This past year, Proskauer’s private fund litigation blog highlighted a Delaware Chancery case adopting an expansive view in favor of parties seeking information from companies under Section 220 of the Delaware General Corporation Law. The Delaware Supreme Court recently affirmed the Chancery Court’s ruling, providing additional appellate guidance on Section 220 and endorsing limits the Chancery Court set on certain defenses companies may have against such requests.
Section 220 allows stockholders to inspect books and records of a Delaware corporation for any proper purpose and to compel inspection if refused. Recognized “proper purposes” to inspect books and records include, among others, determining director independence and investigating disclosures, waste, and possible mismanagement or self-dealing. For investigatory purposes, stockholders must demonstrate a credible basis to infer possible mismanagement warranting further investigation, a standard Delaware courts have described as the lowest possible burden of proof.
In AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund, the Delaware Supreme Court affirmed the Chancery Court’s order compelling the production of books and records under Section 220. In the wake of the opioid epidemic, AmerisourceBergen, a pharmaceutical distributor, came under significant state and federal regulatory scrutiny. Following several investigations and lawsuits, plaintiff shareholders served a Section 220 demand on AmerisourceBergen for the stated purposes of investigating board and management wrongdoing, director independence, and the possibility of litigation or other corrective measures. AmerisourceBergen rejected the demand, the plaintiffs initiated suit to compel document production, and the court ultimately sided with the plaintiffs.
On appeal, AmerisourceBergen argued the Chancery Court erred by holding that the shareholders could state a proper purpose without (i) disclosing the objectives of their investigation or (ii) demonstrating the alleged wrongdoing was actionable. AmerisourceBergen also challenged (iii) the court’s decision to grant the plaintiffs leave to conduct a post-trial deposition.
The Delaware Supreme Court rejected all three arguments. The Court first reasoned that “a stockholder is not required to state the objectives of his investigation” to make out a Section 220 claim. Though the Court acknowledged “a mere statement of suspicion” would be inadequate, it concluded that, where a stockholder “present[s] a credible basis from which the court can infer wrongdoing or mismanagement,” it has met its burden of identifying a proper investigatory purpose, and further information about the objective of the investigation is not required. The Court admonished, however, that “[t]his is not to say that the stockholder’s intended uses are irrelevant or that it is not advisable, in the interest of enhancing litigation efficiencies—to state the intended uses in the stockholder’s demand.” And the decision likewise acknowledged corporations remained free to “challenge the bona fides of a stockholder’s stated purpose.” But the Court nevertheless concluded that, when the purpose of a Section 220 demand is to investigate corporate wrongdoing, a stockholder “is not required to specify the ends to which it might use the books and records.”
The Court next declined to endorse the company’s contention that stockholders were required to demonstrate that the alleged wrongdoing they sought to investigate was legally actionable, finding any such actionability requirement would be at odds with the “credible basis” standard for investigative inspections under Section 220, and would detract from the intended summary nature of Section 220 proceedings. The Court thus rejected the company’s actionability argument based on its alleged exculpation and laches-based defenses. However, the Court also acknowledged actionability could be relevant where “the 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.”
Finally, the Court concluded the Chancery Court did not abuse its discretion by, on its own initiative, permitting the plaintiffs to conduct a deposition “to explore what types of books and records exist and who has them.” Rejecting the company’s argument that the Chancery Court impermissibly expanded the scope of inspection without holding the stockholders to their burden for each category of sought-after documents, the Supreme Court reasoned the Chancery Court had instead reserved judgment on various categories pending additional discovery, a ruling that was within its sound discretion.
The AmerisourceBergen decision sheds further light on what constitutes a proper investigative purpose under Section 220, and counsels toward caution for potential company litigants. Though the opinion acknowledges companies can still challenge the veracity and, sometimes, the actionability of stockholders’ articulated investigative purposes, it also encourages plaintiff stockholders to make broad investigatory requests. Additionally, the decision is likely to further the trend among Delaware stockholders of making Section 220 demands before launching mismanagement suits.