Delaware Supreme Court Clarifies That A Section 220 Demand Is Not Necessarily Required To Establish That Suspected Wrongdoing Is “Actionable”
On December 10, 2020, in an en banc opinion authored by Justice Gary F. Traynor, the Delaware Supreme Court affirmed a decision by the Delaware Court of Chancery ordering the production of books and records by AmerisourceBergen Corporation pursuant to a Section 220 inspection demand. AmerisourceBergen Corporation v. Lebanon County Employees’ Retirement Fund, C.A. No. 60, 2020 (Del. Dec. 10, 2020). Under Section 220 of the Delaware General Corporation Law, a stockholder may inspect company records for a “proper purpose.” A stockholder who seeks company records for the purpose of investigating corporate wrongdoing must establish a “credible basis” from which the court can infer that wrongdoing may have occurred. Affirming the order of the Court of Chancery, the Delaware Supreme Court clarified that a stockholder who demonstrates such a credible basis “is not required in all cases to establish that the wrongdoing under investigation is actionable.”
Plaintiffs served a Section 220 demand requesting certain company documents concerning settlements, investigations and other events and operations related to the company’s potential involvement in the opioid crisis. The demand provided in part that its purposes were “to investigate possible breaches of fiduciary duty . . . and other violations of law” and “to evaluate possible litigation or other corrective measures.” The company rejected the demand in its entirety, claiming that it did not state a proper purpose because, it argued, potential derivative claims related to the alleged wrongdoing were legally barred by the company’s Section 102(b)(7) exculpatory provision in its certificate of incorporation and by laches. After a trial on a paper record, the Delaware Court of Chancery determined that plaintiffs had established a “credible basis” to infer a possible violation of law by the company and ordered the production of the demanded records.
On appeal, the Delaware Supreme Court held that, once a stockholder presents a “credible basis” to support an inference of wrongdoing, the stockholder “need not demonstrate that the alleged mismanagement or wrongdoing is actionable.” The court further held that when a Section 220 demand states a proper investigatory purpose, it “need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing.” However, the decision did note that, where the stockholder’s “sole reason” for investigating is to pursue litigation and there is an “insurmountable procedural obstacle” to that litigation—such as a lack of standing—“a court may be justified in denying inspection.”