As regular readers know, this blog sometimes takes a break from recent developments to reflect on bedrock decisions and key principles of which all practitioners should be aware. This post highlights decisions that have shaped legal practice concerning Section 220 of the Delaware General Corporate Law, which allows stockholders to inspect corporate books and records under certain circumstances. Counsel sending or receiving a Section 220 demand would be wise to review these seven decisions.
- AmerisourceBergen Corp. v. Lebanon Cnty. Emps. Ret. Fund, 243 A.3d 417 (Del. 2020): It is well established that under Section 220, a stockholder seeking to inspect the books and records of a corporation must demonstrate a “proper purpose” for inspection. In this seminal opinion from 2020, the Delaware Supreme Court affirmed a Chancery Court decision that found a sufficient proper purpose and required the company to produce corporate books and records in response to stockholders’ demand to “investigate possible breaches of fiduciary duty, mismanagement, and other violations of law,” regarding the corporation’s distribution of opioids and related ongoing governmental investigations. While recognizing that a stockholder must demonstrate a “credible basis” from which wrongdoing may be inferred, the Supreme Court affirmed that “where a stockholder meets this low burden of proof . . . [the] stockholder’s purpose will be deemed proper under Delaware Law” and that the stockholder “is not required to specify the ends to which it might use the books and records.” Moreover, the Supreme Court affirmed that a demanding stockholder need not demonstrate the suspected wrongdoing it seeks to investigate is “actionable” under Delaware law. See here for this blog’s robust examination of AmerisourceBergen and its likely implications going forward.
- High River Ltd. P’ship v. Occidental Petrol. Corp., C.A. No. 2019-0403-JRS, 2019 WL 6040285 (Del. Ch. Nov. 14, 2019): As noted above, to inspect corporate books and records, a stockholder must demonstrate a “proper” investigatory purpose reasonably related to the stockholder’s interests as an owner of the company. Although quite broad, this definition is not without limits, as evidenced by High River. There, plaintiff affiliates of an activist investor purchased stock in an acquiring company following its announcement of a merger agreement with a target entity. The plaintiffs then mounted a proxy contest to replace members of the acquiring company’s board, and lodged a Section 220 demand to inspect the acquiror’s books and records. Although the plaintiffs made a “cursory argument about the need to investigate corporate wrongdoing or mismanagement,” their admitted, principal purpose for the demand was to “aid them in their proxy contest” to “enhance the quality of their communications with fellow stockholders.” The Court of Chancery denied plaintiffs’ inspection demand, concluding that plaintiffs failed to state a proper purpose, and noting that “pleading an imminent proxy contest is not enough to earn access to broad sets of books and records relating to the details of questionable transactions, particularly when the board’s decision-making is subject to the business judgment rule.”
- Weingarten v. Monster Worldwide, Inc., C.A. No. 12931-VCG, 2017 WL 752179 (Del. Ch. Feb. 27, 2017): Weingarten discusses the threshold principle of standing to bring suit to enforce a Section 220 demand when a corporation refuses to permit an inspection—“[w]here the stockholder seeks to inspect the corporation’s books and records, other than its stock ledger or list of stockholders, such stockholder shall first establish that . . . [she] is a stockholder.” In other words, one who seeks to inspect the books and records of the corporation must be a stockholder at the time their Section 220 suit is filed. Accordingly, a stockholder seeking to enforce their right to inspection ought not delay bringing suit, particularly when faced with a merger agreement to be finalized in the near term. And, company counsel should probe closely a demanding party’s standing on the eve of a merger effectuation. Even mere hours can make all the difference, as illustrated in Swift v. Houston Wire & Cable Company, C.A. No. 2021-0525-LWW, 2021 WL 5763903, at *1 (Del. Ch. Dec. 3, 2021), featured recently in this blog.
- Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264 (Del. 2014): IBEW explores the circumstances where even in a Section 220 proceeding, which has a low threshold for its more limited allowable discovery, a stockholder can satisfy the higher threshold to obtain otherwise protected privileged documents. In this case, a pension fund that owned company stock sought corporate books and records regarding the company’s alleged mismanagement of an internal investigation into bribery at a company subsidiary. Former Vice Chancellor Strine granted the plaintiff’s Section 220 demand and ordered the company to produce various documents, including internal, corporate communications with counsel. Significantly, the Supreme Court affirmed the Court of Chancery’s assessment of the Garner doctrine, first recognized in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which provides that, upon a showing of “good cause,” a stockholder seeking to investigate breaches of fiduciary duties by those who control the company may obtain discovery of the company’s privileged documents and communications “necessary and essential” to the stockholder’s stated investigatory purpose. Although Delaware courts apply the Garner exception remarkably sparingly, IBEW serves to remind that the privilege afforded corporate communications involving counsel is not absolute, and that the exception applies in summary Section 220 litigation, and not just in plenary, derivative suits. See here for a recent blog article discussing analysis of the Garner exception in the derivative context.
- Ret. Sys. of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS, 2021 WL 529439 (Del. Ch. Feb. 10, 2021): As Section 220 inspection demands become more commonplace, so too have demanding parties’ requests for discovery beyond formal board materials like meeting minutes and board presentations. Facebook reemphasizes a modern trend of books and records litigation: “if non-email books and records are insufficient [to accomplish the demanding parties’ proper investigatory purpose], then the court should order emails to be produced.” Here, the Court of Chancery compelled production of company email communications because traditional corporate records the company had already produced did not provide sufficient information to satisfy the plaintiff’s investigatory purposes. The decision reminds practitioners that detailed, formal, board-level documentation can be a benefit in curtailing the reach of Section 220 discovery.
- Salberg v. Genworth Fin., Inc., C.A. No. 2017-0018-JRS, 2017 WL 3499807 (Del. Ch. July 27, 2017): Salberg presents the unique circumstance where plaintiffs levy a Section 220 demand following the commencement of a derivative suit against the company. Here, plaintiffs asserted breach of fiduciary claims against a company’s directors and officers relating to alleged false and misleading statements concerning the company’s insurance business portfolio. While the derivative suit was pending, the company announced it had agreed to be acquired by another entity. The same plaintiffs litigating the plenary action then demanded to inspect the company’s books and records to investigate whether the board properly considered and valued their derivative claims when negotiating the impending merger. Following the company’s production of heavily redacted board materials, and the company’s refusal to produce unredacted, privileged records, plaintiffs filed a Section 220 complaint to compel production pursuant to the Garner fiduciary exception. In response, the company argued that plaintiffs failed to allege an “obviously colorable” claim for breach of fiduciary duty relating to the board’s analysis of plaintiffs’ derivative claims. It further argued that under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), a stockholder vote approving the merger would extinguish plaintiffs’ derivative claims and their standing to maintain them, and thus plaintiffs failed to state a proper purpose for their books and records demand. Although the Court of Chancery declined to compel production of privileged documents under Garner, it nevertheless held the “colorability” of plaintiff’s Section 220 demand “must by assessed under the standard that applies here—‘credible basis.’” Accordingly, the Court of Chancery declined to determine under Corwin whether the plaintiffs’ purpose for investigation was proper, and concluded plaintiffs demonstrated a credible basis for their demand.
- City of Cambridge Ret. Sys. v. Univ. Health Servs., Inc., C.A. No. 2017-0322-SG, 2017 WL 4548460 (Del. Ch. Oct. 12, 2017): Incorporation by reference is an important tool in the belt of a company faced with a plenary complaint following a demand for corporate books and records. A company’s desire to have the protection of this provision has been supported in certain circumstances, such as it was in City of Cambridge. There, the company contested the plaintiff’s stated purpose for, and requested scope of, its Section 220 demand, but offered to produce certain documents if the plaintiff agreed to an incorporation-by-reference provision within a proposed confidentiality agreement governing plaintiff’s demand and the company’s production. The proposed provision ensured that all documents produced by the company in response to plaintiff’s demand would be incorporated by reference in any complaint filed by the plaintiff in a subsequent, plenary proceeding, and thus make available all produced documents for purposes of any motion to dismiss the plenary complaint. The plaintiff refused and sought to compel production of the company’s books and records. The Court of Chancery acknowledged its discretionary authority under Section 220 to impose “conditions as the Court deems appropriate” regarding books and records productions, including incorporation-by-reference conditions. And under the circumstances presented in City of Cambridge, the Court of Chancery concluded an incorporation-by-reference condition met “the salutary ends of judicial and litigants’ economy,” and granted the company’s request for its inclusion.