the prerequisites for establishing a proper purpose for the inspection. The court found that the trust failed to satisfy the necessary elements of a proper purpose which in this case meant that the plaintiffs neither: (i) established that they have a credible basis to investigate mismanagement or wrongdoing based on their Caremark allegations, (ii) nor have they shown that the tax issues for which they sought information would have any material impact on the valuation of the company.
Importantly, the court explained that in order to satisfy a proper purpose for investigation of mismanagement, “mere suspicion” or “subjective belief of wrongdoing, without more, is not sufficient to stay a proper purpose.”
The court provides a very useful explanation of the details that would satisfy the credible basis standard when a Section 220 demand alleges the failure of the board to fulfill its duties under Caremark.
Compare the case cited at footnote 39 in which a successful 220 case based on a Caremark claim was recognized by the Court of Chancery. See Oklahoma Firefighters Pension and Retirement System v. Citi Group, Inc., 2015 WL 1884453, at *5-6 (Del. Ch. Apr. 24, 2015).
This opinion is also helpful to explain those situations in which a publicly held company can successfully defend against a demand for books and records when the purpose stated is valuation and there has not been a satisfactory justification for explaining why the documents requested are necessary for purposes of valuation – – or not otherwise publicly available.
This opinion should be read together with the opinion by Vice Chancellor-by-Designation LeGrow which was published within a few days of this decision in the matter of Bizzari v. Suburban Waste, highlighted on these pages here, in which the demand for corporate records by a director was denied based on somewhat unusual facts involved in that case.
Both of these cases involve post-trial denials of Section 220 demands. Readers of these pages over the years will be forgiven for perceiving a constant refrain in the commentary on many of the Section 220 cases highlighted on these pages in which one might detect a theme that Section 220 cases can be quite expensive and time-consuming and, after trial, do not always result in any substantial document production for the plaintiff.