A recent decision from the Delaware Court of Chancery belongs in the pantheon of consequential court opinions addressing the nuances, first principles and practical challenges regarding Section 220 of the Delaware General Corporation Law. There are many decisions on this topic addressing the right of stockholders to demand inspection of corporate records, but few are as noteworthy or as “blogworthy” as this decision in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0173-KSJM (Del. Ch. Nov. 24, 2020). Compare another pantheon-worthy Chancery decision earlier this year in AmerisourceBergen highlighted on these pages. See Lebanon Cnty. Emps. Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13, 2020).
Weighing in at 69-pages, this opinion’s length is indicative of the complexities of Section 220 that are belied by the apparent simplicity of the statute. My favorite part of this decision is the acknowledgement that when pursuing the statutory rights that Section 220 appears to allow, one can easily be stymied by the gamesmanship of companies who can play a war of attrition, usually with impunity, in light of the asymmetrical economics involved. See Slip op. at 3-5 and footnote 6 (citing an article addressing the obstacles to pursuing Section 220 rights: James D. Cox, et al., The Paradox of Delaware’s “Tools at hand Doctrine: An Empirical Investigation,” 75 Bus. Law. 2123, 2150 (2020)).
Similar observations about the practical hindrances, economic and otherwise, to utilizing Section 220 have often been the topic of blog posts on these pages over the last 15 years. See, e.g., my recent blog post explaining that Section 220 cases are not for the fainthearted.
This Gilead case provides guidance on an important topic that warrants a very lengthy analysis, but as I am want to do on this blog, I provide highlights via bullet points, and then interested readers can click on the above link and read all 69-pages.
The bullet points that I find to have the most widespread applicability and importance are the following:
• The court criticizes the trend in which companies often inappropriately litigate the underlying merits of a potential, future plenary suit as opposed to addressing whether the prerequisites have been met for a Section 220 demand, as well as the tendency of companies to otherwise prevent stockholders from using Section 220 as a “quick and easy pre-filing discovery tool.” Slip op. at 3-4.
• The court provides many quotable explanations of the “credible basis” standard that must be satisfied in order to rely on the proper purpose of investigating suspected wrongdoing. The court emphasizes that this “lowest possible burden of proof” does not require a stockholder to prove that any wrongdoing actually occurred; nor does it require a stockholder to show by a preponderance of the evidence that wrongdoing is even probable. Slip op. at 23, footnotes 103 and 104.
• Rather, the court instructed that the recognized proper purpose for using Section 220 to investigate suspected wrongdoing is satisfied when there is a credible basis to suspect merely the “possibility” of wrongdoing. Id. at 24, n. 106.
• The court addresses the common tactic used by companies challenging a proper purpose when they assert that the “stated proper purpose is not the actual proper purpose for the demand.” This opinion teaches that in order to succeed in such a defense, the company must prove that the “plaintiff pursued its claim under false pretenses. Such a showing is fact intensive and difficult to establish.” See footnote 153 and accompanying text.
• The court made quick work of dispensing with the issue of standing in Section 220 cases. The court reasoned that the standing argument in this case was in reality a Potemkin Village (my words) for the company’s challenge to the viability of derivative claims that the plaintiffs might pursue in the future. Although the court discussed standing under Section 220 in general, it also underscored that a Section 220 proceeding does not warrant a trial on the merits of underlying claims. Slip op. at 41–42.
• The court instructed that generally Section 220 plaintiffs need not specify the “end-uses” of the data requested for their investigation. Slip op. at 49.
• The court also provided helpful practical tips about the scope of production required once the preliminary prerequisites of Section 220 have been satisfied. The court noted that in some instances the company will be required to provide more than simply formal board materials. See Slip op. at 51-54.
• The opinion acknowledged that in some instances after limited discovery in a Section 220 action, plaintiffs can refine their requests with greater precision and that in some cases the court has asked the plaintiffs to streamline their requests. See Slip op. at 63.
• In response to the court being vexed by the overly aggressive tactics of the company, the court invited the plaintiff to “seek leave to move for fee shifting.” As one example of the court’s observation that the company was taking positions for no apparent purpose other than obstructing the exercise of the statutory rights of the plaintiff, the court noted that the company refused to produce even a single document before litigation commenced.