Delaware Supreme Court Grants Stockholder’s Section 220 Demand As To Certain Email, And Grants Requested Exceptions To Jurisdictional Use Restriction
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  • Delaware Supreme Court Grants Stockholder’s Section 220 Demand As To Certain Email, And Grants Requested Exceptions To Jurisdictional Use Restriction
     
    02/05/2019
    On January 29, 2019, in a decision authored by Chief Justice Leo E. Strine Jr., the Supreme Court of Delaware unanimously granted a stockholder petitioner’s demand under Delaware General Corporation Law Section 220, 8 Del. C. § 220, to inspect the books and records of respondent Palantir Technologies Inc. for the purpose of investigating potential mismanagement and breaches of fiduciary duty.  KT4 Partners LLC v. Palantir Techs. Inc., C.A. No. 281-2018 (Del. Jan. 29, 2019).  Previously, the Delaware Court of Chancery had issued a post-trial opinion partially granting petitioner’s demand for books and records, but denying access to email and ruling that information secured in the action could not be used in litigation outside of the Delaware Court of Chancery.  Reversing in part on appeal, the Supreme Court held that respondent—which allegedly conducted board-level business electronically and did not maintain traditional board records—was required to produce certain email and granted petitioner’s request for certain exceptions to the jurisdictional use restriction.

    In connection with its investments in respondent that began in 2003, petitioner entered investors’ rights agreements granting it a right to inspect respondent’s books and records and a “right of first offer” as to future stock offerings.  In 2015, petitioner attempted to sell its shares in respondent to a private equity fund.  Before the sale could be completed, however, respondent allegedly thwarted the deal.  Petitioner then made an inspection demand under the investors’ rights agreement.  Before responding to the demand, in September 2016, respondent allegedly executed amendments to its investors’ rights agreements—without the involvement of petitioner—which largely stripped petitioner of its rights (the “September 2016 Amendments”).  Petitioner shortly thereafter made its Section 220 demand.

    The Delaware Supreme Court held that the Court of Chancery abused its discretion by denying wholesale petitioner’s demand for access to email related to the September 2016 Amendments.  The Court explained that petitioner “made a sufficient showing that emails were necessary to investigate potential wrongdoing” related to the amendments.  Specifically, petitioner “discharged its evidentiary burden by presenting evidence that [respondent] did not honor traditional corporate formalities … and had acted through email in connection with the same alleged wrongdoing that [petitioner] was seeking to investigate.”  The Court emphasized that companies that decide to conduct formal corporate business through informal electronic communications “cannot use [their] own choice of medium to keep shareholders in the dark about the substantive information to which § 220 entitles them.”

    The Supreme Court also partially reversed the Court of Chancery’s determination that petitioner could not use the documents obtained pursuant to the Section 220 demand other than in litigation in the Court of Chancery.  Petitioner had requested that it be allowed exceptions to bring suit: (1) in Delaware Superior Court, where other litigation between the parties was already pending; and (2) for non-derivative actions where personal jurisdiction was unavailable in Delaware.  The Delaware Supreme Court held that the lower court’s rejection of petitioner’s “modest requests to temper” the use restriction was an abuse of discretion.  The Court explained that nothing “has ever suggested that the only possible place a stockholder can sue” using books and records obtained under Section 220 is in the Delaware Court of Chancery.
    CATEGORY: Books and Records

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