Delaware Supreme Court Provides Important Guidance Regarding Section 220 Demands, Rejecting Several Limiting Principles Frequently Offered By Corporations Resisting Stockholder Inspection Demands
Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220 (“Section 220”), permits a stockholder of a Delaware corporation to inspect corporate books and records upon a showing of a proper purpose. The Delaware courts have long urged stockholders to avail themselves of Section 220 — the “tools at hand” — to inspect relevant corporate documents before commencing plenary derivative litigation. See, e.g., Grimes v. Donald, 673 A.2d 1207, 1216 & n.11 (Del. 1996). Perhaps as a result of stockholders heeding this advice, recent years have seen an increase in litigation arising out of Section 220 demands, with corporations pursuing various objections and defenses to resist inspection. In AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund, 2020 WL 7266362 (Del. Dec. 10, 2020), the Delaware Supreme Court (Traynor, J.) weighed in on and ultimately rejected two objections commonly proffered by corporations who seek to limit or resist Section 220 stockholder inspection demands. The Court held that (i) it is not necessary for a stockholder to specify the “ultimate objectives” of the investigation in the stockholder’s Section 220 demand; and (ii) a stockholder is not required to establish that the alleged corporate wrongdoing would be judicially “actionable” in order to obtain corporate records under Section 220. This decision of the Delaware Supreme Court provides essential guidance to Delaware corporations and practitioners on the full panoply of issues related to Section 220 demands.
AmerisourceBergen, Corp. (“Amerisource” or the “Company”) is one of the largest opioid distributors in the United States. The Company has been the target of multiple lawsuits and governmental investigations arising from Amerisource’s purported failure to effectively monitor and report suspicious opioid orders. The stockholder plaintiffs served a Section 220 inspection demand seeking corporate records concerning alleged corporate wrongdoing relating to the Company’s opioid distribution practices. Amerisource refused to produce documents in response to the stockholders’ inspection demand. As a result, the stockholders initiated a Section 220 proceeding in the Delaware Court of Chancery to compel production of the records.
Amerisource argued that the stockholders had failed to state a proper purpose for the inspection demand because they did not specify the stockholders’ “ultimate objectives,” and because they did not demonstrate that any of the alleged wrongdoing was “actionable.” The Court of Chancery rejected Amerisource’s arguments, ordered the Company to produce certain records in response to the demand, and allowed additional discovery regarding whether other records were pertinent to the demand. In response, Amerisource requested certification of an interlocutory appeal. The Delaware Supreme Court accepted the interlocutory appeal noting that the issues raised by the Company were “substantial issues of material importance relating to the scope of the statutory proper-purpose requirement.”
On appeal, the Delaware Supreme Court affirmed the Court of Chancery’s order. The Supreme Court began its analysis by recognizing that the investigation of alleged corporate wrongdoing falls within the ambit of Section 220 because it is reasonably related to a stockholder’s interests as a stockholder. Seeking to balance the stockholder’s right to corporate information against the corporation’s right to avoid baseless interference with the corporate directors’ discretion to manage the business affairs of the corporation, the Court reiterated that “bare allegation of possible waste, mismanagement, or breach of fiduciary duty, without more, will not entitle a stockholder to a Section 220 inspection.” However, a stockholder who can establish by a preponderance of the evidence a “credible basis” from which a court may infer that “corporate wrongdoing” occurred will, in most instances, be entitled to obtain corporate records under Section 220.
The Supreme Court also affirmed the Chancery Court’s rejection of the two limiting principles argued by Amerisource. First, stockholders claiming to investigate alleged corporate wrongdoing under Section 220 are not required disclose what they intend to do with those records. Credible allegations of corporate wrongdoing are in and of themselves a “proper purpose” under Section 220 regardless of whether the stockholder specifies any or all of the reasons for which she may be seeking the records. Second, the Court rejected the Company’s argument that a stockholder must in all instances demonstrate “actionable” wrongdoing in order to receive corporate records under Section 220. There are a myriad of purposes for which a stockholder may want to investigate corporate wrongdoing — including, for example, asking the directors to voluntarily take remedial action — beyond simply filing a shareholder derivative suit. In addition, litigating the “actionability” or merits of a putative stockholder action in a Section 220 action is contrary to the “summary” nature of a proceeding to enforce stockholder inspection rights under Section 220.
The Delaware Supreme Court articulated one “rare” exception to the rule dispensing with the need that a stockholder demonstrate “actionability” to be entitled to documents under Section 220: the Court of Chancery has discretion to deny a Section 220 inspection demand where a “stockholder’s sole reason for investigating mismanagement or wrongdoing is to pursue litigation and a purely procedural obstacle, such as standing or the statute of limitations, stands in the stockholder’s way such that the court can determine, without adjudicating merits-based defenses, that the anticipated litigation will be dead on arrival, the court may be justified in denying inspection” (emphasis added). In other words, so long as the stockholder indicates that she may use the corporate records to pursue non-litigation related goals (such as remediation), she will not be subject to any type of “actionability” inquiry. And, even if the stockholders’ sole purpose is in fact pursuing litigation, the “actionability” of her potential claims will only be adjudicated if a purely procedural defense would render those claims futile.
The AmerisourceBergen decision reflects the Delaware courts’ prevailing view that stockholder investigations of corporate wrongdoing serve an important oversight function. The decision is part of a trend rejecting attempts by corporations to limit or reject stockholder inspection rights. The Court signaled that as long as a stockholder has a credible basis to suspect corporate wrongdoing (rather than a pretextual harassing “fishing expedition”), she should be able to conduct her investigation of that wrongdoing, unimpeded by an in-depth inquisition into what specifically she intends to do with the records or the merits of her hypothetical derivative claims. By stressing the importance of stockholder inspection rights in instances of alleged corporate wrongdoing, the Delaware courts are channeling putative stockholder plaintiffs through this process before those plaintiffs initiate a potentially meritless derivative suit to the detriment of the corporation in whose benefit the derivative action is allegedly brought.