A recent Delaware Court of Chancery opinion clarified a few key Section 220 prerequisites that are not otherwise explicit in the statute. The decision styled In re Facebook, Inc., Section 220 Litigation, Cons. C.A. No. 2018-0661-JRS (Del. Ch. rev. May 31, 2019), is notable for the following refinements of well-worn Section 220 requirements for a successful books and records demand. For example:
- The court explained the familiar requirement that in order to establish the proper purpose of investigating mismanagement, or in this case to investigate a failure to satisfy Caremark duties, the stockholder seeking books and records must present a “credible basis” for the claims against fiduciaries.
- That standard is the “lowest burden of proof known in our law and asks a fundamentally different question than would be asked at a trial on the merits: has the stockholder presented ‘some evidence’ to support an inference of wrongdoing that would justify allowing the stockholder to inspect . . .” books and records. See Slip op. at 4.
- The court also noted that in a Section 220 proceeding, hearsay evidence may be considered if it is sufficiently reliable. See footnote 10 for supporting authority. The court relied in this case on an heavy dose of newspaper articles and other news media reports.
- The court allowed for the electronic communications of board members to be produced with some limitations in scope. See Slip op. 51 to 55.
Postscript: Regular readers are familiar with a theme in my comments on the multitude of Section 220 decisions highlighted on these pages over the last 14 years: that Section 220 cases are not for the faint of heart. I have described Section 220 as a blunt instrument, often untimely and expensive–through no fault of the courts. This 56-page post-trial decision, based on a paper record, was submitted for decision to the court on March 7, 2019. The complaint was filed on September 6, 2018.