A recent decision in the federal securities class action regarding the take-private transaction of Pattern Energy lends further support to plaintiffs invoking an aggressive pre-litigation strategy to pursue discovery through a 220 demand. Plaintiffs in the federal case chose not to make a pre-suit 220 demand. Instead, faced with a motion to dismiss, they sought relief from the discovery stay of the Private Securities Litigation Reform Act (PSLRA) to obtain the same 220 demand discovery obtained by Chancery Court plaintiffs in parallel litigation. The discovery motion was denied, and the motion to dismiss was recently granted. Conversely, for the Chancery Court plaintiffs, the breadth of 220 discovery they were able to obtain became the basis for the Chancery Court’s appointment of a lead plaintiff. These divergent outcomes send a further message to plaintiffs that they face real danger if they fail to aggressively pursue pre-suit 220 discovery.
As recent decisions from the Delaware courts remind us (e.g., Murfey v. WHC Ventures, LLC), Delaware entities often have the ability to negotiate the scope of investors’ right to inspect company books and records—and perhaps even to eliminate those rights. But few corporations, partnerships, or LLCs appear to do so. With the proliferation of books-and-records litigation in recent years, however, more Delaware entities should consider whether opportunities may be available to limit the potential burden of such litigation and whether it would be prudent to explore those opportunities.
A short decision issued in January by the Delaware Supreme Court provides helpful insight into an issue of practical import in the context of Section 220 demands: when does a stockholder have a right to go beyond formal communications, such as board minutes, presentations, and resolutions, to conduct a more invasive and burdensome search of informal methods of communication, such as text messages and emails?
The Delaware Court of Chancery recently showcased its commitment to maintaining open judicial records and proceedings. In a derivative suit predicated on the widely covered Boeing crashes from 2018 and 2019, in which the Complaint featured materials that had been produced pursuant to a books-and-records inspection demand under Section 220 of the Delaware General Corporation Law, the Court rejected all but one of Boeing’s attempts to shield its internal documents from the public spotlight. Most cases, of course, will not be so charged with public interest. Nonetheless, the Court’s analysis should serve as a reminder that keeping information confidential in Delaware courts may be an uphill battle.
The above-referenced turn of phrase was penned by Benjamin Franklin in admonishing his fellow Philadelphians to take heed of fire prevention strategies. Although the benefits discussed here are short of life-saving, attention to implementation and periodic review of your practices for the preparation and maintenance of board minutes and related materials can yield significant dividends in managing and mitigating litigation risk, including the risk of personal liability for directors. In addition to providing an accurate record of board decisions, to the extent that minutes evidence directors’ good faith, diligence, and absence of conflict (or appropriate handling of conflict), minutes can help support early termination of stockholder suits for breach of duty. Attention to board (and board committee) minutes is especially important given the increase in demands by would-be stockholder plaintiffs for corporate books and records to assist them in assessing potential claims and constructing their allegations.
Sidley is pleased to share the December 2020 issue of Sidley Perspectives on M&A and Corporate Governance, a quarterly newsletter designed to keep you current on what we consider to be the most important legal developments involving M&A and corporate governance matters.
The Delaware Supreme Court recently affirmed Vice Chancellor Laster’s decision requiring the production of corporate books and records in an action some have characterized as expanding the scope of Section 220 actions. These decisions, however, largely affirm the long-standing statutory mandate that a requesting stockholder must state a “proper purpose” for inspection (not what the stockholder intends to do with the resulting records) and confirm that a stockholder investigating potential wrongdoing need not prove it has actionable claims in order to proceed.