This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans.
The Court of Chancery recently granted a Section 220 request for corporate records based almost entirely upon allegations contained in a complaint lodged by the U.S. Department of Justice (“DOJ”) against UnitedHealth., in the matter of In re UnitedHealth Group, Inc. Section 220 Litigation, C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28, 2018).
Background: In July 2017, a former senior executive of a UnitedHealth subsidiary filed a qui tam action under the False Claims Act against UnitedHealth for its alleged pervasive practice of defrauding Medicare. In his qui tam complaint filed in the United States District Court for the Central District of California, the former executive accused UnitedHealth of “up-coding” patient risk data and failing to delete incorrect diagnoses, which resulted in overpayments from Medicare.
The DOJ intervened in the qui tam action, and alleged that UnitedHealth had violated Medicare regulations and provisions of the False Claims Act for a period of twelve years.
Three entities with a long record of stock ownership in UnitedHealth (“Stockholder Plaintiffs”) filed a Section 220 action in the Court of Chancery to investigate: (1) mismanagement by the directors and officers of UnitedHealth; (2) possible breaches of fiduciary duties by the directors and officers; and (3) the independence of the board of directors, including whether pre-suit demand would be futile.
Analysis: The Court of Chancery noted the familiar standard that a stockholder may inspect the books and records of a Delaware corporation for any “proper purpose.” A proper purpose includes the investigation of corporate mismanagement. The stockholder bears the burden of proof in the Section 220 action, but need not establish corporate misconduct by a preponderance of the evidence to prevail. Instead the Section 220 plaintiff must show “some evidence” to suggest a “credible basis” from which the court may infer corporate misconduct.
The Stockholder Plaintiffs asserted at trial that the voluminous documents obtained by the DOJ in the qui tam action demonstrated that the CEO, several other executives, and directors of UnitedHealth were aware of the Medicare reporting issues and other indicia of corporate misconduct. The Stockholder Plaintiffs contended that such evidence more than supported a credible basis for the court to infer wrongdoing.
UnitedHealth argued that the Court of Chancery should deny the books and records request because it is inappropriate for a Section 220 claimant to base its entire claim on the fact that others have sued the corporation. Defendant also contended that the California District Court was considering a motion to dismiss the DOJ’s complaint, and that the 220 Complaint should be stayed pending resolution of the motion to dismiss.
Vice Chancellor Montgomery-Reeves rejected Defendant’s arguments in this post-trial ruling. The Court noted that unlike Graulich v. Dell, Inc. (summarized previously on these pages), in which the Court of Chancery denied a books and records request, the instant action alleged far more evidence of corporate misconduct. Notably, the Court found that the DOJ recovered documents from UnitedHealth which reflected direct communications among UnitedHealth executives and directors acknowledging the occurrence of pervasive misconduct, as well as depositions of over twenty employees of Defendant.
Accordingly, the Court of Chancery granted the Stockholder plaintiffs’ books and records request. In so ruling, the Court specifically rejected Defendant’s “invitation to make merit-based determinations on whether Defendant’s behavior is actually wrongful or violates the law.” Although granting broad relief to the Stockholder Plaintiffs, the Court denied their request for email communications from certain high-level executives of Defendant because “email communications are more the exception than the rule” in a Section 220 action.
Takeaway: The Court of Chancery will sustain a Section 220 Complaint based on the allegations of a separately filed complaint against a corporation when there is evidence suggesting a credible basis of corporate misconduct.