Are Emails “Necessary and Essential” To Satisfy A Section 220 Demand? It Depends.

On April 20, 2022, the Delaware Supreme Court affirmed in part and reversed in part the Court of Chancery’s decision requiring production of certain informal records from NVIDIA’s officers and directors pursuant to a Section 220 of the Delaware General Corporation Law (“Section 220”).  NVIDIA Corp. v. City of Westand Police & Fire Retirement System, et al., 2022 WL 2812718 (Del. Apr. 20, 2022).

To review the standard summarized by the Court (citations omitted): Under Section 220, stockholders have a right to inspect corporate books and records.  “This right, however, is not unfettered.  Section 220 first imposes strict form and manner requirements.”  Specifically, a stockholder bears the burden of proving that they have a purpose “reasonably related to such person’s interest as a stockholder” (i.e., a “proper purpose”) for the request.  “[W]here a stockholder seeks to investigation wrongdoing, the stockholder must also ‘show, by a preponderance of the evidence,’ a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation . . . .”  The stockholder must further show that each category of information requested is “essential” to the stated purpose for the inspection.  2022 WL 2812718, at *6.

Here, the NVIDIA shareholders sought books and records to investigate possible wrongdoing and mismanagement by certain company executives in light of allegations that those executives knowingly made false or misleading statements regarding the effect of crypto mining on NVIDIA’s channel and the company’s ability to manage increasing demand for gaming graphics processing units by those seeking to mine crypto.  The stockholders further alleged that the executives traded on the inflated stock price.

The Court held: (1) the stockholders’ original demands did not violate Section 220’s form and manner requirements; (2) the stockholders did not expand their requests throughout litigation and the Court of Chancery was not required to deny an overbroad request; (3) the Court of Chancery did not err in holding that sufficiently reliable hearsay evidence 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; (4) the Court of Chancery did not err in holding that the stockholders proved a credible basis to infer wrongdoing; and (5) the documents ordered to be produced by the Court of Chancery are essential and sufficient to the stockholders’ stated purpose.  Id. at *1.  Below we address the key takeaways:

First, with regard to the scope of the books and records demands, and the specific documents requested based on those demands, the Court concluded that the Court of Chancery is not required to outright deny overbroad demands.  It may choose to issue a production order tailored to its determination of the proper purpose established or it may deny the request as overbroad.  Both outcomes will be “subject to an abuse of discretion standard and deference” from the Court.  Order at *7.  Furthermore, the Court confirmed that whether the specific requested materials for satisfying the demands themselves are “necessary and essential” is a “fact specific” determination, “which is committed to the court’s sound discretion.”  Order at 18.  In this case, the Court affirmed the Court of Chancery’s holding that informal board materials and officer-level materials, including certain officer email communications, were “necessary and essential.”  Id.  Specifically, the narrow group of emails requested were explicitly described in the related securities class action complaint and reflected information provided to and communications between the implicated officers about the impact of crypto-related demand on NVIDIA’s sales.  The Court of Chancery had found these emails address the “crux” of the stockholder’s stated purpose for the demand and contained information unavailable from any other source.  Id.

Second, reviewing a more than 18-year history of caselaw, the Court also affirmed that hearsay is admissible in a Section 220 proceeding, without limitation as to the specific use of the hearsay, provided that hearsay is “sufficiently reliable.”  Id. at *14.  However, a stockholder must “communicate honestly and early with the company regarding their intent so as to allow companies to decide whether to depose the stockholders or to identify their own witnesses for trial.”  Id. at *15.  In this case, the Court found the stockholders had not met their burden because they had refused to identify any witnesses and the company was unable to test the alleged proper purpose.  Id.

Finally, the stockholders offered evidence to support their alleged claim concerning NVIDIA public statements, the executives’ stock sales, and in the allegations in the parallel securities class action complaint.  The Court held: “While this evidence likely would fall far short of that necessary to support an actual claim, we cannot say that it is insufficient to meet the lowest possible burden of proof – a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation.”  Id. at *17.