Search results for: section 220

A recent decision of a Magistrate in Chancery is useful for its application of the latest changes to DGCL Section 220 to the extent it applied the new version of the statute to a demand for books and records for the purpose of valuation. The decision in Trematerra v. The Affinity Project Inc., C.A. No. 2025-0596-DH, Final Post-Trial Report (Del. Ch. Dec. 8, 2025), made the following noteworthy determinations about new aspects of the statute providing stockholders with more limited rights to demand books and records of a corporation:

  • Identifying specific corporate documents that were determined to satisfy the purpose of performing a valuation, pursuant to the new narrow restrictions for documents available under Section 220(a)(1)(a).
  • Specifying which additional documents for valuation purposes would be ordered based on the expanded (but still limited) tranche of eligible documents under the new sub-section (g) of Section 220(a)(1) when certain conditions are met that might make a stockholder entitled to additional documents beyond the more narrow enumerated list in Section 220(a)(1)(a).
  • The post-trial report of the Magistrate in this case also provides useful definitions of the “compelling need” test under new sub-section (g)
  • The court also provides a helpful explanation of what is required to meet the new “clear and convincing evidence” standard under new sub-section (g) that must be demonstrated to determine what documents are “necessary and essential” for, in this case, the purpose of valuation. See Order at page 30 and footnote 114. (The footnote cites to the caselaw that applies, by analogy, the compelling need standard used in connection with seeking the production of otherwise protected attorney work-product to assess materials not otherwise discoverable.)

In the few days since the Delaware Legislature proposed Senate Bill 21 to make major changes to Delaware corporate law, there has been a veritable avalanche of commentary by the professoriate, practitioners, and journalists with their predictions of the consequences of SB 21 being enacted into law. See, e.g., article on The CLS Blue Sky Blog.

Most of the observations by leading scholars and others focus on the more glitzy proposed changes to DGCL Section 144 via SB 21, which features new definitions for “controlling shareholder” and “disinterested director”.

The fusillade of reviews of SB 21 is easily found in a online search about the newly proposed changes in Delaware law that are arguably more dramatic than the revisions to the DGCL last year, which also broke anecdotal records for the high volume of opinions shared from all corners of the corporate commentariat.

But my focus in this short overview will be on the changes to DGCL Section 220, regarding the qualified rights of a shareholder to demand corporate books and records. Not quite as sexy as the proposed amendments to Section 144, but an issue more often encountered.

Having worked as a legislative counsel drafting legislation for the Delaware Legislature about 30 years ago, I realize that the synopsis at the end of a proposed Senate Bill cannot always be relied on for precision, but the part of the synopsis of SB 21 that pertains to the amendments to Section 220 is excerpted below:

… this Act amends § 220 of Title 8 to define the materials that a stockholder may demand to inspect pursuant to a request for books and records of the corporation. The amendments also set forth certain conditions that a stockholder must satisfy in order to make an inspection of books and records. The amendments make clear that information from books and records obtained by a stockholder from a production under § 220 will be deemed to be incorporated by reference into any complaint filed by or at the direction of a stockholder on the basis of information obtained through a demand for books and records. New § 220(b)(4) preserves whatever independent rights of inspection exist under the referenced sources and does not create any rights, either expressly or by implication. New § 220(f) provides that if the corporation does not have specified books and records, including minutes of board and committee meetings, actions of board or any committee, financial statements and director and officer independence questionnaires, the Court of Chancery may order the production of additional corporate records necessary and essential for the stockholder’s proper purpose.

In order to keep my commentary as pithy as possible, I’ll resort to my favorite format of bullet points:

  • I have written over 200 articles about Delaware court decisions on DGCL Section 220 and the analogous section of the Delaware LLC Act, and have litigated countless cases on this topic. See, e.g., selection of some of my articles on Section 220.
  • Although we all know that the sister provision in the LLC Act has important differences, many court decisions have instructed that the reasoning in cases applying Section 220 can often be applicable to the analogous provision in the LLC Act–which is another opening for more commentary about the impact of SB 21 if it is signed into law.
  • Over the nearly 40 years that I have highlighted cases involving Section 220 and its LLC counterpart in various publications, I have tried to provide a neutral overview of the court decisions without my own opinion. But today I will provide my own insights based on the hundreds of cases on this topic that I have written about and litigated:
  • First, some say indeterminacy in Delaware corporate law is a benefit, not a bug, to the extent that the outcome of a case is not predictable. Notwithstanding some measure of predictability that comes from over 2 centuries of Delaware court decisions, in my view, Section 220 cases that are litigated are often a “black hole”–in the astronomical sense of entering a zone that prevents one from predicting what happens after one enters. I acknowledge that to be less than an optimistic view, but it reflects my own experience of many years.
  • Thousands of reported decisions on Section 220 provide some guidance, but even, for example, when an expert report provides a list of documents needed for the purpose of valuation, the court can still determine that the list is too long, or that the purpose of the plaintiff is not “really” valuation–after a shareholder spends a small fortune on litigation costs. Maybe SB 21 will provide some relief from this state of affairs.
  • Some regard the proposed changes to Section 220 as “raising the bar” and imposing more prerequisites for employing the statute. Maybe so.
  • Nonetheless, in my view, a welcome clarification that SB 21 brings to the table is a concrete list of documents or data that a shareholder is entitled to if the prerequisites of the revised statute are satisfied–that is, less indeterminacy.
  • The highlights of the proposed changes include: (i) a specific list of documents as compared to the current “guess work” about which documents must be produced; (ii) a three-year period prior to the request for documents that also removes the guess work about the period during which documents can be requested; (iii) codification of some requirements that the courts have imposed for years, such as allowing the condition of a confidentiality agreement prior to production.
  • The net result of SB 21 would be to give the court less discretion, though as a court of equity, the Court of Chancery will still be entitled to exercise its equitable powers.
  • I realize that there a limits to the powers of a court of equity. I weigh more of the pros and cons in the supplement below.

Supplement: The DSBA Corporation Law Council on March 3 proposed revisions to the recently debuted SB 21. The revisions to SB 21 include new proposed changes to Section 220–which are not covered in the above blog post about the original SB 21.

An updated SS1 for SB21 was passed by the Delaware Senate. A House vote, and a proposed House Amendment is scheduled for a vote on March 25, 2025.

Notwithstanding the various iterations of the legislation since it was first introduced, the commentary in this post still applies.

Professor Stephen Bainbridge, who has written extensively about proposed SB 21 within the weeks since its introduction, recently penned a scholarly analysis regarding the proposed revisions to SB 21 relating to Section 220.

I readily acknowledge up front that even the revised SB 21 would impose additional hurdles on top of the existing formidable roadblocks to the quest of a shareholder to obtain corporate books and records— to say nothing of the LLC analog. No changes to that statute have been proposed yet.

The good professor refers to the Yahoo case which involved a demand for extensive records in compliance with the Supreme Court’s repeated entreaties to use Section 220 before filing a plenary complaint. The newly proposed Section 220 might make it more difficult or impossible to obtain the same array of documents that were obtained in the Yahoo case. 

But even under the existing regime, it can often cost substantial 6-figures to litigate a Section 220 claim, which is intended to be a summary proceeding. There are published examples, e.g., the Wal-Mart case, highlighted on these pages, where each side spent millions of dollars to litigate a Section 220 claim. For nearly every Yahoo case, there are countless examples—under the existing statute, where a shareholder came up empty due to somewhat amorphous, nuanced defenses currently available.

If SB 21 is passed, companies will have more defenses to a Section 220 demand, and even with a more definite, itemized list of available documents, which I describe above as an offset to the new obstacles, many shareholders will decide that they don’t want to spend, or cannot spend, substantial 6-figures to fight for documents about a company they are invested in.

Aimee Czachorowski, an attorney in the Delaware office of Lewis Brisbois, prepared this post.

Chancellor McCormick’s recent letter decision in Floreani, et al. v. FloSports, Inc., C.A. No. 2023-0684-LM-KSJM (Del. Ch. Oct. 31, 2014), illustrates the pitfalls of non-compliance with the technical requirements of a Section 220 demand by a stockholder for corporate books and records.

The Chancellor summarized the statutory form-and-manner requirements–as well as those imposed by case law–that must be complied with when making a Section 220 books and records request, as follows:

“Breaking it down, Section 220(b) requires that a demand: (1) be in writing, (2) be under oath, (3) state the stockholder’s purpose, and (4) be directed to the corporation at its registered agent or principal place of business. (5) If the stockholder is not a record holder, then the demand must be accompanied by documentary evidence of beneficial ownership of the stock. (6) If the demand is sent by an attorney, then it must be accompanied by a power of attorney. That’s four form-and-manner requirements that apply in all circumstances and two that apply in certain circumstances. The form-and-manner requirements are not onerous, but they are strictly enforced.”

The Court further noted that an “implied condition of the fifth and sixth form-and-manner requirements” is that the demand must “identify the stockholders on whose behalf [the demand] is sent.”

Concluding that three separate demands made under Section 220 were deficient, the Court granted the defendant’s exceptions to the Master’s report. Notably, Section 220 requires a five-day waiting period after the demand–before filing suit.

But here, the five-day waiting period was not complied with when plaintiffs made their third demand; plaintiffs made a motion to amend the same day they served the demand, although they waited an additional five days after the demand to serve the proposed amended complaint. The Chancellor found that the motion to amend, made before the statutory five-day window closed, did not comply with the requirements of Section 220(c).   

Over the last 18 years that I have maintained this blog, I have published highlights on these pages, and elsewhere, of about 190 or so Delaware decisions involving stockholder demands under DGCL Section 220 for books and records, as well as the analogue in the LLC context. Nowadays, I only highlight those I find to be especially noteworthy.  A case that meets that standard is Seidman v. Blue Foundry Bancorp, C.A. No. 2022-1155-MTZ (Del. Ch. July 7, 2023), in which the Court “regretfully” shifted fees for “glaringly egregious litigation conduct in defending against a books and records request.”

This is a “doubleheader” blog post. I will also highlight a second decision (by the same VC) also issued this month that addressed sanctions for failure to comply with post-trial obligations to produce a company’s books and records in the LLC context, as well as errant litigation conduct.

This short blog post assumes the reader is familiar with the basic principles applicable to these types of summary proceedings. 

Highlights

The complaint in the Seidman case was filed on December 14, 2022, and the trial was scheduled for Feb. 22, 2023.  (Notably, complaints in summary proceedings such as these need not be long, compared to complaints I have filed in plenary cases which were 100-pages long–not including voluminous exhibits.)

The demand in this case included requests for formal board materials and compensation consulting reports for the purpose of investigating mismanagement and communicating with fellow stockholders.  Defendants initially refused to produce a single document.  Moreover, the company refused to confirm or deny what, if any, formal board materials existed.

Errant Litigation Conduct

The court observed that the defendant offered no real reason for demanding a deposition in-person in Delaware, in light of the plaintiff being in Florida at the time, especially when the defendant initially did not press an improper purpose defense.

Despite his confirmation that he was not a member of the purported group, the company continued to claim that the plaintiff was a member of the “Jewish mafia.”  The plaintiff was offended by the ethnic slur. 

The company notified the plaintiff too late for the plaintiff to take discovery on the affirmative defense that plaintiff’s stated purpose was not his actual purpose, despite the plaintiff being entitled to take discovery on that issue—on which the company bears the burden.  See Woods Tr. of Avery L. Woods Tr. v. Sahara Enters., Inc., 2038 A.3d 879, 891 (Del. Ch. 2020).

Two days before trial, the parties submitted a Proposed Final Order and Judgment pursuant to which the company produced 60-pages of documents including the compensation consulting reports that were the focus of the initial demand.

Attorneys’ Fees

This decision, from page 14 to 24, discusses the request for attorneys’ fees of over $220,000 for the time period ending two-days before trial.  Included in the court’s analysis was the fact that the company was inappropriately defending the case on the merits of a future plenary action, despite Delaware law being clear that a books and records proceeding is not the time for a merits assessment of potential claims.

Rather, under settled Delaware law, a stockholder “who demonstrates a credible basis from which the court can infer wrongdoing or mismanagement need not demonstrate that the wrongdoing or mismanagement is actionable.”  See Slip op. at 19 (quoting AmerisourceBergen Corp. v. Lebanon Cnty. Emps’. Retirement Fund, 243 A.3d 417, 437 (Del. 2020)).  The court also observed that it was improper to refuse to state what exact formal board materials existed.  Id. at n.78. 

Key Points

The court highlighted the categories of the company’s litigation conduct that the court found glaringly egregious: (i) The plaintiff was forced to file suit to “secure a clearly defined and established right” to inspect the company’s books and records; (ii) “Unnecessarily prolonged or delayed litigation” by refusing to produce any documents; (iii) “Increased the litigation’s cost” by, among other things, insisting in bad faith on an in-person deposition leading to motion practice; (iv) “Completely changed its legal argument” in a way which would prevent plaintiff from taking discovery to which he was entitled; and (v) Multiple misrepresentations to the court.  Id. at 21-22.

Takeaways

Although somewhat egregious facts often are not easily applicable to more routine cases, this case serves as a cautionary tale for companies that are less cooperative than the courts require in responding to stockholder demands for books and records.

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Part two of this “doubleheader” blog post discusses another cautionary tale: the recent Chancery decision in Bruckel v. TAUC Holdings, LLC, C.A. No. 2021-0579-MTZ (Del. Ch. July 17, 2023). This opinion deals with contempt sanctions for failure to comply with a post-trial order for production of books and records.  This case is another example of how difficult it is sometimes for a plaintiff to achieve, even after trial, the production of books and records. 

Key Facts

This case involves the demand by a manager pursuant to Section 18-305 of the LLC Act, as well as a contractual right pursuant to the operating agreement.

The court issued multiple prior decisions in this case, cited in the opinion, that provide additional background details.

The defenses asserted by the company included an alleged lack of a proper purpose, and that the stated purpose was not the primary purpose, and that demand was deficient under 6 Del. C. Section 18-305(e).  The court noted that the contractual rights under the operating agreement did not require a proper purpose.

Reasons for Fee-Shifting

The court summarized its reasons for fee-shifting to include the following: the company resisted through and after trial, by:  (1) withholding books and records to which the manager had unfettered rights; (2) failing to identify whether formal board materials exist; (3) altering the way the board functions in an attempt to duck the company’s production obligations; (4) manufacturing weeks-long delays in conveying books and records; (5) over-designating documents and communications as privileged.

Highlights

This decision includes guidance that goes beyond books and records cases and includes reminders of well-settled Delaware law regarding obligations for the preparation of privilege logs and redaction logs.

Also notable is that the court required production of documents through the present, as an ongoing obligation, not limited to documents dated as of the trial.

In connection with forcing compliance, the court appointed a receiver from among three Delaware lawyers proposed by the parties.

The scope of the opinion was intended to address the contempt of the company and any further sanctions; whether the defendant waived privilege; and whether the defendant met its burden to show cause as to why fees should not be shifted.

The court reviewed the standards for imposing sanctions due to the violation of a court order.  See Slip op. at 16.

Date-Range

The court noted that it was “remarkable” that the defendant took the position that it did not owe documents dated after the trial, and that this position ignored the plaintiff’s statutory inspection rights as a manager and the contractual inspection rights based on the operating agreement. 

Exception to Board Member’s Full Access

In this 44-page decision, the court also reviewed the standard to determine whether the exception when a board member is “adverse” applied such that it would entitle a company to withhold from a director or a manager unfettered access to the books and records that a manager or a director would normally be entitled to obtain–especially to the extent that they are provided to other board members.  Slip op. at 25.  It did not.

Privilege Log

The court reviewed the obligations of a party preparing a privilege log, which include a prohibition on withholding entire documents that are only partially privileged.  Id. at 26.  The court also explained that attachments to otherwise privileged documents need to be separately analyzed and described to justify their privilege.

The court found that not disclosing board materials was “at the heart of this case” and defendants did not explain why a member of the board was adverse to the extent that the minutes of a board meeting should not be produced in their entirety.

The court applied the standard for shifting fees in these types of cases as recited in the Gilead case, which was highlighted previously on this blog. See also AmerisourceBergen case highlighted on these pages as another cautionary tale.

As an example of an improperly asserted defenses, the court repeatedly explained that the plaintiff had contractual rights under the operating agreement that did not require that it establish a proper purpose, especially in light of a manager having essentially unfettered statutory rights and, in this case, “unbounded contractual rights” to books and records.  See Slip op. at 36-37 and footnote 164.

Reasonableness of Fees The court observed that the plaintiff was requesting approximately $219,000 in fees and expenses–incurred merely for bringing the contempt motion.  The court requested that the plaintiffs’ counsel supplement the request for fees by including billing statements.  The court also determined that it would consider the request for fees pertaining to the contempt motion as part of its consideration of the request for fees shifted for the entire action,

Takeaways

The parties and their counsel should expect close scrutiny by the Court of Chancery, in all aspects of the litigation, both pre-trial and post-trial, to ensure that the procedural and substantive obligations of the parties and their counsel are being complied with in good faith, especially in what is categorized as a summary proceeding.

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.