Chancery Declines to Establish New Rule Concerning Books and Records Inspections Related to Proxy Contests
Section 220 of the DGCL grants stockholders a qualified right to inspect corporate books and records “necessary and essential” to a “proper purpose.” One recognized proper purpose is investigating potential corporate wrongdoing or mismanagement. In such cases, the stockholder must establish a “credible basis” for the suspicion before the Court of Chancery will order inspection. When a stockholder makes that showing, the Court has permitted use of the produced books and records to mount a proxy contest. However, as the Court of Chancery observes in this decision, no Delaware court has compelled inspection “when the stockholder’s only stated purpose for inspection is a desire to communicate with other stockholders in furtherance of a potential proxy contest.” And under the facts and circumstances of this case, the Court declines to be first.
This action arose out of the merger between Occidental Petroleum and Anadarko Petroleum. Plaintiffs, all affiliates of the prominent investor Carl Icahn, invested in Occidental upon the merger’s announcement and, purportedly unhappy with the merger, were trying to mount a proxy fight to replace Occidental’s board of directors. To that end, plaintiffs brought suit against Occidental under Section 220 seeking a range of books and records related to the transaction. Their primary inspection purpose was to communicate with other stockholders about the proxy contest, while their secondary inspection purpose was to investigate potential wrongdoing or mismanagement.
In this post-trial decision, the Court of Chancery denied the requested inspection. The Court quickly rejected plaintiffs’ secondary inspection purpose as an initial matter, finding that plaintiffs failed to establish any credible basis to infer wrongdoing or mismanagement related to the transaction. That left plaintiffs’ primary inspection purpose, which presented a novel theory that would authorize inspections relating to questionable but not actionable board-level decisions if the documents sought would be material to carrying out a proxy contest. While the Court acknowledged a lack of clarity in this area of the law, and declined to rule out such a theory in the right case, it ultimately determined this case was not the right one in which to validate it.
In reaching that conclusion, the Court distinguished the two decisions advanced by plaintiffs in support of their position—namely, Tactron, Inc. v. KDI Corporation, 1985 WL 44694 (Del. Ch. Jan. 10, 1985) and High River Ltd. Partnership v. Forest Labs., Inc., C.A. No. 7663-ML (Del. Ch. July 27, 2012) (TRANSCRIPT). According to the Court, neither decision articulated a broad rule permitting inspection of transaction-related documents in a dispute with management about substantive business decisions in order to support a proxy contest.
The Court went on to find that this case was not the correct one to provide clarity concerning inspections to support proxy contests. Specifically, regardless of the propriety of the plaintiffs’ proxy contest purpose, the Court concluded that the requested documents were not “necessary and essential” to that purpose. Relevant to that determination was the widely-publicized nature of the challenged transactions and the plaintiffs’ already-articulated concerns about the wisdom of the board’s decision making. Accordingly, no inspection was warranted in any event.Share