The Court of Chancery issued an important decision a few days ago for those who need to understand the latest nuances of Delaware law involving DGCL Section 220. Readers of these pages for the last 12 years have seen highlights of a plethora of rulings supporting the view that demands pursuant to Section 220 are not for the faint of heart. Rumors of the death of Section 220, however, have been greatly exaggerated, in light of the ruling in Rodgers v. Cypress Semiconductor Corporation, C.A. No. 2017-0070-AGB (Del. Ch. April 17, 2017).
Background: A former CEO of the company involved in this case sought books and records to investigate allegedly excessive compensation paid to the executive chairman of the board, and also alleged that the chairman violated the Code of Business Conduct and Ethics of the company. The company defended the claim based on the argument that the former CEO’s stated purpose was not the true purpose, and that the true purpose for the request was not proper. The company also denied the Section 220 demand based on the argument that there were no claims for non-exculpated allegations.
The most noteworthy aspects of this opinion are the following:
· The court explained that there remains a very high threshold to establish that the “true improper main purpose” of a demand is something other than the stated primary purpose.
· The court recited the prerequisites for a demand under Section 220 such as having a proper purpose and having a credible basis for claims to support the purpose to investigate wrongdoing. In this post-trial opinion, the court found the testimony of the claimant credible that his primary purpose was proper. Those primary purposes included investigation of wrongdoing such as a conflict of interest in violation of the company’s Code of Business Conduct and Ethics, as well as a desire to communicate with other stockholders and attempt to persuade the board to make changes.
· The court distinguished the decision of the Delaware Supreme Court in Southeastern Pennsylvania Transportation Authority v. AbbVie, highlighted on these pages. Specifically, AbbVie stands for the position that when the sole purpose for a Section 220 demand is to investigate wrongdoing of an exculpated claim, a Section 220 demand will be denied. By contrast, in this matter, derivative litigation to pursue claims of an exculpated nature were not the sole motivation to investigate wrongdoing. The other proper purposes included communication with stockholders and evaluation of suitability of members of the board to continue to serve.
· The court rejected the argument that the true purpose of the Section 220 demand in this matter was to pursue a personal vendetta and to assist in an ongoing proxy battle by the claimant. The court cited to cases finding that it is a high hurdle to prevail on an argument that the primary purpose, contrary to the stated purpose of a claimant, is personal animosity or other improper motives. See cases cited at footnotes 30 and 31.
· The court described the importance of a confidentiality agreement to limit the use of the documents obtained, to minimize the risk that the data would be used for the purposes of a proxy contest, although application to the court could be made for seeking approval to use the information for other purposes in the future.