A Recent Reminder For Outside Directors: Your Emails May Be Fair Game
As stockholders continue to seek expansive books and records collections, and particularly as requests for materials outside “formal” board materials become routine, it is worth reflecting on areas in which Delaware courts have continued to uphold boundaries with respect to Section 220 obligations. In a recent decision announced from the bench, Vice Chancellor Joseph R. Slights III recently offered a reminder of one such area: the non-company email accounts of outside directors.
Collection of materials outside the “formal” record in connection with a Section 220 request has itself been limited by Delaware courts except in certain limited circumstances, for instance where a company conducts formal corporate business without documenting its actions in minutes and board resolutions or other formal means. In addition to and on top of these limitations, while stockholders often seek broad collection of “all communications” on a particular topic, Delaware courts have reminded stockholders that, when it comes to outside directors who are not employees of the company subject to the Section 220 demand, email records may not be part of the books and records of the company at all, and so may fall outside of such a collection entirely.
Vice Chancellor Slights recently offered one such reminder, in prohibiting access to the email records of outside directors located on the servers of the company that operated as the controlling shareholder of the company whose records were being sought.[1] He noted that the documents on the controlling shareholder company server “[were] not even books and records of the Defendant corporation or a subsidiary of the corporation, which are the only documents a stockholder has a right to compel inspection of under Section 220 absent a showing that directors were conducting board or company business on personal devices.” The court further articulated that because of that, and given the stockholders’ duty to show how the books and records are necessary and essential to their stated purpose, “it is hard to see how these documents would be within the scope of a proper Section 220 production in any event.”
In 2015, Vice Chancellor Donald F. Parsons, Jr. articulated similar principles to those recently stated by Vice Chancellor Slights, that Section 220 only allows shareholders to inspect the corporation’s “books and records,” as well as its subsidiaries’ books and records to the extent the corporation has “actual custody and control of such records.” In re Lululemon Athletics Inc. 220 Litig., 2015 WL 1957196, at *3 (Del Ch. Apr. 30, 2015).
Other cases have come to a different conclusion, however, in particular where stockholders seek access to directors’ personal devices as opposed to other companies’ servers. For instance, Chancellor Andre G. Bouchard required the defendant corporation to turn over emails and messages stored on directors’ personal accounts because they related to the directors’ alleged breaches of fiduciary duty. Schnatter v. Papa Johns Int’l, Inc., 2019 WL 194634, at *1 (Del. Ch. Jan. 15, 2019) (abrogated on other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019)). Though expressly declining to adopt a “bright-line rule,” the court instructed that, in regard to whether defendants must turn over communications from non-corporate devices, courts “should apply [their] discretion on a case-by-case basis to balance the need for the information sought against the burdens of production and the availability of the information from other sources.” Id. at *16. In part, the court justified its position by way of policy, stating that “the utility of Section 220” would be undermined were the court not to allow plaintiffs to collect directors’ personal emails and communications. Id. Other cases have likewise required defendants to turn over communications from personal or other non-corporate devices. See, e.g., Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 793 (Del. Ch. 2016) (abrogated on other grounds by Tiger, 214 A.3d 933); Ind. Electr. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., Case No. 7779-CS, at 97-98 (Del. Ch. May 20, 2013) (transcript).
While production of outside director documents stored outside of company servers may be required in special, outlier circumstances, companies should carefully consider a stockholder’s request for “all communications” where that broad category includes such documents, and should evaluate carefully whether such documents are required to be produced.
[1] See Firefighters’ Pension System of the City of Kansas City, Missouri Trust v. Foundation Building Materials, Inc., Case No. 2021-0001-JRS (Del. Ch. Jan. 7, 2022) (transcript).
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