Last week, the Delaware Supreme Court issued a key decision addressing stockholders' rights to access books and records under Section 220 of the Delaware General Corporation Law.1 Because the Supreme Court rarely weighs in on the scope of Section 220, the decision is an important guide for corporations and practitioners navigating stockholder demands for books and records under Delaware law. In the 43-page opinion, the Delaware Supreme Court reiterated that a stockholder need only show a proper purpose for demanding corporate records, such as investigating potential wrongdoing, but need not, at least in many circumstances, show that the wrongdoing is "actionable" or identify the particular course of action the stockholder will take if the books and records confirm the stockholder's suspicions. The decision follows on the heels of another recent decision by the Delaware Court of Chancery2 that reiterated that merits-based defenses to stockholder plaintiffs' potential claims are not appropriate at the Section 220 stage.
The defendant, AmerisourceBergen Corp., distributes opioid medications to pharmacies, hospitals, and other licensed dispensaries and is therefore subject to federal regulations requiring it to maintain effective controls and reporting over its distribution systems. In recent years, its distribution systems and controls have been the subject of investigations and litigation in multiple states and by various state and federal government agencies, causing it to incur significant expenses. Analysts estimated it could potentially pay up to $100 billion to achieve a global settlement. The stockholder plaintiffs made a books and records demand to AmerisourceBergen for four purposes: to 1) investigate possible breaches of fiduciary duty, mismanagement, and other violations of law by the board of directors and management in connection with the company's distribution of opioids; 2) consider any potential remedies for the conduct; 3) evaluate the interests and independence of the board members; and 4) use the information obtained to evaluate possible litigation or other corrective measures with respect to some of the matters. After AmerisourceBergen denied the demand in its entirety, the plaintiffs brought a Section 220 action in the Court of Chancery.
Following a trial on the papers, the Court of Chancery had ordered AmerisourceBergen to produce documents to the plaintiffs for the purpose of investigating possible breaches of fiduciary duty, mismanagement, and other wrongdoing—even though the plaintiffs had neither identified what they intended to do with the documents if they confirmed their suspicions of wrongdoing nor established a credible basis to suspect "actionable" wrongdoing, a term used in prior Court of Chancery decisions as a basis for denying inspection. The Court of Chancery also, sua sponte, ordered AmerisourceBergen to produce a witness for a deposition so that the plaintiffs could "explore what types of books and records exist[ed] and who ha[d] them."
On appeal, the Supreme Court affirmed the Court of Chancery's decision, holding that a stockholder need not identify the specific objective of the demand or the course of action it will take if the books and records confirm the stockholder's suspicions of wrongdoing. In this case, the plaintiffs had preserved the ability to consider all possible courses of action that their investigation might warrant pursuing. The Supreme Court explained that exploring corporate wrongdoing is "in and of itself'a legitimate matter of concern that is reasonably related to [a stockholder's] interest[] as [a] stockholder[].'"
The Supreme Court also held that a stockholder need not establish that the wrongdoing it seeks to investigate is legally "actionable," although "the actionability of wrongdoing can be a relevant factor for the Court of Chancery to consider when assessing the legitimacy of a stockholder's stated purpose." In particular, AmerisourceBergen had argued that the plaintiffs only sought books and records for the purpose of bringing a Caremark claim regarding the board's oversight of the company's legal compliance, which was barred by the company's charter provision exculpating directors and by the stockholder's own delay. The Supreme Court agreed with the Court of Chancery, holding that: 1) the plaintiffs sought the books and records for more purposes than bringing a potential Caremark claim; 2) a stockholder can obtain books and records without having to introduce evidence from which the Court can infer an "actionable" claim because it can use the information for non-litigation purposes; and 3) the company's defenses to a Caremark claim based on the exculpatory charter provision and the untimeliness of the claims were unavailing because the plaintiffs could uncover non-exculpated claims and the doctrines of fraudulent concealment and equitable tolling could affect whether the claims were time-barred.
The Supreme Court emphasized that, at the books and records stage, courts should look to whether the stockholder has shown by a preponderance of the evidence a credible basis to suspect wrongdoing warranting further investigation. The Supreme Court used the occasion to clarify recent Court of Chancery precedent, some of which had "trended" away from prevailing books and records law, by reaffirming the "credible basis" standard by which to judge the adequacy of a stockholder's inspection demand and overruling its summary affirmance of a prior Court of Chancery decision to the extent the affirmance could be read as supporting a different standard.3 The Supreme Court explained "the interjection of merits-based defenses—defenses that turn on the quality of the wrongdoing to be investigated—interfere[]" with what is supposed to be a "summary" process that is "managed expeditiously."
Finally, the Supreme Court held that the Court of Chancery did not abuse its discretion by ordering the company to produce a witness for a deposition post-trial to discuss the types of documents the company had and where they were kept. In doing so, the Supreme Court disagreed with AmerisourceBergen's arguments that permitting such a deposition would relieve the plaintiffs of their burden to identify documents essential to their stated purposes, noting that the trial court had ordered the deposition after AmerisourceBergen created "an additional obstacle" to the stockholders' effort to get targeted access to books and record by refusing to disclose in discovery the types of records it maintained.
This case is important for companies and practitioners to keep in mind when responding to Section 220 demands, particularly where a stockholder seeks books and records to investigate wrongdoing but procedural bars (such as statutes of limitations) might impact potential litigation on the merits. Though those defenses may be relevant in the court's analysis of a Section 220 demand, they generally should not be used to deny the demand outright—especially where a stockholder has multiple stated purposes. This case also serves as a reminder to companies to be cautious of appearing as if they are not being forthright with stockholders regarding the types of documents the company has that could be responsive to a books and records demand and the sources and custodians of those documents, given the potential for Delaware courts to order additional discovery (such as a deposition) on those issues.
For further information, please contact any member of Wilson Sonsini Goodrich & Rosati's corporate governance and securities litigation practices.
[1] AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund, et al., No. 60, 2020 (Del. Dec. 10, 2020).
[2] Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020).
[3] S.E. Penn. Trans. Authority v. AbbVie, Inc., 2015 WL 1753033 (Del. Ch. Apr. 15, 2015), aff’d, 132 A.3d 1, 2016 WL 235217 (Del. Jan. 20, 2016) (TABLE).
