26 April 2021

Section 220 Is Not a Blank Check

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The Delaware Court of Chancery recently issued another decision regarding the statutory right to inspection of corporate books and records under Delaware General Corporation Law Section 220. In Melvin Gross v. Biogen Inc., the plaintiff-stockholder was permitted to obtain certain books and records, but the court limited inspection in key respects, and offered words of caution regarding confidentiality agreements. Companies facing Section 220 demands should review this decision and consider its lessons regarding the appropriate scope of inspection.

Case Background

In December 2019, a stockholder served a Section 220 demand to inspect books and records on Biogen, Inc., ostensibly to (1) investigate possible corporate wrongdoing and breaches of fiduciary duty and (2) evaluate board member independence. In support, the stockholder referenced the company’s involvement in various federal investigations, including a $4 million settlement in November 2019 regarding a nonprofit kickback scheme resulting in fraudulent Medicare payments. Biogen rejected the stockholder’s demand, and the stockholder commenced litigation to compel production.

Takeaways: Section 220 Inspection Is Not Unlimited

Although Vice Chancellor Fioravanti held that the plaintiff-stockholder stated a proper purpose and could seek documents, the Court of Chancery limited the plaintiff’s requested inspection in important respects.

First, the court rejected the plaintiff’s request for all documents that had been produced in, or communications regarding, the government investigations. Pointing to precedent, the court limited inspection to “board-level materials,” reasoning that “[t]hese documents and communications will enable Plaintiff to assess the extent to which Board members were made aware of the alleged wrongdoing and to evaluate how the Board members responded to the Investigation.” The court further explained that the plaintiff had not articulated why other documents produced to the government were “necessary to investigate potential wrongdoing by members of [the] Board.”

Second, the court denied the plaintiff’s request for directors’ emails and notes, and limited production to “formal board materials relating to the Investigation or to any implicated policies and procedures.” The court explained that “Plaintiff presented no evidence or argument that the requested informal board materials are necessary or, conversely, that the formal board materials would be insufficient for him to investigate the alleged wrongdoing.” Biogen thus reminds that while Section 220 is a viable vehicle for inspection, it is a limited one that does not serve as a blank check for stockholders to obtain broad corporate records and informal communications. As this and prior cases indicate (see discussion here for one example), however, such restraints are dependent upon the availability of formal board records to satisfy a Section 220 demand. Biogen thus also reminds of the importance for entities to keep appropriate and timely board materials given their ability to limit the scope of Section 220 demands, as discussed here.

Finally, because Biogen had rejected the demand in its entirety, a confidentiality agreement was not in place. Considering that the parties had not generally disputed implementation of a confidentiality agreement, the court ordered that a confidentiality agreement would govern the company’s production. Critically, however, the court declined to require that the agreement include either a forum selection provision or a so-called “incorporation by reference” provision providing that the production is deemed incorporated by reference into any complaint that the stockholder might file following inspection (and thus, available for the defendant to use in any motion to dismiss briefing). The court noted that those two specific provisions had not been raised or discussed in the case, and should have been presented no later than during the briefing stage or trial, rather than in a pretrial order. This reminds that defendant entities in particular are well served to raise the details of a confidentiality agreement in an inspection action sooner rather than later in order to preserve those arguments and rights.