Search results for: "Section 220"

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.

Among the multitude of court decisions on DGCL Section 220 highlighted on these pages, a rare bird is the shifting of fees by the court based on the bad-faith exception to the American Rule. In a rare instance that should not be considered anything other than unusual, the Court of Chancery recently granted, in a transcript ruling, fee shifting in a books and records action in which the court found that there was no justification for the refusal to provide LLC managers with requested books and records, and that the defendant LLC acted in bad faith by withholding those company records. See Crestview-Oxbow Acquisition, LLC, et al. v. Oxbow Carbon, LLC, C.A. No. 2018-0654-JTL, transcript (Del. Ch. Jan. 15, 2019; filed Jan. 31, 2019).

 

A recent post-trial decision from the Delaware Court of Chancery denied a claim for corporate books and records based on DGCL § 220 after finding that there was no credible basis for wrongdoing to support the stated investigative purpose for the demand. Hoeller v. Tempur Sealy International, Inc., C.A. No. 2018-0336-JRS (Del. Ch. Feb. 12, 2019).  Section 220 cases are among the most common forms of Delaware corporate litigation. (In terms of the number of recent Delaware cases highlighted on this blog, it might only be outnumbered by forum selection clause cases.)

Commentary:

About 100 or more Delaware court decisions on Section 220 have been highlighted on these pages over the last 14 years. Regular readers will recall many commentaries about Section 220 that include this lawyer’s respectful skepticism, or lack of enthusiasm, for Section 220 as a tool to obtain information as part of one’s preparation for a plenary complaint.  To the extent that Section 220 is a tool, the decision highlighted in this post supports the view that in some cases Section 220 may be more akin to a sledgehammer than a scalpel, to the extent that Section 220 can often be expensive and time consuming and unsatisfying as a means of obtaining information from a corporation by a stockholder.

For busy readers, the most noteworthy aspects of this 39-page decision can be explained through the use of bullet points to highlight the court’s comprehensive and well-reasoned review of the facts and law involved in an unsuccessful Section 220 claim.

Brief Background:

This case involved a demand for corporate books and records in connection with the termination of a long-term corporate customer relationship which accounted for over 20% of the sales of the defendant company. This important relationship was the subject of alleged misrepresentations that were allegedly more optimistic about the future of the relationship than was warranted.  Although some documents were produced in response to a pre-suit Section 220 demand, the complaint in this case was filed when additional documents demanded were not provided.

Procedural History:

Although internal Chancery guidelines suggest a trial within about 90 days of a complaint, the trial in this case was held within a still comparatively prompt 6-months after the complaint was filed, in November 2018. This February 2019 post-trial decision provides for a relatively quick determination, however unsatisfying to the plaintiff, although prior Section 220 cases highlighted on these pages indicate that when Section 220 cases are appealed, and in some cases remanded, litigation involving Section 220 conceivably could last for several years.

Key Takeaways:

Some of the key legal principles that can be found in this post-trial opinion include the following well-known prerequisites for a Section 220 claim, and important nuances of those requirements, many of which are not expressly stated in the statute:

  • The prerequisite of a “proper purpose” for inspection is defined as one that is reasonably related to the interest to the plaintiff as a stockholder.
  • Although the desire to investigate mismanagement or wrongdoing is a recognized proper purpose, a stockholder must prove by a preponderance of the evidence that it has presented a “credible basis” from which the court can infer that the alleged wrongdoing occurred. Credible basis requires merely “some evidence” of wrongdoing–and not that wrongdoing actually occurred.
  • A stockholder must also state the reasons why he seeks to inspect books and records. That is, what the plaintiff will do with the information or the goal of the investigation. The court applies this requirement to avoid fishing expeditions. In the absence of evidence of a fiduciary duty breach, where a decision falls within the business judgment rule’s protection, the proper purpose requirement fails as there is no claim for a stockholder to pursue in that situation. (Also, for example, though valuation is a well-established Section 220 proper purpose, some cases have required an explanation about the reason a valuation is sought.)
  • Where the purpose of a stockholder is based on the possible breach of the duty of oversight, such as in a Caremark claim, a stockholder must provide “some evidence” from which the court may infer that the board “utterly failed to implement a recording system or ignored red flags.” Moreover, in that context, there must be evidence of non-exculpated corporate wrongdoing in order to survive a defense (in the event that a corporation has a Section 102(b)(7) provision).
  • In this case, there was an allegation that there were misrepresentations about the future of important customer relationships, but the court found that there was insufficient evidence to satisfy the “credible basis” requirement.
  • In addition, the court referred to prior cases in which the plaintiff could not explain the basis for the wrongdoing that was being investigated or the need for the documents that were requested. In those prior cases, the court found that it was the attorneys who were the driving force behind the litigation and not the plaintiff that was requesting the documents. Although the court suspected that to be applicable in this matter, the court did not deny the claim on that basis, but rather reasoned that: “the plaintiff has failed to proffer even a scintilla of evidence to support a credible basis that a claim may exist” under Caremark.
  • The court also reasoned that the fact that active negotiations failed to lead to a deal with a key customer does not support a Caremark claim, especially based on evidence that the board was apprised of, and at times involved in, the negotiations.
  • An important aspect of the court’s decision is the following rationale: “Disagreement with a business decision, in the absence of evidence from which the court may infer a possible breach of fiduciary duty, does not create a credible basis from which the court can infer mismanagement.” See Slip op. 26-27, n. 90.

A recent post-trial opinion from the Delaware Court of Chancery serves as another example to support the view that demands for books and records pursuant to DGCL Section 220 are not for the faint of heart.

In Wilkinson v. A. Schulman, Inc., C.A. 2017-0138-VCL (Del. Ch. Nov. 13, 2017), the Court denied a request for books and records in a decision supported by copious citations to precedent, based largely on the conclusion that even though the demand may have satisfied the requirement for a “proper purpose” on its face, in reality the true purpose was one crafted by counsel for the stockholder–but that the stockholder himself did not appear too familiar with. During the stockholder’s deposition, it was revealed that the stockholder was not conversant with the details of the demand, or its purpose–and that the stockholder served as a plaintiff in seven other lawsuits for the same law firm that pursued the instant case.

Takeaway: There are many other examples that we have highlighted on these pages over the past nearly 13 years, that demonstrate that Section 220 cases are often hotly litigated and it is not rare to incur the cost of a trial, as in this matter, and “come up dry” in terms of not proving the right to obtain documents from the corporation. Thus, the economics of a Section 220 demand favor those whose stake in a company makes it economically rational to pursue such a claim. See, e.g., Section 220 cases highlighted previously.

A multitude of decisions and commentary about DGCL Section 220 have filled these pages over the last 12 years.  This recent Court of Chancery decision is an example of a condition that the Court of Chancery has somewhat recently imposed as part of its grant of some requests for books and records under Section 220.  Elow v. Express Scripts Holding Company, C.A. No. 12721-VCMR (Del. Ch. May 31, 2017). I have often suggested in connection with Section 220 cases that they are often expensive and unsatisfying, but this decision might not be the best example to support that argument.

Procedural Overview:  The trial in this case took place on March 3, 2017 after a complaint was filed on August 12, 2016.  The two consolidated cases were the subject of a one-day trial based on stipulations and 74 exhibits.  A thoughtful and detailed decision issued approximately ten months after the complaint was filed is still fast by most litigation reference points.  Notwithstanding the grant of a right to obtain some documents, the fees incurred, one can surmise, must not have been inconsiderable.

Key Takeaway:  As a condition of the court granting some documents, after an extensive recitation of the nuances and prerequisites for a Section 220 demand, and how they applied to the facts of this case, the court conditioned the grant of documents pursuant to Section 220 based on the “incorporation by reference doctrine.”  As explained in the Yahoo opinion, (a veritable magnum opus on Section 220) highlighted on these pages, the doctrine “permits a court to review the actual document” referenced in a complaint that is later filed after a Section 220 demand is vindicated.

Specifically, as applied in a 220 case, if the plaintiff files a plenary complaint based on the documents obtained in the 220 case, it must incorporate documents received into any subsequent derivative complaint.  The “Incorporation Condition” ensures:  “That the plaintiff cannot seize on a document, take it out of context, and insist on an unreasonable inference that the court could not draw if it considered related documents.”

The court also imposed a routine condition that a confidentiality agreement also be entered into as part of the production.

 

 

The Court of Chancery issued an important decision a few days ago for those who need to understand the latest nuances of Delaware law involving DGCL Section 220.  Readers of these pages for the last 12 years have seen highlights of a plethora of rulings supporting the view that demands pursuant to Section 220 are not for the faint of heart.  Rumors of the death of Section 220, however, have been greatly exaggerated, in light of the ruling in Rodgers v. Cypress Semiconductor Corporation, C.A. No. 2017-0070-AGB (Del. Ch. April 17, 2017).

Background: A former CEO of the company involved in this case sought books and records to investigate allegedly excessive compensation paid to the executive chairman of the board, and also alleged that the chairman violated the Code of Business Conduct and Ethics of the company.  The company defended the claim based on the argument that the former CEO’s stated purpose was not the true purpose, and that the true purpose for the request was not proper.  The company also denied the Section 220 demand based on the argument that there were no claims for non-exculpated allegations.

Key Takeaways

The most noteworthy aspects of this opinion are the following:

·     The court explained that there remains a very high threshold to establish that the “true improper main purpose” of a demand is something other than the stated primary purpose.

·     The court recited the prerequisites for a demand under Section 220 such as having a proper purpose and having a credible basis for claims to support the purpose to investigate wrongdoing.  In this post-trial opinion, the court found the testimony of the claimant credible that his primary purpose was proper.  Those primary purposes included investigation of wrongdoing such as a conflict of interest in violation of the company’s Code of Business Conduct and Ethics, as well as a desire to communicate with other stockholders and attempt to persuade the board to make changes.

·     The court distinguished the decision of the Delaware Supreme Court in Southeastern Pennsylvania Transportation Authority v. AbbVie, highlighted on these pages.  Specifically, AbbVie stands for the position that when the sole purpose for a Section 220 demand is to investigate wrongdoing of an exculpated claim, a Section 220 demand will be denied.  By contrast, in this matter, derivative litigation to pursue claims of an exculpated nature were not the sole motivation to investigate wrongdoing.  The other proper purposes included communication with stockholders and evaluation of suitability of members of the board to continue to serve.

·     The court rejected the argument that the true purpose of the Section 220 demand in this matter was to pursue a personal vendetta and to assist in an ongoing proxy battle by the claimant.  The court cited to cases finding that it is a high hurdle to prevail on an argument that the primary purpose, contrary to the stated purpose of a claimant, is personal animosity or other improper motives.  See cases cited at footnotes 30 and 31.

·     The court described the importance of a confidentiality agreement to limit the use of the documents obtained, to minimize the risk that the data would be used for the purposes of a proxy contest, although application to the court could be made for seeking approval to use the information for other purposes in the future.

A recent decision from the Delaware Court of Chancery addressed an issue of first impression, and the court ruled that:  In order to maintain a suit under DGCL Section 220 for corporate books and records, the plaintiff must be a stockholder at the time suit is filed.Weingarten v. Monster Worldwide, Inc., C.A. No. 1293-VCG (Del. Ch. Feb. 27, 2017).

Background:  The facts of this case involved a pre-suit demand for books and records under Section 220 of the DGCL.  The demand was made shortly before a merger was scheduled to close, but suit was not filed until after the merger closed.  The merger extinguished the stockholder status of the plaintiff.

Court’s Reasoning:  The court conducted a thorough statutory interpretation of Section 220 and determined that the statutory prerequisite was clear and unambiguous to the extent that it requires that a plaintiff in a Section 220 case be a stockholder at the time suit is filed.  Other Delaware decisions were distinguished to the extent that they involved a stockholder who lost that status after suit was filed.

Commentary:  The multitude of court decisions interpreting Section 220 belie the facial simplicity of the statute.  This well-reasoned decision provides another example of how Section 220 can be a complicated and expensive – – and unsuccessful – – method for obtaining books and records.  Notably, this is a post-trial opinion, which implies that substantial fees were incurred before the plaintiff found that its efforts were not fruitful.

 

This Delaware Court of Chancery opinion is notable for denying, after trial, a demand for books and records of a publicly held company for purposes of valuation and to seek documents under Section 220 to investigate alleged mismanagement based on Caremark claims.  Beatrice Corwin Living Irrevocable Trust v. Pfizer, Inc., C.A. No. 10425-JL (Del. Ch. Sept. 1, 2016). This opinion provides an excellent explanation and example of a successful defense to a demand by a stockholder for corporate records.

This is the second Section 220 opinion within the span of a few days by former Master in Chancery LeGrow, who is now a Delaware Superior Court Judge, but was appointed to decide these cases as a Vice Chancellor-by-Designation under Del. Const. art. IV § 13(2). The prior case was also highlighted on these pages.

Background:

The stockholder seeking books and records under Section 220 in this matter is a trust. The two stated purposes for the demand were both proper purposes but they still did not satisfy the nuanced requirements established by case law which must be satisfied in order for the proper purpose requirement to be met. The purposes for demanding books and records in this case were to investigate mismanagement of alleged Caremark claims for failure to disclose the amount of tax liability for the billions of dollars in revenue that was “located” outside the United States–if the funds were repatriated into the U.S. But the company had no plans to repatriate those funds in the United States, at which time they would be subject to taxation. The company maintained that it had no foreseeable plans to repatriate the funds and therefore there was no need to determine the tax liability. Moreover, they were not required to do so under the applicable accounting standards based in part on their position that to do so was not practicable.

The plaintiff maintained that nonetheless it was a violation of the board’s fiduciary duty of oversight not to determine the amount of potential tax if the funds were repatriated, and they claimed that would have an impact on the valuation. The Court disagreed based on a careful and thoughtful analysis.

Analysis:

The court provided the public policy reasons why it must balance the interests of a stockholder in obtaining books and records with the duties of the board of directors to manage the affairs of the corporation under DGCL § 141. This opinion provides excellent recitations of important principles of corporate litigation and corporate governance involved in Section 220 demands. The many nuances of this common claim as established by case law over the years are explained in lucid fashion.

The sole issue in this case was whether the plaintiff satisfied the prerequisites for establishing a proper purpose for the inspection. The court found that the trust failed to satisfy the necessary elements of a proper purpose which in this case meant that the plaintiffs neither: (i) established that they have a credible basis to investigate mismanagement or wrongdoing based on their Caremark allegations, (ii) nor have they shown that the tax issues for which they sought information would have any material impact on the valuation of the company.

Importantly, the court explained that in order to satisfy a proper purpose for investigation of mismanagement, “mere suspicion” or “subjective belief of wrongdoing, without more, is not sufficient to stay a proper purpose.”

The court provides a very useful explanation of the details that would satisfy the credible basis standard when a Section 220 demand alleges the failure of the board to fulfill its duties under Caremark.

Compare the case cited at footnote 39 in which a successful 220 case based on a Caremark claim was recognized by the Court of Chancery. See Oklahoma Firefighters Pension and Retirement System v. Citi Group, Inc., 2015 WL 1884453, at *5-6 (Del. Ch. Apr. 24, 2015).

This opinion is also helpful to explain those situations in which a publicly held company can successfully defend against a demand for books and records when the purpose stated is valuation and there has not been a satisfactory justification for explaining why the documents requested are necessary for purposes of valuation – – or not otherwise publicly available.

Commentary:

This opinion should be read together with the opinion by Vice Chancellor-by-Designation LeGrow which was published within a few days of this decision in the matter of Bizzari v. Suburban Waste, highlighted on these pages here, in which the demand for corporate records by a director was denied based on somewhat unusual facts involved in that case.

Both of these cases involve post-trial denials of Section 220 demands. Readers of these pages over the years will be forgiven for perceiving a constant refrain in the commentary on many of the Section 220 cases highlighted on these pages in which one might detect a theme that Section 220 cases can be quite expensive and time-consuming and, after trial, do not always result in any substantial document production for the plaintiff.

Why this Case is Noteworthy: The Court of Chancery’s opinion in Laborers’ District Council Construction Industry Pension Fund v. Bensoussan, C.A. No. 1123-CB (Del. Ch. June 14, 2016), is the second decision from the Court of Chancery in two months that provides a reasonable basis for skepticism about whether, as a practical matter, plaintiffs’ attorneys should wait for the results of a Section 220 action before filing a plenary derivative suit. This case involves the popular Lululemon brand of athletic apparel, and allegations of insider trading at the company.

Overview: This opinion needs to be viewed in the context of a Chancery opinion issued last month styled In Re Wal-Mart Stores, Inc. Delaware Derivative Litigation, in which the court found that Delaware derivative litigation was barred due to a prior dismissal in another state of a derivative suit that was filed involving similar claims. The plaintiffs in that related litigation in another state, that was dismissed with prejudice, did not use Section 220. In the Wal-Mart case, as in the instant case, the Delaware plaintiffs waited until their Section 220 claims were litigated before filing their plenary action. By that time however, the litigation that was filed earlier in another jurisdiction, and which was not delayed by Section 220 demands, was dismissed. The Court of Chancery in this case found that the additional information that was obtained through the Section 220 action was not a sufficient reason to avoid the principles of issue preclusion, and claim preclusion, that prohibited the Delaware case from proceeding.

Readers should closely review the 40-page decision, but among several highlights include the following:

Procedural Background:

This litigation was preceded by two separate Section 220 actions. In one of those actions, after trial, the court largely rejected the request for books and records under Section 220. In the other Section 220 action that preceded this litigation, the court ordered the production of some documents but still a motion to compel was required because of a dispute about attorney/client privilege. That dispute resulted in a written opinion that was highlighted on these pages here. See In Re Lululemon Athletica Inc. 220 Litigation, Cons. C.A. No. 9039-VCP (Del. Ch. Apr. 30, 2015).

That decision on Section 220 issues was rendered approximately two years after the first Section 220 litigation was filed in Delaware as a prelude to the instant decision in the plenary case. My comments at the above link regarding the Section 220 opinion, and the shortcomings of Section 220 in general, apply here as well.

Key Takeaway:

The court found that simply because the plaintiffs and their counsel in the New York litigation did not first file a 220 action, or wait for a 220 action to conclude, that fact alone did not, ipso facto, make the plaintiffs in that derivative case inadequate representatives for that litigation. See page 32 and footnote 69 – 70 and accompanying text. See also footnote 75 referring to the Delaware Supreme Court opinion in Pyott, highlighted on these pages, which held that not using Section 220 prior to a derivative action does not create an irrebuttable presumption of inadequacy of representation.