Delaware Court Of Chancery Rejects Stockholder’s Section 220 Books And Record Demand In Connection With Corporation’s Expression Of Opposition To Legislation
M&A and Corporate Governance Litigation
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  • Delaware Court Of Chancery Rejects Stockholder’s Section 220 Books And Record Demand In Connection With Corporation’s Expression Of Opposition To Legislation

    On June 27, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery issued a judgment in favor of a “leading media and entertainment” company with a “substantial presence in Florida” (the “Corporation”), rejecting a demand for corporate books and records under Delaware General Corporation Law Section 220.  Simeone v. The Walt Disney Company, C.A. No. 2022-1120-LWW (Del. Ch. June 27, 2023).  As explained by the Court, the Corporation publicly expressed opposition to certain Florida state legislation “limit[ing] instruction on sexual orientation or gender identity in Florida classrooms” (the “Legislation”).  Thereafter, Florida’s legislature voted to dissolve a special district that had benefitted the Corporation.  Plaintiff, a stockholder, sought the records purportedly to investigate potential breaches of fiduciary duties by the Corporation’s directors and officers in connection with the opposition to the Legislation.  The Court explained that “Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues” and found that plaintiff “decidedly” had not “demonstrated a proper purpose” for the records request.

    The Corporation is among the largest employers in Florida and has a resort on 25,000 acres of land Florida had designated pursuant to legislation enacted in 1967 as a special district with authority to levy taxes, write building codes, and develop infrastructure.  According to the Court, the Corporation “initially took no public position on the [Legislation],” but “spoke out against” the Legislation “[a]fter facing criticism from its employees.”  Florida’s governor subsequently said that the Corporation had “crossed the line” and Florida’s legislature voted to dissolve the special district.  The Corporation’s stock price declined by nearly 50% over the ensuing months.

    Plaintiff, a longtime stockholder of the Corporation and a resident of Florida near the special district, served a Section 220 demand to inspect records.  Plaintiff’s theory, according to the Court, was that the directors and officers “either put their own beliefs ahead of their obligations to stockholders or flouted the risk of losing rights associated with the special district.”  Plaintiff sought several categories of documents, including director questionnaires, various policies and guidelines, board materials, and correspondence between or among directors.  In response, the Corporation produced certain policies and “all formal Board documents—specifically, minutes—concerning” the Legislation.  The Corporation declined to produce, among other things, director questionnaires and email communications.

    Plaintiff filed suit for the additional documents.  After a trial on a paper record, the Court rejected the request for “three independent reasons.”

    First, the Court concluded that the purposes described in the demand were “pretextual” and “not the plaintiff’s own purposes.”  The Court found that plaintiff was “solicited by counsel,” including a “public interest law firm,” to serve the demand.  The Court noted that plaintiff’s concern was that the dissolution of the special district would result in an increase in his property tax bill and that he testified that his “only purpose for inspection was to know the … persons who were responsible for making th[e] political decision to publicly oppose [the Legislation].”  The Court further found that plaintiff had only “limited and non-substantive involvement in the demand and the litigation.”

    Second, the Court explained that “corporate speech on external policy matters brings both risks and opportunities” and “[t]he board is empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).”  The Court found that there is “no indication that the directors suffered from disabling conflicts” or “evidence that the directors were grossly negligent or acted in bad faith.”  The Court highlighted that the board held a special meeting “to discuss the [Corporation’s] approach to the legislation and the employees’ negative response” before issuing its “public rebuke.”  Indeed, “[a] board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders—such as
    the workforce that drives a company’s profits—is ‘rationally related’ to building long-term value.”  Thus, the Court determined that this was a “business decision” that “cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome.”

    Third, the Court concluded that the Corporation had already provided plaintiff with “all necessary and essential documents.”  As the Court explained, the production of “[f]ormal board-level documents” is often all that is required and “a deviation from this typical approach is not merited here.”