Search results for: "section 220"

Some readers who have followed these pages over the last 18 years may be weary of reading about DGCL Section 220 court decisions regarding the nuanced right, subject to various prerequisites, of a stockholder to demand certain books and records. But bear with me for this short post.

Discovery in a Section 220 case is limited, consistent with its narrow focus and due to a Section 220 case being a “summary proceeding”. Discovery is especially restricted as it relates to requests for information directed to the company.

A recent order granting a motion for a protective order provides a helpful overview of the applicable standards, with citations to authority, of the restrictions on deposing a company representative and others. See Job v. jaris, Inc., C.A. No. 2022-0944-LWW, Order at 3 (Del. Ch. Feb. 13, 2023)(the lower case in the defendant company’s name is not a typo. The last page of the foregoing hyperlinked pdf has the court’s explanation attached to the last page of the form submitted by the movant.)

The Delaware Supreme Court recently provided guidance to corporate litigators regarding the nuances of DGCL Section 220, which most readers recognize as the statute that allows stockholders to demand certain corporate records if the prerequisites in the statute–and those imposed by countless court decisions–have been satisfied. In NVIDIA Corp. v. City of Westmoreland Police and Fire Retirement System, Del. Supr., No. 259, 2021 (July 19, 2022), a divided en banc bench of Delaware’s High Court explained in a 54-page decision why the “credible basis” requirement may be satisfied in some circumstances by “reliable hearsay”.

Regular readers of these pages will be forgiven if their reaction might be: what more can be said about the relatively simple right of stockholders to demand corporate records, in some circumstances, pursuant to DGCL Section 220–that hasn’t already been covered by the hundred or more Section 220 cases highlighted on these pages over the last 17 years, as well as the thousands of court decisions on the topic over the many decades preceding this publication? In short, when the Delaware Supreme Court speaks, those who labor in its vineyard need to listen. And one indication that this topic is not as simple as the statute might suggest, is that those with the final word on Delaware corporate law–the members of the Delaware Supreme Court–were not in complete unanimity in their decision in this case. A concurrence was not in 100% agreement with the majority opinion.

Key Takeaway

Prior to this decision, it was not well-settled whether a stockholder could satisfy the “proper purpose” requirement under DGCL Section 220 with hearsay–instead of live testimony, for example. The Delaware Supreme Court ruled that: “The Court of Chancery did not err in holding that sufficiently reliably hearsay may be used to show proper purpose in a Section 220 litigation, but did err in allowing the stockholders in this case to rely on hearsay evidence because the stockholders’ actions deprived NVIDIA of the opportunity to test the stockholders’ stated purpose.” Slip op. at 4. (emphasis added).

Overview of Background

After finding post-trial both a proper purpose and a credible basis for the requests, the trial court ordered the production of documents to investigate: possible wrongdoing and mismanagement; the ability of the board to consider a pre-suit demand; and to determine if the board members were fit to serve on the board. The trial court rejected the defenses that: the requests were overbroad and not tailored with rifled precision to what is necessary and essential for the stated purpose; no proper purpose was shown; no credible basis was demonstrated to infer wrongdoing; and the stockholder failed to follow the “form and manner” requirements–in part by changing the list of requested documents during the litigation.

Several stockholders consolidated their demands prior to suit, and 530,000 pages were produced prior to the litigation. Suit was filed in February 2020 based in part on public statements made during an earnings call. Prior to trial, the stockholders were less than forthcoming about whether they would call any witnesses, or which witnesses they would call at trial to establish their proper purpose. The Supreme Court held that the lack of pre-trial transparency by the stockholders deprived the company of the option to depose witnesses to explore the proper purpose issue prior to trial.

The Basics

Most readers are familiar with the basic Section 220 requirements, but the Court’s review provides a helpful reminder. Some of the prerequisites include:

  • Stockholders must demonstrate by a preponderance of the evidence a credible basis from which the court may “infer possible mismanagement that would warrant further investigation.” Slip op. at 18
  • The requested documents must be “essential to the accomplishment of the stockholder’s articulated purpose of inspection.” Id.

Key Highlights and Takeaways

  • The Court of Chancery has discretion to trim overly broad requests to craft a production order circumscribed with rifled precision.
  • Although a stockholder may not broaden the scope of their requests throughout the litigation, a Section 220 plaintiff may narrow their requests if they do so in good faith and such narrowing does not prejudice the company.
  • The Court observed that Section 220 cases are “summary proceedings” and such trials do not always include live testimony. Thus, the court reasoned that: “hearsay is admissible in a Section 220 proceeding when the hearsay is sufficiently reliable.” Slip op. at 38.
  • The Court cautioned that Section 220 plaintiffs should not abuse the hearsay exception, and “must be up front about their plans regarding witnesses” in the pre-trial phase of a case. Slip op. at 41. In this case the Court held that the company was deprived of the “ability to test the stockholders’ purpose”, such as through a deposition or otherwise, because the stockholders did not give the company sufficient notice about what they would rely on at trial to establish a proper purpose. Slip op. at 42-43.
  • In dicta, the Court upheld the trial court’s inference made by “connecting the dots” that the credible basis requirement was satisfied based on a combination of: insider stock sales, public statements that may have been false, and concurrent securities litigation supported by ample research. Slip op. at 45.
  • The Court restated the law that the “credible basis threshold may be satisfied by a credible showing, through documents, logic, testimony, or otherwise, that there are legitimate issues of wrongdoing.” Slip op. at 46.

The concurring opinion of one member of the High Court observed that Section 220 cases often involve the issue of whether the “stated purpose” is the “actual purpose”, which makes the truth of the stockholder’s statements on that point a key issue.  The concurrence also emphasized the importance of the distinction between a proper purpose and the threshold requirement of credible basis–and that a stockholder who is neither an employee nor an officer of a company will rarely have first-had knowledge of wrongdoing, but a typical stockholder “will always have knowledge of her purpose because it is, after all, her purpose.” Slip op. at 54. (emphasis in original).

In Sum

Although this decision may make it easier in some ways for a stockholder to prove its case in a Section 220 lawsuit, companies still have several tools at their disposal to test the basis for a stockholder’s assertion of a proper purpose and other statutory and court-made prerequisites for a Section 220 demand.

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’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.

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.

Second supplement: A law review article that I received the hard copy of in February 2022, kindly quoted from the above blog post. See Clifford R. Wood, Jr., Note, Knowing your Rights: Stockholder Demands to Inspect Corporate Books and Records Following Woods v. Sahara Enterprises, Inc., 46 Del. J. Corp L. 45, 52. (2021). The same article also cited to a law review article I co-wrote on Section 220. Id. at 46.

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.