Demand For Books And Records Under Section 220 To Aid In Proxy Contest Is Not A Proper Purpose, Chancery Court Finds
In High River Limited Partnership, Icahn Partners Master Fund LP, and Icahn Partners LP v. Occidental Petroleum Corporation, C.A. No. 2019-0403-JRS (Del. Ch. November 14, 2019), the Delaware Court of Chancery (the “Court”) dismissed a demand by stockholders of Occidental Petroleum Corporation (“Occidental”) under Section 220 of the Delaware General Corporate Law (“Section 220”) for documents and information relating to Occidental’s acquisition of Anadarko Petroleum and related transactions. The Court held that the stockholders’ demand for books and records to aid in a proxy contest did not constitute a proper purpose, and that a broad demand for corporate records was not necessary and essential to the stockholders’ purpose of challenging company management over its decision to enter into a transaction.
On April 24, 2019, defendant Occidental announced its proposal to acquire Anadarko Petroleum Corporation (“Anadarko”) with a mixture of cash and Occidental stock (the “Acquisition”). To finance the cash portion of the Acquisition, Occidental issued preferred shares, warrants and debt securities, while also agreeing to pre-sell Anadarko’s Africa assets (collectively, the “Financing”). Because Occidental was able to issue shares constituting less than 20% of its public float, a vote of the Occidental stockholders was not required to approve the Acquisition.
On May 2, 2019, after Occidental’s public announcement of the proposed acquisition, plaintiffs High River Limited Partnership, Icahn Partners Master Fund LP and Icahn Partners LP (collectively, “Icahn Partners”) began buying Occidental stock, eventually investing approximately $1.5 billion. On May 21, 2019, Icahn Partners sent a demand letter to Occidental seeking to inspect books and records relating to the Acquisition and provisions of Occidental’s corporate documents. After Occidental responded that it was considering the demand, Icahn Partners filed this action under Section 220, demanding information provided to Occidental’s board of directors (the “Board”) concerning the Acquisition, the Financing, alternatives considered by the Board, and whether the Board intended to adopt a prior stockholder proposal to lower the threshold for a special meeting from 25% stockholder approval to 15%. On June 26, 2019, Icahn Partners filed preliminary proxy materials and attempted to obtain requests from holders of 20% of Occidental stock (the threshold to require the Board to set a record date for a consent solicitation), with the aim of soliciting written consents to elect four directors to the Board nominated by Icahn Partners and to effect other changes to Occidental’s bylaws and consent solicitation process.
Under Section 220, stockholders of a Delaware corporation must state a “proper purpose” to inspect books and records, with the scope of the inspection to be limited only to those books and records which are “necessary and essential to accomplish the stated, proper purpose”. Where a stockholder seeks to inspect books and records to investigate corporate wrongdoing, the stockholder must demonstrate a credible basis to suspect that mismanagement or wrongdoing has occurred before the corporation will be compelled to allow inspection. If a credible basis to suspect corporate wrongdoing is demonstrated, the Court has allowed plaintiffs to use acquired books and records to mount a proxy contest. Icahn Partners proffered two purposes in support of their Section 220 demand: first, they argued that inspection of Occidental’s books and records would be material to their proxy contest, which would require the Court to recognize a new type of proper purpose under Section 220. Alternatively, Icahn Partners claimed they had a credible basis to infer corporate mismanagement or wrongdoing.
The Court first addressed Icahn Partners’ claim of corporate mismanagement. The Court noted that while demonstrating “credible basis” is the lowest burden of proof recognized in Delaware corporate law, it requires the plaintiff to provide at least some evidence of corporate wrongdoing. Icahn Partners alleged that the Acquisition and Financing were bad deals for Occidental. However the Court noted that disagreeing with the Board’s business judgment, without more evidence, is not sufficient to provide a credible basis to infer corporate mismanagement. Instead, a plaintiff would be required to provide evidence that the Board was conflicted, disloyal or in some way interested in the transaction at issue. Icahn Partners did not provide allegations or evidence of any such wrongdoing by the Board.
The Court then addressed Icahn Partners’ request to recognize a new rule under Section 220 entitling stockholders to inspect documents if they can show a credible basis that the information sought would be material in the prosecution of a proxy contest. Icahn Partners argued that two cases, Tactron, Inc. v. KDI Corporation (“Tactron”) and High River Ltd. Partnership v. Forest Labs, Inc. (“Forest Labs”), provided a basis to recognize Icahn Partners’ proposed new rule. While the Court acknowledged that Tactron involved a demand for logistical information related to a proxy contest, the Court noted that Tactron involved a very narrow demand for purely logistical information related to stock valuation, not a broad demand for information to sway stockholders in a proxy contest. In Forest Labs, the Court acknowledged that it had granted a stockholder’s Section 220 demand where such stockholder was engaged in a proxy contest. However the Court distinguished Forest Labs from Icahn Partners’ demand, noting that Forest Labs involved a demand for amendments to corporate governance documents that were “essential and sufficient” to the stockholder’s proxy contest. In this case, the Court found Icahn Partners’ broad demand for documents related to a dispute with Occidental management over substantive business decisions, particularly where such decisions are subject to the business judgment rule, is not a proper purpose under Section 220.
Finally, the Court noted that Icahn Partners’ broad-based demand for books and records amounted to a “fishing expedition” that was not necessary and essential to their stated purpose of raising concerns with other stockholders about the Board’s decisions to engage in the Acquisition and Financing. The Court found that Icahn Partners did not need a broad set of records from the Company to challenge such decisions by the Board.