This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Chancery Court recently allowed a Facebook Inc. shareholder plaintiff to inspect the directors’ electronic communications concerning how the company ended up paying $5 billion for a 2019 board settlement with government regulators that would cover founder/CEO Mark Zuckerberg’s liability in Employees Retirement System of Rhode Island v. Facebook Inc., No. 2020-0085-JRS memorandum opinion (Del. Ch. Feb.10, 2021).

Vice Chancellor Joseph R. Slight’s February 10 post-trial opinion granted part of an investor’s motion for access to two remaining groups of board-level documents in one of the long-running books-and-records battles under Section 220 of the Delaware General Corporation Law stemming from Facebook’s record-breaking settlement of Federal Trade Commission charges over the company’s data privacy practices.

Background

The Vice Chancellor’s ruling on whether Employees’ Retirement System of Rhode Island could inspect the directors’ decision to pay $4.9 billion more than the $104 million their defense firm advised was necessary to settle liability for Facebook alone was his second in two years on the scope of discoverable documents on whether the board had overpaid to get a settlement that would shield Zuckerberg.

In Vice Chancellor Slights’ May 2019 ruling, a consolidated set of shareholders in a parallel Section 220 action seeking documents and communications relating to Facebook’s Cambridge Analytica data privacy debacle won access to other categories of board level documents. In re Facebook, Inc. Section 220 Litig., 2019 WL 2320842, at *19 (Del. Ch. May 31, 2019).

And then there were two

The February ruling is important because the pension fund plaintiff asserted that the communications that would prove the directors breached their duty by wasting corporate assets to insulate their CEO in the settlement could now only be in two remaining categories:

1. Electronic communications from, to, or copied to a member of the board concerning Facebook’s settlement negotiations with the FTC

2. Hard-copy documents exclusively provided to, or generated by, any member of the Board relating to Facebook’s negotiations with the FTC.

Since his February ruling allowed the pension fund to inspect Facebook’s non-privileged electronic communications, if ERSI does not find the proof it seeks there, it could set up a future final Section 220 battle – likely combining all plaintiffs — over access to the final category— consisting of attorney-client privileged and attorney work-product documents.

The plaintiffs have argued that Facebook intended to make the attorney-client/work-product category the vault for all the sensitive communications and documents that exposed the directors’ plan to use corporate assets to shield Zuckerberg from personal liability. However, the Vice Chancellor said in the February ruling that as long as it is still possible that any other category of documents might contain the information the plaintiffs seek, it is too soon to open that vault.

Plaintiff “has not demonstrated good cause under the Garner fiduciary exception to the attorney-client privilege to justify compelling the company to produce privileged documents for inspection” the Vice Chancellor said in the February opinion, referring to the 5th U.S. Circuit Court of Appeals’ Garner decision that plaintiffs could not examine privileged documents until all non-privileged sources had been searched. Garner v. Wolfinbarger 430 F.2d 1093. That Garner decision and its principle were adopted by the Delaware Supreme Court in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW 95 A.3d at 1278–79.

In his February opinion, Vice Chancellor Slights said he granted access to all non-privileged board communications because “the documents already produced provide no insight into why Facebook would pay more than its (apparently) maximum exposure to settle a claim.”

No penalty for confidence

According to Facebook, the documents produced prior to this litigation, coupled with Plaintiff’s own trumpeting of confidence that it could survive a motion to dismiss in a plenary action by pleading the facts it already possesses, reveals that Plaintiff has received more than “sufficient” information to fulfill its stated purposes for inspection.

But the court said, “that a stockholder plaintiff believes it has a basis in facts already known to pursue claims of wrongdoing against company fiduciaries does not mean the stockholder should be denied use of the tools at hand to develop those facts further.”

Too soon for Garner exception

“While the attorney-client privilege may be asserted by a corporation that has sought legal advice, the privilege is not absolute and an oft-invoked exception applies in suits by minority shareholders,” the court said in finding that the availability of the privilege must “be subject to the right of the stockholders to show ‘good cause’ why the privilege should not apply.”

While Garner identifies multiple factors, the court might consider when assessing whether the stockholder has demonstrated “good cause,” which focuses the good cause inquiry on three factors:

(i) whether the claim is colorable,

(ii) the necessity or desirability of information and its availability from other sources and

(iii) the extent to which the information sought is identified as opposed to a blind fishing expedition.

But the Vice Chancellor noted that whether the privileged information sought “is both necessary to prosecute the action and unavailable from other sources” has been described as “the most important” of the Garner factors. ERSRI argued but could not demonstrate the privileged information it seeks is unavailable elsewhere “because it has not seen the responsive, non-privileged electronic communications that Facebook is withholding.”

Takeaways

The court thought it was “likely that non-privileged electronic communications among board members can provide ERSRI insight into why the board decided to enter the 2019 settlement without exposing the advice of counsel upon which, at least in part, that decision was based.”

But there are two other possibilities: the board’s discussions that led to its $5 billion settlement decision are restricted to the “privileged” vault, or they somehow reached a consensus with little or no formal discussions. Either possibility could lead to a novel third Facebook Section 220 ruling in the future.

A recent decision from the Delaware Supreme Court provides hope to stockholders who seek to obtain corporate documents pursuant to Section 220 of the Delaware General Corporation Law to the extent that Delaware’s High Court removed two common defenses that companies use to oppose the production of corporate records to stockholders.  In AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60, 2020 (Del. Supr. Dec. 10, 2020), the two most important aspects of the ruling are that:

(i) A stockholder making a Section 220 demand need not demonstrate that the wrongdoing being investigated is “actionable;” and

(ii) When the purpose of a Section 220 demand is to investigate potential wrongdoing and mismanagement, the stockholder is not required to “specify the ends to which it might use” the corporate records requested (i.e., exactly what it will do with the documents it receives).

Regular readers of these pages know that over the last 15 years I have highlighted many of the frustrating aspects of decisions construing Section 220 to the extent that one needs stamina and economic fortitude to pursue what oftentimes is an unsatisfying result.  See, e.g., my recent overview on this topic.

 

This decision should be in the toolbox of every corporate litigator not only because it announces a new path for Section 220 cases, and reminds us of the basic prerequisites of the statute, but also in light of it partially overruling and distinguishing some prior cases. This opinion also confirms that several Chancery decisions that were not in harmony with this decision should no longer be followed.

 

Key Takeaways:

•           One of the most important takeaways from this decision is that the court clarified that when the purpose of a Section 220 demand is to investigate potential mismanagement, the stockholder is “not required to specify the ends to which it might use” the corporate documents requested.  See page 22.

•           The second most important takeaway from this case is the court’s holding that a stockholder pursuing a Section 220 demand need not demonstrate that the alleged wrongdoing is “actionable.”  See page 25.

•           The three prerequisites (not including the many nuances) for successfully pursuing a Section 220 demand to inspect a corporation’s books and records requires a stockholder to establish that:  (1) such stockholder is actually a stockholder; (2) such stockholder has complied with Section 220 respecting the form and manner of making demand for inspection of such documents; and (3) the inspection such stockholder seeks is for a proper purpose.  See pages 12-13.

•           The court recited the many examples of proper purposes that have been recognized to be reasonably related to the interest of the requesting stockholder.  See footnote 30 for a lengthy list, which includes “to communicate with other stockholders in order to effectuate changes in management policies.”

•           The court reiterated the well-known requirement that when the proper purpose of a stockholder making a Section 220 demand is to investigate potential mismanagement, a stockholder needs to demonstrate “a credible basis” from which the court may infer that “there is possible mismanagement that would warrant more investigation.”  See page 15.

•           Although a credible basis of wrongdoing needs to be presented by a preponderance of the evidence to pursue the proper purpose of investigating potential wrongdoing, a company will not be permitted to mount a merits-based defense of such potential wrongdoing.  See page 37.

•           Moreover, while trying to harmonize prior decisions on these nuances, the court observed that some of the decisions struck a discordant note.  See footnote 109.

•           The court also affirmed the following two aspects of the Court of Chancery’s ruling:  (1) regarding the scope of documents, the court found that it was appropriate to include a requirement that the company produce officer-level materials and (2) the high court found it was not an abuse of discretion to order a Rule 30(b)(6) deposition–because the company refused to describe the types and custodians of corporate records that it had in response to discovery requests.  See pages 39 and 43.

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’sTools 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.

A recent Delaware Court of Chancery opinion provides insights into nuances of DGCL Section 220 as it relates to the rights of stockholders to inspect corporate books and records, and deserves to be in included in the pantheon of Delaware decisions on this topic. It must be read by anyone seeking a complete understanding of Delaware law on Section 220. In Woods v. Sahara Enterprises, Inc., C.A. No. 2020-0153-JTL (Del. Ch. July 22, 2020), the court provided warmly welcomed clarity about important nuances of DGCL Section 220 with eminently quotable passages for practitioners who need to brief these issues. See generally  overview of takeaways from 15 years of highlighting Section 220 cases on these pages, and compare a recent Delaware Supreme Court decision featured on these pages about contract-based rights to inspect corporate books and records.

This short blog post will only provide several of those worthy passages in the format of bullet points, but this decision deserves a more comprehensive treatment which is the focus of a separate blog post on these pages.

Among the more noteworthy aspects of this notable decision are the following.

  • A consequential aspect of this jewel of a decision is the instruction by the court that there is no basis in Delaware law to require a stockholder demanding corporate records under Section 220 to explain why the stockholder wants to value her interest in the company–in order to satisfy the recognized proper purpose of valuation. See Slip op. at 11; and 14-15.
  • The court provided an extremely helpful list of many recognized “proper purposes” needed to be shown to satisfy Section 220. See Slip op. at 8-9.
  • The court also recited several examples of what showing is recognized as sufficient to satisfy the “credible basis requirement” to investigate mismanagement pursuant to Section 220. See Slip op. 18-19.
  • An always useful recitation of the basic elements of the fiduciary duty of directors of a Delaware corporation and the subsidiary components of the duty of loyalty and care, are also featured. See Slip op. at 20.
  • The court categorized the specific requests for documents in this case as follows: (i) formal board materials; (ii) informal board materials; and (iii) officer-level materials. Then the court expounds on the different focus applicable to each category.
  • Notably, after quoting the actual document requests, the court found that some of them were overly broad–but the court edited and narrowed some of the requests before concluding that the company was required to produce the court-narrowed scope of documents.

Bonus supplement: Prof. Bainbridge, a nationally prominent corporate law scholar, kindly links to the above post and provides learned commentary on this case and Section 220 jurisprudence generally. Readers should recognize the good professor, a friend of the blog, as the prolific author who scholarship is cited in Delaware Court opinions.

The Delaware Court of Chancery recently granted, in part, a stockholder’s request, after a trial without live testimony, for corporate books and records pursuant to DGCL Section 220, in a matter styled Paraflon Investments Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. April 3, 2020).

Readers of these pages over the last 15 years will recognize a familiar pattern in the procedural history of this Section 220 case, as did the Court. See footnote 1 and accompanying text. The company typically resists the request for records, suit is filed, and after trial the Court (sometimes) grants the requests in whole or in part.

Many of the hundred-plus highlights on this blog of Section 220 decisions reflect the reality that Section 220 is not a precise tool.

This pithy decision provides a succinct overview of the pre-trial statutory prerequisites, for example, to comply with the form and manner aspects of a demand, and the elements of a statutory claim that need to be established at trial by a preponderance of the evidence.

This opinion also discusses several nuances of this type of statutory claim that have been developed via case law over the last few decades but are not obvious from a reading of the statute. This type of statutory analysis should be compared with a purely contract-based demand for books and records in the LLC context.

A recently published Delaware Court of Chancery decision must be read by anyone who seeks to understand the latest iteration of Delaware law involving Section 220 of the Delaware General Corporation Law in connection with demands by stockholders for corporate books and records. Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corporation, No. 2019-0527-JTL (Del. Ch. Jan. 13, 2020), is the name of this seminal opinion that will be often-cited as one of the more consequential cases interpreting DGCL Section 220, in part due to the manner in which it performs a deep analysis of the fundamental principles that animate Section 220, as well as how it illuminates the prerequisites that must be satisfied–beyond what the statute explicitly states–in order for one to make a successful claim. It also serves as a reminder that 220 cases are not simple.

Key Takeaways from this 63-Page Opinion:

Although this decision deserves a careful reading in its entirety, and warrants a lengthy analysis, I will merely provide in this short blog post selected bullet points highlighting what this writer views as the most noteworthy aspects that make this decision must-reading for those interested in the latest developments in this area of corporate litigation:

       Proper Purpose Requirement:

  • After providing a justification for why enumerated prior Chancery decisions would not be followed to the extent they added prerequisites to Section 220 that have not been recognized by the Delaware Supreme Court, the Vice Chancellor refused to superimpose on the statute as part of the “proper purpose” requirement, an explanation for what will be done with the documents that are received.
  • That is, this Chancery decision confirmed that in order to satisfy the proper purpose requirement under Section 220, it is not necessary to explain what a stockholder will do once he receives the documents after a Section 220 demand. See Slip op. at 25-29. See also footnote 13.
  • The Court recited the doctrinal underpinnings that animate Section 220, as well as the competing interests between the corporation and the stockholder.
  • This opinion provides an eminently quotable list of the many previously recognized “proper purposes” that satisfy the requirements of Section 220. See page 14. (This alone is a reason that this ruling should have a prominent place in the toolbox of every corporate litigation practitioner.)

       Credible Basis Requirement:

  • This decision also illuminates the meaning of the “credible basis” requirement, which allows the court to infer a sufficient reason for a stockholder to seek records in order to pursue an investigation for certain potential claims. See page 16. See also pages 30-40 (explaining the credible basis standard in the context of an investigation into types of wrongdoing).
  • The Vice Chancellor expressly rejected the defense that “they-only-want-to-sue” as a reason for not producing documents requested–that could be used for other reasons.

       Scope of Documents for Production–including Emails:

  • The Court describes the scope and conditions and details for the production of documents that were ordered to be produced. The Court also ordered a Rule 30(b)(6) deposition to determine “what types of documents exist and who has them.”
  • Citing for support to prior Section 220 decisions (after distinguishing others), this opinion requires the production of emails among board members, even if those emails are on a non-corporate email account. See, e.g., Palantir decision.
  • Both the Court of Chancery and the Delaware Supreme Court in prior decisions on Section 220 have quoted from a law review article that Francis Pileggi co-authored, here and here, on the topic of electronically-stored information (ESI) that should be produced pursuant to a Section 220 demand.

This post juxtaposes two recent decisions from the Delaware Court of Chancery addressing a perennial favorite of Delaware corporate litigation: Stockholder demands for records under DGCL Section 220.

Although the Section 220 demand was successful in the matter of Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019), by contrast:

Section 220 demands were denied in post-trial opinions in the matter of Southeastern Pennsylvania Transportation Authority v. Facebook, Inc., C.A. No. 2019-0228-JRS (Del. Ch. Oct. 29, 2019), and High River Limited Partnership v. Occidental Petroleum Corporation, C.A. No.  2019-0403-JRS (Del. Ch. Nov. 14, 2019).

The Donnelly case, is an example of a successful 220 demand based on the court’s finding of:

(1)       A credible basis to investigate claims of breach of the duty of loyalty; and,

(2)       The rejection of the argument that, contrary to the 2017 Chancery decision in Wilkinson v. A. Schulman, Inc. (highlighted on these pages here), the plaintiff in this matter was a mere proxy for plaintiff’s counsel who was a driving force behind the Section 220 demand, as was the case in Schulman.  The Schulman case was distinguished on its facts.

(3)       The Donnelly decision also provides an excellent overview of the necessary elements, and their “sub-parts”, that must be satisfied to prevail in a Section 220 claim. See Slip op. at 8.

By contrast, the decision in SEPTA v. Facebook, Inc., linked above, added to the long list of examples highlighted on these pages over the past 15 years that, at least in this author’s view, support the observation that Section 220 is a “blunt instrument at best” that requires substantial financial stamina and wherewithal to “go the distance” through trial and potential appeals. This SEPTA case is one of many cases that also support the observation that the results of a Section 220 demand, even when a post-trial ruling requires the production of documents, are often unsatisfying and do not provide an enticing ROI.

In the High River case, after describing Delaware law as “murky” at best, regarding whether the desire to communicate with other stockholders is a proper purpose under Section 220 in all circumstances, the Court of Chancery explained in a 22-page post-trial opinion why this was “not the right case” to announce a bright line rule endorsing such a purpose.

Adding to the voluminous case law interpreting DGCL Section 220 that has been highlighted over the last 14 years on these pages, the recent Delaware Court of Chancery decision in Kosinski v. GGP Inc., C.A. No. 2018-0540-KSJM (Del. Ch. Aug. 28, 2019), is notable for its useful and thorough recitation of the basic requirements of a Section 220 demand and the clarity of reasoning on which it relies to reject the typical defenses presented at trial “on a paper record.”

Introductory Note:

These short highlights presume that the reader is familiar with the basic prerequisites for a successful Section 220 demand and typical challenges to a Section 220 demand. This opinion is worthwhile reading, even for veterans of Section 220 battles, due to its lucid recitation of not only the basics, but also the nuances that most Section 220 litigation centers on. Hundreds of Section 220 decisions have been featured on these pages, so at this point I only highlight those rulings on Section 220 that, in my view, offer something more than the average fare.

Brief Overview of the Case:

A Section 220 demand was made in this case to investigate possible wrongdoing in connection with a merger. The company argued that the plaintiff was not entitled to inspect books because: (1) the stated purposes for the inspection were not those of the actual plaintiff/stockholder; and (2) the company argued that the stockholder lacked a credible basis for investigating possible wrongdoing.The most useful way to highlight the memorable passages from this pithy opinion would be to provide bullet points that would allow readers to determine if they would find it helpful to read the whole opinion.

Basics of § 220:

  • The court explained that under DGCL Section 220 a stockholder is entitled to inspect the books and records of a company if she demonstrates by a preponderance of the evidence that: (1) she is a stockholder of the company; (2) she has made a written demand on the company that complies with the statutory requirements; and (3) she has a proper purpose for making the demand. Once a stockholder meets those 3 requirements, she also must establish another prerequisite: (4) to establish that each category of the books and records requested is essential and sufficient to the stated purpose.
  • In addition to those 4 requirements, there are additional nuances that must be addressed.

Nuances:

  • The nuances that must be addressed to successfully repel defenses to a Section 220 demand include a rebuttal to a frequent defense by a company that the stated purpose, which might be a well-recognized proper purpose, is “not the actual purpose for the demand.”
  • The court distinguished the recent decision in Wilkinson v. A. Schulman Inc., 2017 WL5289553, at * 2 (Del. Ch. Nov. 13, 2017), highlighted on these pages, because the facts of the instant case established that the stockholder himself was the actual motivating force behind the demand and he was not merely serving as a puppet for his lawyers.

Special Observation:

  • A welcome and refreshing acknowledgement from the court in this case was provided in a footnote where the court observed that Section 220 jurisprudence in Delaware is both complex and sprawling. See footnote 67.

Proper Purposes – More Nuances:

  • The court defined a proper purpose as one that “reasonably relates to the stockholder’s interest as a stockholder.” See footnotes 72 and accompanying text. The stockholder has the burden of proof to demonstrate that proper purpose by a preponderance of the evidence.
  • The court explained that although it is a proper purpose to investigate mismanagement, in order to prevail on that basis, a stockholder must “present some evidence that establishes a credible basis from which the Court of Chancery could infer there were legitimate issues of possible waste, mismanagement or wrongdoing that warrant further investigation.” See footnote 75.
  • The court explained that the credible basis standard is the lowest possible burden of proof and requires a plaintiff to demonstrate “only some evidence of possible mismanagement or wrongdoing to warrant further investigation.” See footnote 77.
  • The court explained that the “threshold may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing.” See footnote 79.
  • An important observation by the court in this decision was in connection with the interface between a failure of a company in connection with a merger to satisfy the trigger for the business judgment standard of review announced in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014)(hereinafter MFW). Namely,  the court noted that its decision in the instant case “merely concludes that the absence of MFW procedural protections might contribute to a credible basis.”
  • That basis for the court’s finding, of a credible basis is an important contribution to Section 220 jurisprudence.
  • The court also noted that a recognized proper purpose under Section 220 is to investigate questions of director disinterestedness and independence, such as uncovering cronyism in the process of nominating directors. See footnotes 113 to 114 and accompanying text.
  • The court also recognized the well-established case law that regards valuation of one’s shares as a proper purpose for the inspection of books and records. See footnote 118.

The Delaware Supreme Court recently announced a decision of great importance for stockholder demands under Section 220 of the Delaware General Corporation Law. In Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Supr. Aug. 7, 2019), the Delaware Supreme Court ruled that:

(i) although inspection of records demanded by stockholders pursuant to Section 220 is typically conditioned on a confidentiality order, or stipulation or agreement, such inspections are “not subject to a presumption of confidentiality”;

(ii) when the court, in the exercise of its discretion, enters a confidentiality order, an indefinite period of confidentiality protection should be the exception and not the rule; and

(iii) a party demanding books and records need not show exigent circumstances for a court to grant something less than indefinite confidentiality, under Section 220.

Regular readers familiar with the voluminous highlights on these pages of Section 220 cases over the last 14 years, are aware that despite the relative simplicity of the statute, pursuing rights under Section 220 requires stamina and patience and financial wherewithal.

Procedural Background:

This case involved an initial demand in December 2014 for books and records pursuant to Section 220. The primary dispute related to the scope and duration of a confidentiality agreement that the company required.  A second demand under Section 220 was sent in February of 2017, and again the parties could not reach an agreement over the terms of a confidentiality agreement.  In October 2017, a complaint was filed in the Court of Chancery demanding access to books and records based on a demand amended in May 2017.  The primary dispute between the parties continued to be the scope of the confidentiality obligations imposed by the company on its production.  Although the stockholder also requested non-confidential records, the company demurred.

A Master in Chancery submitted a report in July 2018 recommending indefinite confidentiality until such time as the stockholder filed a suit based on the inspection, after which confidentiality would be controlled by the applicable court rules. This appeal followed the finality of the Master’s Report.

Highlights and Key Takeaways of Court’s Ruling:

  • Although the court disagreed with the reasoning of the Court of Chancery, it affirmed the decision because even though the Supreme Court would have employed different reasoning, there was no abuse of discretion or reversible error with the result.
  • The Supreme Court clarified that there is no presumption of confidentiality in productions of data pursuant to Section 220. Slip op. at 11.
  • Although a corporation need not show specific harm that would result from disclosure before receiving confidentiality treatment in a Section 220 case, Delaware’s High Court explained that: “One cannot conclude reflexively that the need for confidentiality is readily apparent.” Id. at 12.
  • “Given that there is no presumption of confidentiality at all, a fortiori, there is certainly no presumption of indefinite confidentiality…. Id.
  • The Court ruled that: (i) An indefinite period of confidentiality protection should be the exception and not the rule; (ii) A party demanding Section 220 books and records need not show exigent circumstances for a court to grant something less than indefinite confidentiality. Id. at 13.
  • Although the Supreme Court disagreed with Chancery’s grant of indefinite confidentiality restrictions until a suit was filed, the stockholder did not make an adequate showing of reversible error.

In sum, this decision can be added to the extensive list of examples of Section 220 cases that have been lengthy and expensive for the stockholder to pursue to a final adjudication in the court of last resort in Delaware. Although the Delaware case law is well-established that stockholders should employ Section 220 before filing a plenary complaint, that effort–in the end–is not always satisfying.

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.