Delaware Court Of Chancery Orders Production Of Formal, Board-Level Materials In 220 Action
On April 14, 2021, Vice Chancellor Paul A. Fioravanti granted a shareholder plaintiff’s motion to compel production of certain books and records of a pharmaceutical company. Melvin Gross v. Biogen Inc., C.A. No. 2020-0096-PAF (Del. Ch. Apr. 14, 2021). Citing Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020), the Court found that the company’s complete denial of plaintiff’s Section 220 demands followed what the Court described as a recent trend of adopting an “overly aggressive defense strategy” in opposing such requests. The Court held that plaintiff established a proper purpose and was therefore entitled to certain books and records, but restricted the production to formal, board-level materials and compliance policies.
Plaintiff, a shareholder of the company, read a May 2016 news article describing subpoenas issued by federal and state authorities to the company regarding its sales practices and relationships with nonprofit organizations that provided financial assistance to Medicare patients. Plaintiff thereafter served a series of four Section 220 demands on the company’s Board of Directors, which the company rejected in their entirety. Plaintiff stated that he sought to investigate a possible breach of fiduciary duty by the company’s board and to determine its independence with respect to the federal investigation of an alleged kick-back scheme; the fourth demand requested eight categories of documents. Following denial of his December 2019 demand, plaintiff filed suit to compel production. The company raised several defenses, including that plaintiff did not have his own purpose for the demand, had not shown a credible basis to suspect wrongdoing, had not established an ability to bring a lawsuit based on the wrongdoing he sought to investigate, and that investigating the board’s independence was not a proper purpose.
The Court first rejected the company’s position that the purposes in the demand belonged to plaintiff’s counsel, rather than plaintiff. Distinguishing Wilkinson v. A. Schulman, Inc., 2017 WL 5289553 (Del. Ch. Nov. 13, 2017), the Court noted that plaintiff took action on his own after reading the Bloomberg article and was entitled to rely on counsel to pursue his purpose. The Court also found a credible basis to suspect wrongdoing, noting that this “lowest possible burden of proof” was met by evidence of an investigation by the Department of Justice, settlement by the company, and a jury verdict against the company in a False Claims Act case; the Court found this purpose extended to investigating the board’s independence. The Court concluded that plaintiff need not prove the ability to bring suit based on the potential wrongdoing because the purpose of his demand included not only a potential derivative action but also to compel the board to address the underlying conduct.
With respect to the scope of production, however, the Court declined to order production of informal materials from the board (such as directors’ notes, below board-level communications between the company and government agencies, and demands for inspection from other stockholders) and instead directed the company to produce board meeting materials and minutes, compliance policies, and director questionnaires.