Locke Lord QuickStudy: Delaware Supreme Court Rules Stockholders Are Entitled to ‎Books and Records Based on “Investigatory Purpose” Without Stating Objectives of ‎Investigation

Locke Lord LLP
January 25, 2021

In an important decision, the Delaware Supreme Court, in AmerisourceBergen Corp. v. Lebanon ‎Cty. Employees’ Ret. Fund, No. 60, 2020, 2020 WL 7266362 (Del. Dec. 10, 2020), ruled that ‎stockholders may obtain access to a corporation’s books and records based on a credible showing ‎of issues of wrongdoing without needing to identify any particular course of action they intend ‎to take with the books and records obtained or explain whether any suspected wrongdoing is ‎actionable. This decision affirmed the Court of Chancery’s finding (discussed by us last February ‎here) that followed an increasing trend of lowering the threshold needed for stockholders to gain ‎access to corporate information through a Section 220 books and records demand.‎

During the ongoing opioid epidemic, AmerisourceBergen, one of the country’s largest opioid ‎distributors, has been investigated by numerous law enforcement and government agencies. In ‎May 2019, amidst this “flood of government investigations and lawsuits relating to ‎AmerisourceBergen’s opioid practices,” the plaintiffs made a Section 220 demand on ‎AmerisourceBergen, requesting inspection of thirteen categories of books and records. The ‎plaintiffs requested Board materials relating to certain settlements, acquisitions, investigations, ‎and other events related to AmerisourceBergen’s operations and its potential involvement in the ‎opioid crisis. The demand listed four purposes:‎

(i) to investigate possible breaches of fiduciary duty, mismanagement, and other ‎violations of law by members of the Company’s Board of Directors and ‎management . . . in connection with [the Company]’s distribution of prescription ‎opioid medications;‎

‎(ii) to consider any remedies to be sought in respect of the aforementioned ‎conduct;‎

‎(iii) to evaluate the independence and disinterestedness of the members of the ‎Board; and

‎(iv) to use information obtained through inspection of the Company’s books and ‎records to evaluate possible litigation or other corrective measures with respect to ‎some or all of these matters.‎

AmerisourceBergen argued that this demand was “an indiscriminate fishing expedition or out of ‎mere curiosity.” AmerisourceBergen also argued that the stockholders’ sole purpose in seeking ‎the inspection was to investigate a potential breach of fiduciary duty (Caremark claim) because ‎the stockholders’ demand “reserved the ability to consider all courses of action that their ‎investigation might warrant pursuing.” It further argued that the stockholders needed at least to ‎demonstrate that they sought to investigate “actionable” wrongdoing.‎

The Delaware Supreme Court found that Section 220(c) provides that stockholders may inspect a ‎corporation’s books and records where they establish that “(1) [s]uch stockholder is a ‎stockholder; (2) [s]uch stockholder has complied with [Section 220] respecting the form and ‎manner of making demand for inspection of such documents; and (3) [t]he inspection such ‎stockholder seeks is for a proper purpose.” The heart of the AmerisourceBergen opinion centered ‎on whether the stockholders had established a proper purpose. ‎

While the Court recognized that “[t]o avoid ‘indiscriminate fishing expedition[s],’ a bare ‎allegation of possible waste, mismanagement, or breach of fiduciary duty, without more, will not ‎entitle a stockholder to a Section 220 inspection,” the Court found that the AmerisourceBergen ‎stockholders had established a credible basis to infer possible mismanagement. The Court ‎reasoned that “the credible basis standard is the ‘lowest possible burden of proof,’” and found ‎that a stockholder need not show that corporate wrongdoing or mismanagement has occurred in ‎fact, but rather the “threshold may be satisfied by a credible showing, through documents, logic, ‎testimony or otherwise, that there are legitimate issues of wrongdoing.” The Court also found ‎that “although the actionability of wrongdoing can be a relevant factor for the Court of Chancery ‎to consider when assessing the legitimacy of a stockholder’s stated purpose, an investigating ‎stockholder is not required in all cases to establish that the wrongdoing under investigation is ‎actionable.”‎

In upholding the stockholders’ Section 220 demand, the Court cited with approval the recent ‎Court of Chancery decision in Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. ‎‎24, 2020). In Pettry, the Court of Chancery granted a stockholder’s inspection request over the ‎corporation’s objections that the stockholder lacked standing to pursue follow-on derivative ‎claims, which, in any event, would be time-barred and barred by the corporation’s exculpatory ‎charter provision. The AmerisourceBergen Court clarified that a Section 220 proceeding “is not ‎the time for a merits assessment of Plaintiffs’ potential claims against [the corporation’s] ‎fiduciaries.” The Court reiterated the new standard for assessing Section 220 demands, and ‎stated:‎

In the rare case in which the stockholder’s sole reason for investigating mismanagement ‎or wrongdoing is to pursue litigation and a purely procedural obstacle, such as standing or ‎the statute of limitations, stands in the stockholder’s way such that the court can ‎determine, without adjudicating merits-based defenses, that the anticipated litigation will ‎be dead on arrival, the court may be justified in denying inspection. But in all other cases, ‎the court should—as the Court of Chancery did here—defer the consideration of ‎defenses that do not directly bear on the stockholder’s inspection rights, but only on the ‎likelihood that the stockholder might prevail in another action. ‎

Finally, in another noteworthy part of the decision, the Delaware Supreme Court ruled that it was ‎not an abuse of discretion for the Court of Chancery to order a corporate representative ‎deposition in a Section 220 proceeding. The Court further clarified that its previous ruling in KT4 ‎Partners LLC v. Palantir Technologies Inc., 203 A.3d 738 (Del. 2019), did not constrain the ‎Court of Chancery from exercising its discretion to permit a Rule 30(b)(6) deposition, nor did ‎Palantir “establish any bright-line rules regarding discovery to be applied in all Section 220 ‎actions.”‎

Following AmerisourceBergen, stockholders are well-advised to broaden their Section 220 ‎demands so that it does not appear, on the face of the demand, to be motivated only by a desire ‎to pursue litigation. In the wake of AmerisourceBergen, Pettry, and recent Delaware court trends ‎regarding Section 220 demands, Locke Lord reiterates its suggestion that corporations consider ‎take the following steps:‎

Dealing with stockholder Section 220 demands:‎

  • Responding to Section 220 demands in a timely manner and with records that reasonably ‎fall within the proper purpose specified in the demand can foreclose access to other ‎information.‎
  • Because courts may allow discovery beyond formal meeting minutes in order to ‎determine “what records exist,” including potentially a corporate representative ‎deposition, it can be advantageous to maintain detailed and accurate formal board ‎materials, including but not limited to minutes, consents, letters, and resolutions.‎
  • Company board members can protect personal information by using company email ‎platforms for board-related communications and other messaging platforms for personal ‎emails and other communications.‎

Mitigating exposure to Caremark claims:‎

  • Companies should ensure that board-level policies and company compliance practices and ‎procedures are well documented and that board meeting discussions are accurately and ‎timely documented in board minutes.‎
  • Company boards should regularly evaluate the company’s risk policies and should ‎address and timely record discussions of risks pertinent to company operations.‎
  • Companies in regulated businesses might consider having board members with special ‎background and expertise to assess its mission-critical risks.‎