For the last 16 years, these pages have featured many highlights of court decisions addressing the right of a stockholder, or a member of an LLC, to demand a company’s “books and records“. Regular readers will recall much commentary about why the exercise of such rights are not for the fainthearted.
Why this decision is important: The Delaware Court of Chancery’s pithy ruling in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. July 22, 2021), provides guidance to litigators in general, and corporate litigators in particular, that “glaringly egregious” is where the line is drawn for determining when fees will be shifted. This illuminates the amorphous “bad faith” articulation of the standard that must be triggered before the losing party will be required to pay the attorneys’ fees of the victor as an exception to the general “American Rule” that each party pays its own legal fees. To be sure, other decisions have shifted fees, and this letter decision is filled with copious citations to many prior Chancery opinions that provide a solid foundation for the court’s reasoning. The court also cited to key cases that explain the substantive requirements of DGCL Section 220. See, e.g., AmerisourceBergen Chancery decision, highlighted here, and upheld by the “Supremes”, as noted here.
In this recent ruling, the Court of Chancery clarified the standard the court will apply to shift fees and require the company who has engaged in improper litigation tactics to pay the attorneys’ fees of the stockholder seeking the books and records of a company. In this case, the court granted a request for attorneys’ fees that have been reported to be about $1.7 million through the trial. The post-trial decision in this matter that granted the requested access to books and records provides more background about this case and was featured on these pages.
Commentary on court decisions too numerous to count appearing on these pages has included the statutory prerequisites for successfully demanding corporate books and records, and the ruling in this case assumes familiarity with those requirements. Thus, the most useful approach for this short blog post is to highlight via bullet points the notable quotes with the most widespread applicability for those who toil in the vineyards of corporate and commercial litigation in Delaware.
- “Gilead argued that Plaintiffs had not met the credible basis requirement to investigate wrongdoing–a requirement that imposes ‘the lowest possible burden of proof’–even though Plaintiffs had ample support for their proposition.” See footnote 10, which recites examples of that support from the post-trial opinion.
- Gilead incorrectly opposed the inspection requests by arguing (wrongly) that any claims being investigated would be dismissed–but the Court instructed that under Delaware law: “…the stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable in order to be entitled to inspection.” See footnote 11 and accompanying text.
- “… where this court shifts fees to curb and correct for overly vexatious litigation behavior, a showing of glaringly egregious litigation conduct is enough.” (emphasis added) Slip op. at 5. (Glaringly egregious is a more useful formulation than “bad faith alone”, and specific examples were provided in this ruling.)
- The court added that: “To the extent a finding of bad faith is necessary, then the court can infer bad faith based on the litigation conduct alone.” Slip op. at 5-6. In this case, the court found that inference to be appropriate based on the examples provided and references to the post-trial opinion–highlighted on these pages.
Supplement: I was quoted by The Delaware Business Court Insider, as well as by a publication of Financial Times called Agenda about the impact of this decision.