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When a Director May Inspect the Company's Books and Records

March 2, 2016
Albert H. Manwaring
Delaware Business Court Insider

Section 220(d) of the Delaware General Corporation Law (DGCL) permits a director to inspect a company's books and records "for a purpose reasonably related to the director's position as a director." It is well settled under Section 220 that a director's access to corporate books and records is broader than that of stockholders. A director, who has a proper purpose for inspection, i.e., reasonably related to his or her position as a director, has "virtually unfettered" access—at least equal to that of other board members—to inspect the books and records of the company. The broad inspection rights of directors to access corporate books and records relative to that of stockholders under Section 220 are correlative with the directors' fiduciary obligations to stockholders "to protect and preserve the corporation." However, in contrast to the broad scope of discovery permitted in a plenary action under the Delaware Court of Chancery Rule 26, Section 220 limits inspection (even by directors) to documents and communications that fall within its more limited "contemplation of 'books and records,'" which correlates with the "summary nature of a Section 220 proceeding."

A recent decision of the Court of Chancery reaffirms these principles, and clarifies that a director request for communications among corporate directors or officers must: "(1) state a proper purpose, (2) encompass communications constituting books and records of the corporation, i.e., those that affect the corporation's rights, duties, and obligations, and (3) be sufficiently tailored to direct the court to the specific books and records relevant to the director's proper purpose." In Chammas v. NavLink, C.A. No. 11265-VCN (Del. Ch. Feb. 1, 2016) (Noble, V.C.), the Court of Chancery held the plaintiff directors' requests for inspection were limited to records affecting the corporation's rights, duties and obligations, and must be sufficiently tailored to specific documents and communications relevant to the directors' stated purpose to perform their duties as directors.

Background

The plaintiff directors, who were also the founders and prior officers, brought a Section 220 action to obtain books and records from the defendant, NavLink Inc., an information technology services company. The directors made broad requests for six categories of documents and communications of NavLink in connection with their stated purpose to discharge their duties as its directors.

Based on suspicions of secret meetings without the plaintiff directors, they sought, in categories one and two, documents and communications between the nonplaintiff directors and NavLink's officers, and between the board's chairman and other nonplaintiff directors. Based on evidence concerning the timing and accuracy of board minutes, the directors sought, in category three, documents and communications concerning the preparation of board minutes by the board's secretaries. Based on the NavLink CEO's request for the board to consider options in response to an important customer's request to terminate its contracts with NavLink, the directors sought, in category four, documents and communications related to NavLink's contracts with the important customer. Based on the board's consideration of whether to approve NavLink's annual budget and three-year operating plan, the directors sought, in category five, documents related to the business cases to support the annual budget and three-year operating plan, but also sought communications regarding sales, marketing and operations related to NavLink's business and financial performance. Lastly, based on the ability of NavLink's stockholders to attend the annual stockholder meeting on its scheduled date and place, the directors sought, in category six, communications between NavLink and its counsel regarding the annual meeting.

Court Limited the Directors' Inspection

After a trial in this books-and-records action, the court issued its decision, denying the plaintiff directors' requests for inspection of the books and records in categories one and two, limiting their inspection in categories three to five, and granting their request for inspection in category six. In categories one to five, where the directors' requests for inspection were either denied or limited, the court reasoned that under Section 220 of the DGCL, even directors, who have virtually unfettered access, are limited to records affecting the corporation's rights, duties and obligations, and the requests must be tailored to specific documents relevant to the directors' stated purpose to perform their duties as directors.

In categories one and two, where the directors were denied documents and communications between the nonplaintiff directors and NavLink's officers, and between the board's chairman and other nonplaintiff directors, the court found that not all communications between the nonplaintiff directors, or between such directors and the NavLink officers, constitute books and records of NavLink. The court explained that mere suspicion of secret meetings without the plaintiff directors was insufficient to compel the production of private communications between corporate directors and officers—even if the communications were stored on NavLink's servers. In sum, the directors had failed to demonstrate that the broad range of private communications among corporate actors that they were seeking were corporate records of NavLink affecting its rights, duties and obligations, and that such requests were tailored to specific communications relevant to the performance of their duties as directors.

In category three, where the directors sought documents and communications concerning the preparation of board minutes by the board's secretaries, the court limited the directors' inspection to communications between the nonplaintiff directors and the current or former board secretary concerning draft or official board minutes. The court found that communications to and from a board secretary in carrying out his or her corporate duty to properly draft and maintain board minutes directly affected NavLink's rights, duties and obligations, and were thus corporate records relevant to the directors' purpose to ensure the accuracy, recipients and timing of board minutes. The court explained, however, that communications between the nonplaintiff directors concerning draft board minutes, not involving a corporate secretary, do not affect the corporation's rights or obligations, and were thus not corporate records subject to production.

In category four, where the directors sought documents and communications related to NavLink's contracts with an important customer, the court found that the directors were entitled to communications between management and the customer related to official documents, acceptance proposals, and other documents affecting the contractual rights and obligations of NavLink, and the customer's request to terminate the contracts. These communications were relevant to the board's ability to consider NavLink's options in response to the customer's request to terminate its contracts with NavLink. But, in the absence of alleged mismanagement or wrongdoing, mere communications between NavLink management and the customer unrelated to official contractual documents do not rise to the level of corporate records, and thus, the court denied the request as to these communications.

In category five, where the directors sought documents related to the business cases to support the annual budget and three-year operating plan, the court found that these corporate records were relevant to the board's consideration of whether to approve NavLink's annual budget and three-year operating plan. But, the court denied the directors' broad request for communications regarding sales, marketing and operations related to NavLink's business and financial performance. The court explained that mere communications between corporate officers and clients concerning sales, marketing or operations, at least in absence of alleged wrongdoing or that the communications affected the corporation's rights, duties or obligations, do not constitute records of the company. Further, the directors had failed to allege how these communications were relevant to the performance of their duties as directors.

Finally, in category six, where the directors sought communications between NavLink and its counsel regarding the annual meeting, the court found that the directors were entitled to such communications to perform their duty to ensure that NavLink's stockholders are able to attend and vote in the annual stockholder meeting on its scheduled date and place. The directors alleged facts that NavLink's management had failed to inform its counsel of material facts concerning the time and place of the annual meeting, which failure risked potential liability affecting NavLink's legal duties and obligations. Thus, the communications between NavLink and its counsel regarding the annual meeting qualified as corporate records subject to production.

Decision Impact

The Chammas decision offers practical guidance to directors seeking books and records under Section 220 of the DGCL. To successfully seek inspection of corporate communications and documents on behalf of a director, practitioners should craft requests that seek records affecting the corporation's rights, duties and obligations, and tailor the requests to specific documents and communications relevant to the director's performance of his or her duties as a director of the corporation.

Delaware Business Court Insider  |  March 2, 2016