iIn Lebanon County Employees’ Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan v. AmerisourceBergen Corp., C.A. No 2019-0527-JTL (Del. Ch. Jan. 13, 2020), the Delaware Court of Chancery (the “Court”) granted the plaintiffs’ demand to inspect the defendant’s books and records. In so doing, the Court upheld the plaintiffs’ stated justifications for seeking review of the books and records as a proper purpose under Delaware law.
The defendant, AmerisourceBergen Corp, is one of the largest wholesale distributors of opioids in the United States (“defendant”). Due to its status, it has been the frequent subject of litigation and investigation, including two congressional investigations concluding that the defendant failed to identify and address suspicious orders of opioids as required under the Comprehensive Drug Abuse Prevention and Control Act of 1970 (the “Controlled Substances Act”).
Under the Controlled Substances Act, the defendant was required to maintain “effective controls against diversion of [opioids] into other than legitimate medical, scientific, research, or industrial channels.” Orders of opioids which on their face may lead to such improper diversion, termed suspicious orders, are ones that are unusually large, unusually frequent or substantially deviate from a normal pattern. Suspicious orders must be reported to the DEA. A distributor must either decline to ship a suspicious order or must conduct due diligence to determine that the order is not likely to be diverted into improper channels before shipping the order. The DEA may suspend or revoke licenses of companies that fail to follow these guidelines.
The plaintiffs in this matter were stockholders of the defendant (“plaintiffs”). As part of their investigation of possible corporate malfeasance, the plaintiffs requested to inspect the defendant’s books and records pursuant to Section 220 of the Delaware General Corporation Law (the “DGCL”). The inspection demand requested ten categories of information and stated that the plaintiffs were investigating possible mismanagement or breach of fiduciary duties by the defendant’s directors and officers. The plaintiffs commenced this litigation after the defendant rejected their inspection request as overbroad and lacking a proper purpose.
Section 220 of the DGCL allows any stockholder to inspect a corporation’s books and records so long as the stockholder has a proper purpose for doing so. The plaintiffs’ demand stated several purposes for the inspection, including: 1) the investigation of mismanagement, breach of fiduciary duties, or other violations of law; 2) to consider possible remedies to be sought; 3) to evaluate the independence and disinterestedness of the members of the defendant’s board of directors; and, 4) to use the information gathered to evaluate possible litigation or other corrective measures. This litigation addressed two issues: whether the plaintiffs’ stated purposes were proper under the DGCL and, if a proper purpose were established, the exact scope of the inspection.
The Court began by stating that it was well established in Delaware that the investigation of possible wrongdoing by a stockholder is a proper purpose. While mere curiosity or a general statement of a purpose to investigate mismanagement are not enough, a stockholder can prevail under Section 220 if it is shown by a preponderance of the evidence that a credible basis exists from which the Court could infer possible mismanagement by the corporation warranting further investigation. The “credible basis” burden is the lowest possible standard of proof which can be satisfied by demonstrating through documents, logic, or testimony that legitimate issues of wrongdoing exist.
The defendant argued that each of the plaintiffs’ purposes were improper in this case because they were only seeking the information in order to sue the defendant at a later date. To bolster this position, the defendant claimed that a stockholder who wishes to inspect the books and records of a corporation for some purpose other than litigation must state so in its demand. The Court disagreed, stating that such a rule would require a stockholder to commit to a course of action before its investigation was underway. While the Court conceded that a line of Delaware cases seemed to require certain stockholders to state the ends to which they intended to use the materials (referred to as the purpose-plus-an-end test), those cases were fact-specific rulings where the stockholders had not identified any other ends in their demands other than litigation, a circumstance which was not present in this case. In addition, the Court explained that in any event, the purpose-plus-an-end test went beyond the plain language of Section 220 and was contrary to Delaware Supreme Court precedent.
In a similar vein, the defendant also argued that the plaintiffs’ true purpose was to investigate a possible Caremark claim. Under such circumstances, the defendant claimed that the plaintiffs were required to present evidence of “actionable wrongdoing” to gain access to the defendant’s books and records. The Court rejected this interpretation of the law, stating that the imposition of the “actionable wrongdoing” dismissal standard under Rule 23.1 into a Rule 220 context would result in an onerous burden being placed upon stockholders. Such an onerous burden, the Court continued, would be contrary to Delaware case law and policy.
Finally, the defendant contended that the plaintiffs could not obtain the books and records of the corporation due to an exculpatory provision in the defendant’s certificate of incorporation. Because the plaintiffs had not presented evidence to support an inference that a non-exculpated claim existed, the defendant did not have to grant the plaintiffs access to its books and records. The Court again rejected the defendant’s stance, finding that the plaintiffs’ inspection rights did not hinge on the existence of an actionable claim for damages. Even assuming that they did, continued the Court, it was possible that the plaintiffs would obtain information leading to non-exculpated claims. Indeed, even the possibility that the plaintiffs’ potential future claims were time-barred was not enough to disallow the plaintiffs’ access because it was not clear to the Court at this early stage that all of the plaintiffs’ claims would be time-barred.
The Court ultimately concluded that the plaintiffs had met their credible basis burden. First, it stated that the existence of ongoing investigations and lawsuits alone can satisfy the standard, particularly when such investigations are carried out by law enforcement agencies. Additionally, the Court found strong circumstantial evidence to conclude that the defendant pushed opioids into illegal channels due to drastic drops in suspicious order report rates to the DEA over the preceding several years.
The Court thus concluded that the plaintiffs had demonstrated a proper purpose, thereby entitling them to inspect some of the books and records of defendant. Further, the Court permitted the plaintiffs to conduct a deposition under Court of Chancery Rule 30(b)(6) to explore potential other sources of records held by the defendant to which the plaintiffs’ right of inspection may attach.
