As regular readers know, this blog sometimes takes a break from recent developments to reflect on fundamental decisions and key principles that all practitioners should be aware of. This article highlights decisions that have shaped legal practice regarding Section 220 of the Delaware General Corporations Act, which allows shareholders to inspect corporate books and records in certain circumstances. Counsel sending or receiving a Section 220 request would be advised to review these seven decisions.
- Amerisource Bergen Corp. vs. Lebanon Cnty. Emp. Back. Funds, 243 A.3d 417 (Del. 2020): It is well established that under Section 220, a shareholder seeking to inspect the books and records of a corporation must demonstrate a “legitimate purpose” for the inspection . In this seminal 2020 opinion, the Delaware Supreme Court upheld a chancery court ruling that found sufficient legitimate purpose and required the company to produce corporate books and records in response to the request. shareholders to “investigate possible breaches of fiduciary duty, mismanagement, and other violations of law,” regarding the company’s distribution of opioids and related ongoing government investigations. While acknowledging that a shareholder must demonstrate a “credible basis” from which wrongdoing can be inferred, the Supreme Court affirmed that “where a shareholder meets this low burden of proof . . . [the] the shareholder’s purpose will be deemed appropriate under Delaware law” and that the shareholder “is not required to specify the purposes for which it might use the books and records”. Further, the Supreme Court held that a demanding shareholder need not demonstrate that the alleged wrongdoing it is seeking to investigate is “actionable” under the law of the Delaware. see here for the in-depth review of this blog on AmerisourceBergen and its likely implications in the future.
- High River Ltd. P’ship c. Western Petrol. Corp., CA No. 2019-0403-JRS, 2019 WL 6040285 (Del. Ch. Nov. 14, 2019): As noted above, to inspect corporate books and records, a shareholder must demonstrate an investigative purpose “ appropriate” reasonably related to the interests of the shareholder as owner of the company. Although quite broad, this definition is not without limits, as evidenced by High River. In this case, plaintiffs affiliated with an activist investor purchased shares of an acquiring company following the company’s announcement of a merger agreement with a target entity. The plaintiffs then staged a proxy contest to replace the acquiring company’s board members and filed a Section 220 request to inspect the acquirer’s books and records. Although the plaintiffs made a “superficial argument about the need to investigate wrongdoing or corporate mismanagement”, their avowed primary purpose was to “help them in their proxy fight” to “improve the quality of their communications with their fellow shareholders”. The Court of Chancery dismissed the plaintiffs’ request for inspection, finding that the plaintiffs had failed to state a legitimate purpose and noting that “litigating an impending proxy contest is not sufficient to gain access to large sets of books and records relating to details of suspicious transactions, particularly where board decision-making is subject to the business judgment rule.
- Weingarten vs. Monster Worldwide, Inc.CA No. 12931-VCG, 2017 WL 752179 (Del. Ch. February 27, 2017): Weingarten discusses the threshold principle of standing for bringing an action to enforce a claim under Section 220 when a company refuses to allow an inspection – “[w]here the shareholder seeks to inspect the books and records of the company, other than its share register or list of shareholders, such shareholder must first establish that . . . [she] East a shareholder”. In other words, anyone seeking to inspect the company’s books and records must be a shareholder at the time their Section 220 complaint is filed. Thus, a shareholder wishing to assert his right of inspection should not delay in bringing an action, in particular in the face of a merger agreement to be finalized in the short term. And, the company’s attorney should closely probe the position of a demanding party on the eve of the consummation of a merger. Even simple hours can make all the difference, as illustrated in Swift vs. Houston Wire & Cable CompanyCA No. 2021-0525-LWW, 2021 WL 5763903, at *1 (Del. Ch. Dec. 3, 2021), recently featured in this blog.
- Wal-Mart Stores, Inc. v. Indiana Electric. Workers Pension Tr. IBEW Fund95 A.3d 1264 (Del. 2014): IBEW explores the circumstances where even in a proceeding under Section 220, which has a lower threshold for its more limited authorized discovery, a shareholder can satisfy the higher threshold for obtaining otherwise protected privileged documents. In this case, a pension fund that owned shares in the company requested books and records relating to the company’s alleged mishandling of an internal corruption investigation at a company subsidiary. Former Vice-Chancellor Strine granted the plaintiff’s Section 220 request and ordered the company to produce various documents, including internal corporate communications with counsel. It is important to note that the Supreme Court confirmed the assessment of the Court of Chancery on the Collect doctrine, recognized for the first time in Garner vs. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which provides that upon presentation of “good cause”, a shareholder seeking to investigate breaches of fiduciary duty by those who control the corporation may obtain discovery of the documents company privileges and communications “necessary and essential” for the shareholder’s stated investigative purpose. Although Delaware courts apply the Collect remarkably parsimonious exception, IBEW serves as a reminder that the privilege given to business communications involving an attorney is not absolute and that the exception applies in summary litigation under section 220, not just in derivative full suits. see here for a recent blog post discussing the analysis of the Collect exception in the derived context.
- Back. Sys. of Rhode Island against Facebook, Inc.CA No. 2020-0085-JRS, 2021 WL 529439 (Del. Ch. Feb. 10, 2021): As Section 220 inspection requirements become more common, discovery requests from demanding parties have also grown beyond formal board documents like meeting minutes. and presentations to the board of directors. Facebook again emphasizes a modern trend in books and records litigation: “if email-free books and records are insufficient [to accomplish the demanding parties’ proper investigatory purpose], then the court should order the production of emails. Here, the Court of Chancery compelled the production of company email communications because the traditional company documents that the company had already produced did not provide enough information to satisfy the plaintiff’s investigative objectives. The decision reminds practitioners that detailed and formal documentation at the council level can be an advantage in narrowing the scope of discovery under Section 220.
- Salberg v Genworth Fin., Inc.CA No. 2017-0018-JRS, 2017 WL 3499807 (Del. Ch. July 27, 2017): Salberg presents the unique circumstance where plaintiffs impose a section 220 claim following the initiation of a derivative lawsuit against the company. Here, plaintiffs asserted breach of fiduciary claims against directors and officers of a company relating to alleged false and misleading statements regarding the company’s insurance business portfolio. While the spinoff lawsuit was ongoing, the company announced that it had agreed to be acquired by another entity. The same plaintiffs litigating the full action then demanded to inspect the company’s books and records to determine whether the board of directors had properly considered and assessed their derivative claims when negotiating the impending merger. Following the company’s production of heavily redacted counseling materials and the company’s refusal to produce unredacted confidential documents, the plaintiffs filed a lawsuit under Section 220 to compel production pursuant to the Collect fiduciary exception. In response, the company argued that the plaintiffs did not allege a “patently disguised” claim for breach of fiduciary duty related to the board’s analysis of the plaintiffs’ derivative claims. He further argued that under Corwin vs. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), a shareholder vote approving the merger would extinguish Plaintiffs’ derivative claims and their ability to sustain them, and Plaintiffs have therefore failed to indicate the proper purpose of their request for books and of registers. Although the Court of Chancery refused to compel the production of privileged documents under Collecthe nonetheless held that the “colorability” of Plaintiff’s Section 220 claim “must be assessed by the standard that applies here – ‘credible basis’.” Accordingly, the Court of Chancery declined to determine under Corvin whether the purpose of the Complainants’ investigation was appropriate, and the Complainants concluded have demonstrated a credible basis for their claim.
- City of Cambridge Ret. Sys. c.Univ. Health Services, Inc., CA 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 facing a full complaint following a request for books and recordings. A company’s desire to benefit from the protection of this provision has been supported in certain circumstances, as was the case in City of Cambridge. In this case, the company challenged the plaintiff’s stated purpose and asked the scope of his claim under Section 220, but offered to produce certain documents if the plaintiff agreed to a provision of incorporation by reference in a proposed confidentiality agreement governing the applicant’s application and the company. production. The proposed provision ensured that all documents produced by the company in response to the plaintiff’s request would be incorporated by reference into any complaint filed by the plaintiff in a subsequent plenary proceeding, and would thus make available all the documents produced for the 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 recognized its discretion under Section 220 to impose “such terms as the Court thinks fit” regarding productions of books and documents, including terms of incorporation by reference. And under the circumstances presented in City of Cambridgethe Court of Chancery concluded that a condition of incorporation by reference met “the salutary purposes of judicial economy and litigants”, and granted the application for registration of the company.
