The Culture Wars Come For Section 220

On June 27, 2023, in Simeone v. The Walt Disney Company (Del. Ch. June 27, 2023), the Delaware Court of Chancery rejected a lawsuit by a Walt Disney Company’s stockholder to compel inspection of its books and records relating to the company’s opposition to Florida House Bill 1557. Though this case was in some ways quite routine—it rested on a straightforward application of the long-settled standard for a Section 220 demand—the political subtext underlying the inspection demand was anything but ordinary.

Disney has a substantial presence in Florida due to its Walt Disney World Resort, which makes it one of the largest employers in the state. On February 24, 2022, the Florida House of Representatives voted to approve House Bill 1557, titled the “Parental Rights in Education” bill, “which limits instruction on sexual orientation or gender identity in Florida classrooms.” It is better known as the “Don’t Say Gay” bill, and it fanned the flames of a culture war across the state and the nation last year. After the bill’s approval in the House, many of Disney’s employees and creative partners demanded Disney take a public stand against it. Disney eventually spoke out against the legislation, and in response, Florida’s legislature voted to dissolve the special tax district that encompasses Walt Disney World Resort.

It was in this political environment that a “longtime Disney stockholder” was solicited by counsel to serve a books and records demand upon Disney, asserting that the company’s directors and officers may have breached their fiduciary duties to the company and its stockholders by opposing the bill. Though Disney believed the shareholder lacked grounds to obtain books and records, Disney produced certain board minutes and corporate policies. The shareholder, dissatisfied with the documents he received, filed litigation.

In a post-trial opinion, the court denied the shareholder’s request for a further inspection of Disney’s books and records and held that: (1) the stated purpose for the inspection request was not the stockholder’s own purpose; (2) the stockholder failed to establish a proper purpose for inspection and; (3) in any event, no further inspection would be warranted as the stockholder had been given essential books and records.

The court first held that the stockholder had not established a proper purpose for his inspection demand because the stated purpose belonged to the stockholder’s counsel, and not the stockholder himself. The alleged stated purpose was to “[t]o investigate potential wrongdoing, mismanagement and breaches of fiduciary duties . . . in connection with the Company’s decision to publicly oppose the Parental Rights Act.” But the shareholder testified that he did not consider pursuing litigation or making an inspection demand after learning about HB 1557. Instead, he made an inspection demand only after he had been solicited by an attorney connected to the Thomas More Society, a “public interest law firm championing Life, Family, and Freedom.” Further, the shareholder testified that his only purpose in requesting to inspect Disney’s books and records was to “know the person or persons who were responsible for making th[e] political decision at Disney to publicly oppose” the law. Thus, the court held that the inspection demand did not address “the plaintiff’s own interests as a stockholder.”

Second, the court determined that the inspection demand was not motivated by a proper corporate purpose, as the shareholder failed to provide a credible basis from which to infer possible wrongdoing. In the court’s view, the shareholder “was not describing potential wrongdoing;” he was “critiquing a business decision” to speak on a public policy issue.

Third, and finally, the court held that the shareholder did not meet his burden to prove that the records he sought were “essential” to the purpose of his inspection demand. In doing so, the court followed ordinary practice in Delaware “not [to] order emails to be produced when other materials (e.g., traditional board-level materials, such as minutes) would accomplish the petitioner’s proper purpose.” Because Disney provided all board materials related to the Bill and its response to the legislation, as well as the potential loss of the special tax district, the shareholder had all necessary and essential information.

The Simeone decision does not break new ground on the application of Delaware law on books-and-records demands. But it does demonstrate that the Section 220 standard has real teeth, and cannot be used by lawyers with a social or political agenda to fish for ammunition in the absence of any credible allegation of actual wrongdoing. Delaware courts continue to require that Section 220 demands be driven by actual stockholder interests, and not by the causes and interests of counsel or special interest groups.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.