Delaware Court Of Chancery Rejects Stockholder Demand For Corporation To Supplement Its Section 220 Production With Searches And Production Of Email
On August 25, 2023, Magistrate Bonnie W. David of the Delaware Chancery Court issued a post-trial report denying stockholder requests for supplemental productions of emails from Zendesk, Inc. (the “Company”) pursuant to a books and records demand. In re Zendesk, Inc. Section 220 Litig., C.A. No. 2023-0454-BWD (Del. Ch. Aug. 25, 2023). Plaintiffs served the demands pursuant to 8 Del. C. § 220 seeking to investigate possible wrongdoing in connection with the Company’s entry into a merger (the “Transaction”). The Company voluntarily produced “Formal Board Materials,” including board minutes, presentations, and other board-level documents in response. Plaintiffs, however, asserted that there were “gaps” and “inconsistencies” that purportedly necessitated searches and production of email. The Court found that plaintiffs “have not met their burden to prove that [the requested] electronic communications … are essential to accomplishing the proper purposes stated in their [d]emands.”
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.
Delaware Court Of Chancery Assesses The Application Of Timeliness Principles To Caremark Red Flags Claim And Applies “Separate Accrual Approach” But Subsequently Dismisses Complaint For Failure To Plead Demand Futility
On December 15, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss claims as untimely in a derivative action brought by stockholders against the officers and directors of AmerisourceBergen Corporation (the “Company”). Lebanon County Employees’ Retirement Fund v. Collis, C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022). The Company is a wholesale distributor of pharmaceuticals that faced extensive investigations and litigation related to the opioid epidemic. Plaintiffs primarily alleged that defendants breached their fiduciary duties by ignoring “red flags” related to the Company’s purported failure to report suspicious opioid orders. Although the challenged conduct began nearly a decade earlier, plaintiffs did not even seek books and records until 2019. The Court highlighted that “[n]o Delaware court has addressed the timeliness principles that govern” a Caremark red-flags claim. The Court held that the “separate accrual approach” applies and, therefore, plaintiffs could assert claims with respect to alleged “conduct and consequences” that occurred within the three-year limitations period prior to their “vigilant” pursuit of claims.
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.”
Delaware Court Of Chancery Limits Discovery In Appraisal Proceeding To Materials Available In Books-And-Records Demand
On January 31, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery partially granted a protective order brought by Zoox, Inc. (“respondent” or “Zoox”) limiting discovery requests by stockholders in a post-merger appraisal proceeding. Wei v. Zoox, Inc., C.A. No. 2020-1036-KSJM (Del. Ch. Dec. 07, 2020). The Court concluded that the “real purpose” of the discovery was “to facilitate a pre-suit investigation of a fiduciary duty claim,” therefore, discovery would be limited to information petitioners could have obtained in a typical action to inspect a company’s books and records.
Delaware Court Of Chancery Dismisses Section 220 Action Initiated Hours After Certificate Of Merger Was Filed With Delaware Secretary Of State
On December 3, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted a motion to dismiss claims to compel inspection of books and records brought by a former stockholder of Houston Wire & Cable Company (the “Company”) in connection with the Company’s all-cash merger into Omni Cable, LLC. Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021). The merger agreement provided that each share of the Company would be cancelled and converted into the right to receive $5.30 in cash at the “Effective Time,” which it explained was “such time as [a] Certificate of Merger” is filed. Plaintiff filed the action under Section 220 of the Delaware General Corporation Law (“DGCL”) hours after the Company’s certificate of merger was filed with the Delaware Secretary of State. The Court held that Section 220 requires a plaintiff to be a current stockholder at the time the litigation is initiated. The Court found that plaintiff “ceased to own stock” when the certificate of merger was filed and, therefore, lacked standing when the complaint was filed later the same day.
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.
Delaware Court Of Chancery Partially Grants Section 220 Demand For Materials Related To Facebook FTC Settlement
On February 10, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted in part and denied in part a stockholder demand to inspect Facebook’s books and records related to its July 2019 settlement with the FTC arising from the unauthorized release of user data to data analytics firm Cambridge Analytica. Employees’ Retirement System of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS (Del. Ch. Feb. 10, 2021). In a post-trial order, the Court directed Facebook to produce electronic communications from board members concerning the FTC settlement but not privileged documents that the stockholder sought.
Delaware Supreme Court Affirms The Partial Denial Of Books And Records Demand
On January 26, 2021, the Supreme Court of Delaware affirmed a decision by the Delaware Court of Chancery rejecting in part the request by a member of a limited liability company (LLC) for the production of certain books and records for inspection pursuant to Section 18-305 of the Delaware Limited Liability Company Act (the analog to a Section 220 inspection demand for Delaware corporations). Durham v. Grapetree, LLC, No. 343, 2019 (Del. Jan. 26, 2021). The Delaware Supreme Court clarified that plaintiff was entitled pursuant to the requests approved by the trial court to informal records, such as emails, text messages, and phone records, to the extent the company conducted its business without documenting its actions in minutes, board resolutions, or by other formal means. But the Delaware Supreme Court held that the Court of Chancery did not abuse its discretion in denying requests it found overbroad, unrelated to a proper purpose for inspection, or that required the company to create new records.
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.”
Delaware Court Of Chancery Holds Stockholder Inspection Rights For Delaware Corporations Are Governed Exclusively By Delaware Law And Are Subject To A Delaware Forum Selection Provision Addressing Internal Affairs
On August 13, 2020, Vice Chancellor J. Travis Laster held that defendant, a stockholder of plaintiff JUUL Labs, Inc., did not have the right to seek inspection of books and records of the Delaware corporation under any state statutory law other than that of Delaware. JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020). Therefore, because defendant had only sought inspection under a California statutory provision, the Court rejected the demand and granted judgment on the pleadings in favor of plaintiff. The Court also held that a forum selection provision in the certificate of incorporation, providing that the Delaware Court of Chancery is the exclusive forum for actions arising pursuant to the Delaware General Corporation Law (“DGCL”) or asserting claims against the corporation “governed by the internal affairs doctrine,” applies to actions to inspect books and records.
Delaware Court Of Chancery Rejects Demand To Inspect Books And Records Under Section 220 To Aid In Proxy Contest
On November 14, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery rejected a demand by stockholders of Occidental Petroleum Corporation under Section 220, 8 Del. C. § 220, for documents and information relating to the corporation’s acquisition of Anadarko Petroleum and related transactions. High River Ltd. P’ship, Icahn Partners Master Fund LP, and Icahn Partners LP v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS (Del. Ch. Nov. 14, 2019). According to the Court, plaintiffs considered the transactions “bad deals” and acknowledged that their primary purpose in seeking the documents was to aid them in their proxy contest to replace certain directors. In a post-trial decision in favor of the corporation, the Court explained that “an imminent proxy contest is not enough to earn access” to broad sets of documents relating to “substantive business decisions.”
Delaware Court Of Chancery Grants Shareholder’s Post-Merger Books And Records Demand, Finding “Credible Basis” To Investigate Merger Process
On August 28, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted a shareholder’s demand under 8 Del. C. § 220 to inspect the books and records of defendant GGP Inc. for the purpose of investigating potential mismanagement. Kosinski v. GGP Inc., C.A. No. 2018-0540 (Del. Ch. Aug. 28, 2019). Plaintiff’s demand stemmed from a merger in which defendant, a real estate company, was acquired by Brookfield Property Partners L.P., another real estate company that owned approximately one third of defendant’s common stock at the time. Plaintiff contended that the buyer had been defendant’s de facto controlling shareholder and the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—had not been implemented. Following trial, the Court granted plaintiff’s Section 220 demand, holding that where procedural protections are absent, “it is possible that the transaction was not at arm’s length,” and finding that plaintiff had demonstrated facts that established a “credible basis” to investigate potential breaches of fiduciary duty. But the Court noted that it was making an “exceptionally modest point” and not announcing a rule that noncompliance with MFW procedural protections “automatically supplies a credible basis.”
Delaware Supreme Court Clarifies That Section 220 Books And Records Demands Are Not Subject To A Presumption Of Confidentiality
On August 7, 2019, in a decision authored by Justice Gary F. Traynor, the Delaware Supreme Court concluded that books and records produced to a stockholder under Section 220 of the Delaware General Corporation Law are not subject to a presumption of confidentiality. Tiger v. Boast Apparel, Inc., C.A. No. 23, 2019 (Del. Aug. 7, 2019). In this case, the Delaware Court of Chancery referenced such a presumption when it issued an order requiring the stockholder to keep such records confidential indefinitely. The Delaware Supreme Court affirmed the indefinite confidentiality order as “within the range of reasonableness … given the facts and circumstances of this case.” But the Court expressly clarified that there is no such presumption of confidentiality and the Court of Chancery must instead “assess and compare benefits and harms when determining the initial degree and duration of confidentiality” in connection with a Section 220 demand.
Delaware Court Of Chancery Grants Books And Records Request Arising From Caremark Claims Related To Facebook User Privacy
On May 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted a stockholder demand to inspect Facebook’s books and records in connection with their Caremark claims arising from alleged data privacy breaches. In re Facebook, Inc. Section 220 Litig., C.A. No. 2018-0661-JRS (Del. Ch. May 30, 2019). The Court concluded that, as a matter of law, it would be improper to assess the merits of plaintiffs’ Caremark claims in the context of a books-and-records demand and ruled that plaintiffs met the minimum burden of proof under Section 220 of the Delaware General Corporation Law (“Section 220”), noting that this standard was more easily met where, as here, the underlying claims allege the failure to prevent corporate violations of law, rather than challenging routine business operations.
Delaware Court Of Chancery Finds A Circumstantial Connection To Negative Corporate Developments Insufficient To Trigger Inspection Rights Under Section 220
On February 12, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a books and records demand of a mattress company’s (the “Company”) stockholder in connection with the termination of the Company’s contract with its largest customer and related litigation. Hoeller v. Tempur Sealy Int’l Inc., C.A. No. 2018-0336-JRS (Del. Ch. Feb. 12, 2019). Plaintiff sought the records pursuant to Delaware General Corporation Law Section 220, 8 Del. C. § 220, purportedly to investigate breaches of fiduciary duty by the board. Attempting to articulate his justification, plaintiff relied on what the Court referred to as a “where there’s smoke there’s fire syllogism” in plaintiff’s contention that such a significant customer does not “just leave” in the absence of board culpability. Rejecting the request, the Court held that a “smoke then fire circumstantial connection” does not provide the “credible basis” to suspect wrongdoing that is required to entitle a stockholder to inspect a corporation’s books and records.
Delaware Supreme Court Grants Stockholder’s Section 220 Demand As To Certain Email, And Grants Requested Exceptions To Jurisdictional Use Restriction
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.
Delaware Court of Chancery Grants Section 220 Demand By Director And Former CEO For Documents Related To His Ouster From The Company
On January 15, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted a former director’s petition under 8 Del. C. § 220, demanding that Papa John’s International Inc. (the “Company”) hand over various documents, including text messages and personal emails among board members, pertaining to plaintiff’s removal as a director and ouster as CEO of the Company. Schnatter v. Papa John’s Int’l Inc., C.A. No. 2018-0542 (Del. Ch. Jan. 15, 2019). Following allegedly racially tinged commentary on an earning’s call, plaintiff was asked to step down as CEO and later resigned as chairman of the board and was terminated as spokesman. In granting the 220 demand, the Court rejected the Company’s arguments that the demand was personally motivated and was not reasonably related to plaintiff’s position as a director of the Company.
District Of Delaware Finds Successful Section 220 Action Tolled Claims For Alleged Mismanagement
On September 4, 2018, Judge Leonard P. Stark of the United States District Court for District of Delaware ruled that a shareholder’s separate Section 220 action for books and records tolled claims against the managing shareholder. Norman v. Elkin, C.A. No. 06-005-LPS (D. Del. Sept. 4, 2018). Plaintiff, the only minority shareholder of U.S. Mobilecomm, Inc. (“USM”), brought various contract, fraud, and breach of fiduciary duty claims against USM’s majority shareholder—who managed the affairs of the company—in connection with the sale of company assets and the subsequent distributions of the proceeds. Explaining that there is “no hard and fast rule” under Delaware law for determining whether a Section 220 action tolls a statute of limitations, the Court considered various factors and held that plaintiff met its burden to demonstrate that tolling should apply. In particular, the Court highlighted that the Section 220 action sought to investigate possible mismanagement related to the asset sales and distributions of proceeds and the claims subsequently advanced “were related to that information.”
Delaware Court Of Chancery Grants Minority Stockholder’s Section 220 Demand As To Emails But Denies Access To Merger-Related Drafts
On July 30, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery partially granted a Section 220 demand for the books and records of Globalstar, Inc. brought by the company’s largest minority stockholder, Mudrick Capital Management, L.P. Mudrick Cap. Mgmt, L.P. v. Globalstar, Inc., C.A. No. 2018-0351-TMR (Del. Ch. July 30, 2018). The demand arose in the context of a pending merger between Globalstar and Thermo Acquisitions, Inc., an entity controlled by Globalstar’s CEO and controlling stockholder. The parties did not dispute that Mudrick Capital’s demand was based on several proper purposes in connection with evaluating certain aspects of the merger and Globalstar agreed to produce various categories of documents. Resolving remaining disputes about the scope of the production, however, the Court held that emails were subject to production, but denied the demand for draft board minutes and other draft materials.
Delaware Court Of Chancery Rejects Challenge To Books And Records Demand, Holding That Evidence From Qui Tam Action Demonstrated “Credible Basis” From Which To Infer Wrongdoing
On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery granted stockholders’ Section 220 demand to inspect the books and records of UnitedHealth Group Inc. (“UnitedHealth”) in order to investigate allegedly fraudulent Medicare billing practices. In re UnitedHealth Group, Inc. Sec. 220 Litig.
, C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28 2018). The Court held that plaintiffs could rely on evidence cited by the government in a qui tam
complaint against UnitedHealth to demonstrate a “credible basis” from which to infer wrongdoing or mismanagement so as to justify authorizing the Section 220 demand in part.
Delaware Supreme Court Affirms Dismissal Of Stockholder Derivative Claims On Issue Preclusion Grounds Based On A Demand-Futility Dismissal Of A Prior Derivative Suit, Holding That The Application Of Issue Preclusion Does Not Violate Federal Due Process
On January 25, 2018, the Supreme Court of Delaware ruled that the Court of Chancery’s dismissal on issue preclusion grounds of the derivative claims of stockholder plaintiffs against the directors of Wal-Mart Stores, Inc. (“Wal-Mart”)—after a parallel derivative suit in federal court was dismissed for failure to allege demand futility—did not violate plaintiffs’ due process rights. In re Wal-Mart Stores Inc. Del. Deriv. Litig.
, C.A. No. 7455-CB (Del. Jan. 25, 2018). In affirming the dismissal, the Delaware Supreme Court declined to adopt the recommendation of the Delaware Court of Chancery to adopt a rule refusing to give preclusive effect to other courts’ decisions on demand futility on federal due process grounds.
Delaware Court Of Chancery Grants Books And Records Demand, Holding That Corwin Is Irrelevant To Section 220 Proceedings
On December 29, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted a stockholder’s demand to inspect books and records related to the acquisition of West Corporation (“West”) by Apollo Global Management (“Apollo”), pursuant to 8 Del. C.
§ 220. Lavin v. West Corp.
, C.A. No. 2017-0547-JRS (Del. Ch. Dec. 29, 2017). The Court found that plaintiff established a valid primary purpose for seeking inspection of the materials: to investigate whether West’s directors and officers breached their fiduciary duties under Revlon
by approving the sale of West to Apollo when other bids indicated that a sale of West’s various business segments to different purchasers may have yielded greater value for West stockholders. Plaintiff alleged that the Apollo transaction was preferred because West’s CEO, directors, and financial advisor would receive greater compensation for a whole-company sale than a segmented sale. Importantly, the Court rejected West’s argument that Corwin v. KKR Fin. Holdings, LLC
, 125 A.3d 304 (Del. 2015), precluded a § 220 demand because any possible breaches of fiduciary duties that plaintiff sought to investigate were cleansed by stockholder approval of the Apollo acquisition.
Finding No Credible Basis For Inferring Wrongdoing, Delaware Court Of Chancery Denies Demand for Books And Records Concerning Alleged Related-Party Transactions
On December 5, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion for reargument concerning the Court’s rejection of a shareholder’s demand to inspect documents pertaining to alleged related-party transactions pursuant to 8 Del. C.
§ 220. Silverberg v. ATC Healthcare, Inc.
C.A. No. 2017-0242-JRS (Del. Ch. Dec. 5, 2017). After a trial, the Court had rejected the request of plaintiff—a shareholder in ATC Healthcare, Inc. (“ATC”)—for books and records from ATC concerning alleged related-party transactions with Travel Healthcare Solutions, LLC (“Travel Healthcare”), an entity allegedly affiliated with ATC’s controlling shareholders. Denying plaintiff’s motion to reargue, the Court held that a change in contractual terms favorable to the related party “is not enough on its own to establish a credible basis of wrongdoing; something more is needed.”
Delaware Court Of Chancery Rejects Books-And-Records Demand Driven By Entrepreneurial Counsel
On November 13, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery rejected a stockholder’s demand to inspect books and records of A. Shulman, Inc. (the “Company”) under Delaware General Corporation Law Section 220. Wilkinson v. A Schulman, Inc.
, C.A. No. 2017-0138-VCL (Del. Ch. Nov. 13, 2017). The Court explained that a stockholder who lacks a “proper purpose” and has “only minor and non-substantive involvement” in the demand process is not entitled to inspect books and records.
Delaware Court Of Chancery Imposes Incorporation-By-Reference Condition On Section 220 Production, Consistent With Other Recent Decisions
On October 12, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery agreed to impose an “incorporation-by-reference” condition on any production by Universal Health Services, Inc. (“UHS”) in response to a books-and-records demand under Delaware General Corporation Law Section 220. City of Cambridge Ret. Sys. v. Universal Health Serv., Inc.
, C.A. No. 2017-0322-SG (Del. Ch. Oct. 12, 2017). In so disposing of the action to compel production brought by the UHS stockholder who made the Section 220 demand (The City of Cambridge Retirement System (“City of Cambridge”)), the Court explained that the interests of judicial and litigants’ economy outweighed whatever concern might exist that a company would manipulate “the universe of documents produced” to attempt to frustrate a later-filed derivative action.
Delaware Chancery Court Holds Garner Fiduciary Exception Does Not Justify Compelled Production Of Privileged Documents Relevant To A Derivative Litigation In Response To A Section 220 Demand Brought By The Same Plaintiffs
On July 27, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery found that stockholder plaintiffs had not satisfied their burden of showing “good cause” under the Garner
fiduciary exception to the attorney-client privilege doctrine to require defendant Genworth Financial, Inc. (“Genworth”) to produce privileged communications in response to a books and records demand. Salberg v. Genworth Fin., Inc.
, C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017). The demand under Section 220 of the Delaware General Corporation Law, 8 Del. C.
§ 220, sought documents relating to the same plaintiffs’ claims in a separate derivative action against Genworth’s directors and officers. The Court held that the Garner
exception did not require Genworth to produce the privileged communications during the pendency of the derivative action, because the communications related to the “bona fides
” of plaintiffs’ claims in that action.
Delaware Chancery Court Issues Opinion Offering Rare Interpretation Of Stock Transfer Restriction Provision, Delaware General Corporation Law Section 202
On July 10, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery found plaintiff was not bound by stock transfer restrictions under which the company had sought to revoke his ownership and was therefore entitled to inspect the books and records of a company in which he held stock. Henry v. Phixios Holdings, Inc.
, C.A. No. 12504-VCMR (Del. Ch. Jul. 10, 2017). The opinion is one of few offering substantive guidance regarding Delaware General Corporation Law (“DGCL”) Section 202, 8 Del. C.
§ 202, a provision governing stock transfer restrictions. Applying the statute, the Court held that “in order for a stockholder to be bound by stock transfer restrictions that are not ‘noted conspicuously on the certificate or certificates representing the security,’ he must have actual knowledge of the restrictions before he acquires the stock” or “affirmatively assent to the restrictions, either by voting to approve the restrictions or by agreeing to the restrictions.”
Third Circuit Holds That Statutes Of Limitation May Be Tolled By Books-And-Records Demands Under Delaware Law Despite Inquiry Notice To Plaintiff Of Wrongdoing
On June 13, 2017, Chief Judge Smith of the United States Court of Appeals for the Third Circuit reversed in part the District Court’s dismissal of claims for breach of contract as untimely. Norman v. Elkin
, No. 16-1924 (3d Cir. June 13, 2017). The Third Circuit found that plaintiff’s argument that his books-and-records demand tolled the relevant statute of limitations was not categorically barred by a finding that plaintiff had “inquiry notice” of defendant’s wrongdoing at the time he filed the demand. The Court vacated dismissal of the contract claims and remanded them to the District Court with instructions to determine whether plaintiff’s books-and-records demand tolled the statute of limitations and, if so, whether the claims were timely.
Former CEO Granted Right To Inspect Books And Records Of Company After Demonstrating At Trial A “Credible Basis” To Infer Potential Wrongdoing By Board Chairman
On April 17, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ruled, in a post-trial decision, that defendant Cypress Semiconductor Corporation (“Cypress”) must allow plaintiff and former Cypress CEO, T.J. Rodgers, to inspect certain books and records of Cypress pursuant to Section 220 of the Delaware General Corporation Law, 8 Del. C.
§ 220. Rodgers v. Cypress Semiconductor Corp.
, C.A. No. 0070-AGB (Del. Ch. Apr. 17, 2017). Chancellor Bouchard found that Rodgers, who made the demand in his capacity as a stockholder, sufficiently established a valid primary purpose for seeking inspection of the materials: to investigate potential wrongdoing by Ray Bingham, the Executive Chairman of the Board.
Delaware Chancery Court Holds That Former Stockholder Lacks Standing To Bring Section 220 Action For Inspection Of Books And Records
On February 27, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed for lack of standing a lawsuit for inspection of corporate books and records brought by a former stockholder squeezed out in a two-step merger. Weingarten v. Monster Worldwide Inc.
, C.A. No. 12931-VCG, 2017 WL 752179 (Del. Ch. Feb. 27, 2017). As noted by the Court, this case presented an issue of first impression: whether a plaintiff seeking corporate records under Section 220 of the Delaware General Corporation Law, 8 Del. C.
§ 220, must be a stockholder at the time the complaint is filed. Based on the language of the statute, the Court held that the former stockholder lacked standing to bring a Section 220 action because he no longer owned shares following the merger.
Delaware Supreme Court Affirms Dismissal For Pleading Inadequacy When Plaintiffs Could Have Demanded Books And Records To Develop Facts
On November 16, 2016, the Delaware Supreme Court affirmed a Delaware Court of Chancery decision by Vice Chancellor Sam Glasscock III that dismissed derivative and direct claims against two board members of Premium of America, LLC (“Premium”) and an affiliate. Joseph Penar Family Trust v. Adams
, No. 250-2016 (Del. Nov. 16, 2016), aff’g
, C.A. No. 10441 (Del. Ch. Apr. 28, 2016). Plaintiffs—members of Premium, a Delaware limited liability company (“LLC”)—had alleged that defendants misappropriated funds when liquidating the company’s assets in breach of their fiduciary duties. The Supreme Court held that the Chancery Court “correctly determined that the appellants’ failure to allege in a non-conclusory fashion the circumstances of the alleged misappropriation required dismissal of the amended complaint.”
Delaware Chancery Court Rejects Books And Records Demand Concerning Board’s Alleged Failure To Properly Account For U.S. Tax Liabilities On Foreign Earnings
On August 31, 2016, Judge Abigail LeGrow, sitting by designation on the Delaware Court of Chancery, held that Pfizer, Inc. (“Pfizer”) did not need to make its books and records available for inspection to a shareholder purportedly investigating whether the board breached its fiduciary duties by failing to comply with applicable accounting standards. Beatrice Corwin Living Irrevocable Trust v. Pfizer, Inc.
, C.A. No. 10425-JL (Del. Ch. Aug. 31, 2016). In rejecting this shareholder demand pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”), the Court found that the shareholder had not shown any “credible basis to infer mismanagement or wrongdoing by the board.”
Delaware Court of Chancery Finds Suit against Lululemon Chairman and Board Is Precluded by Previous Dismissal of New York Lawsuit
On June 15, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a derivative action against current and former directors of Lululemon Athletica, Inc., finding that plaintiffs’ claims were precluded by a previous dismissal of similar allegations in a New York based action. Laborers District Council Constr. Indus. Pension Fund v. Bensoussan et al.
, C.A. No. 11293-CB (Del. Ch. June 14, 2016).