Delaware Court Of Chancery Issues Post-Trial Judgment In Favor Of Defendant, Rejecting Stockholder’s Section 220 Books And Records Demand
On June 1, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of defendant retail company (the “Corporation”), rejecting a demand for corporate books and records under Delaware General Corporation Law Section 220. Plaintiff, a stockholder, sought the records purportedly to investigate possible mismanagement in connection with the Corporation’s compliance with certain antitrust and tax laws. In response to the demand, the Corporation produced certain board-level materials but declined to comply with plaintiff’s request for a wide array of additional documents. Following a trial on a paper record, the Court found that plaintiff failed to demonstrate the requisite “credible basis” to suspect wrongdoing, and in any event, the demand was “satisfied” because the Corporation “produced all necessary and essential documents related to the alleged wrongdoing discussed in the demand.”
According to the Court, the evidence of possible mismanagement that plaintiff proffered primarily concerned certain antitrust-related investigations and litigation that the Corporation was facing. The Court acknowledged that the “credible basis” standard of proof relevant to a Section 220 demand is the “lowest recognized under Delaware law.” But the Court added that “it is not inconsequential.” Significantly, the Court explained, “Delaware law does not . . . provide that evidence of open inquiries and lawsuits alone necessarily begets a credible basis from which the court can infer possible mismanagement.” Instead, courts look to the “scale” and the “severity or results of those inquiries,” as well as to the related “corporate trauma.”
Here, the Court found that plaintiff’s evidence of alleged anticompetitive conduct lacked the “sort of plus factor” found in prior decisions in favor of plaintiffs on Section 220 demands based on investigations and lawsuits. The Court noted, for example, that a Congressional Subcommittee investigation closed with no finding of any violation and that plaintiff’s allegations of investigations by the Department of Justice and Federal Trade Commission were based on news reports that did not contain evidence of wrongdoing.
Moreover, according to the Court, the Corporation “wisely” attempted to avoid litigation “by producing the core, formal board materials that generally satisfy a company’s obligations under Section 220.” The Court thus found that plaintiff’s “request for eleven years’ worth of additional documents falling within nineteen different categories amounts to a fishing expedition and lacks the precision our law requires.”
Notably, the Court specifically denied plaintiff’s request for documents concerning director independence because neither the demand nor the complaint included allegations “that legitimately call into question the directors’ independence.” The Court also found that plaintiff “lack[ed] grounds to challenge” the Corporation’s redactions of the produced board materials for “non-responsiveness.” The Court explained, that under Section 220, a stockholder is “only entitle[d]” to information “essential” to the stated purpose of the inspection and redactions “appropriately cabin” such inspections to “their intended scope.”