Delaware Chancery Court Rejects Books And Records Demand Concerning Board’s Alleged Failure To Properly Account For U.S. Tax Liabilities On Foreign Earnings
On August 31, 2016, Judge Abigail LeGrow, sitting by designation on the Delaware Court of Chancery, held that Pfizer, Inc. (“Pfizer”) did not need to make its books and records available for inspection to a shareholder purportedly investigating whether the board breached its fiduciary duties by failing to comply with applicable accounting standards. Beatrice Corwin Living Irrevocable Trust v. Pfizer, Inc., C.A. No. 10425-JL (Del. Ch. Aug. 31, 2016). In rejecting this shareholder demand pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”), the Court found that the shareholder had not shown any “credible basis to infer mismanagement or wrongdoing by the board.”
The plaintiff’s demand was prompted by news reports that Pfizer and other large companies that amass substantial earnings outside the United States are not taxed on such earnings so long as the earnings are indefinitely reinvested overseas, but are subject to a “Repatriation Tax” when such earnings are repatriated to the United States. Under generally accepted accounting principles (“GAAP”), a company must report its deferred Repatriation Tax liability unless calculating it would be “not practicable.” Plaintiff argued that Pfizer improperly failed to report a Repatriation Tax liability and made material misrepresentations when it stated that it was “not practicable” to calculate that liability.
The Court emphasized that a shareholder inspection demand must allege a “credible basis” for investigating mismanagement or wrongdoing. While the Court acknowledged that the “credible basis” standard is the “lowest possible burden of proof,” it is not met when a plaintiff only offers “[m]ere suspicion . . . or a subjective belief of wrongdoing.” Here, plaintiff did not show a credible basis to infer a breach of fiduciary duty by the board for two reasons. First, plaintiff did not present any evidence establishing that the board had breached its oversight duties under In re Caremark International Inc. Derivative Litigation, 698 A.2d 967 (Del. Ch. 1996). Second, the evidence at trial undisputedly showed that the board had relied on the opinion of Pfizer’s outside auditors that its statements were in conformity with GAAP. Therefore, the board was insulated from liability under Section 141(e) of the DGCL.
The Court also rejected a second ground on which plaintiff sought inspection, the calculation of the value of Pfizer shares. The Court explained that a demand for inspection for purposes of calculating the share value of a publicly traded company is only proper when a plaintiff can “show why publicly available information is not sufficient to perform the valuation,” which plaintiff here failed to do.