Chancery Further Explains the “Proper Purpose” Requirement for Section 220 Demands
Section 220 of the Delaware General Corporation Law (“DGCL”) provides stockholders seeking information for a proper purpose with the right to inspect a corporation’s books and records. This recent decision provides additional guidance by (i) rejecting a “purpose-plus-an-end” test as inconsistent with the text of Section 220 and Delaware Supreme Court precedent; and (ii) explaining that a stockholder may have a proper purpose to investigate wrongdoing regardless of whether she can show potentially viable claims against a board of directors.
Here, the many federal and state investigations targeting the defendant-corporation’s alleged outsized role in the national opioid epidemic supported that the plaintiff-stockholders had a credible basis to suspect wrongdoing that justified further investigation. Briefly, those investigations and related civil suits provided some reason to believe that the defendant-corporation may have unlawfully continued to distribute opioids to pharmacies engaged in suspicious sales practices, and that this conduct had exposed the corporation to tens of billions of dollars in legal claims and litigation costs. After trial, the Court rejected the defendant’s two arguments that the stockholders’ demand was deficient because: (i) it did not state what the stockholders intended to do with the information upon receipt; and (ii) the evidence presented at trial did not support actionable wrongdoing on the part of its directors. The Vice Chancellor reasoned that requiring stockholders to commit to specific ends to which they will use the books and records was not required by Section 220 or Supreme Court jurisprudence. The Court further reasoned a stockholder often would want, and perhaps need, to receive and review the books and records before determining how best to use them. The Court acknowledged that some Court of Chancery case law supported a “purpose-plus-an-end” test, but it declined to follow such decisions. Turning to the second challenge, the Court held that the plaintiff-stockholders only needed to demonstrate a credible basis that wrongdoing occurred, and were not required to produce evidence linking that suspected wrongdoing to an actionable, non-exculpated breach of fiduciary duty by members of the board of directors, as would be required to survive a motion to dismiss and as was suggested by Beatrice Corwin Living Irrevocable Tr. v. Pfizer, Inc., 2016 WL 4548101 (Del. Ch. Aug. 31, 2016) and its progeny. The Court accordingly rejected the defendant-corporation’s arguments that the stockholders lacked a proper purpose because, inter alia, the defendant’s directors would be entitled to exculpation under Section 102(b)(7) of the DGCL. In that regard, the Court discussed the duties of officers, who are not entitled to exculpation under Section 102(b)(7). The Vice Chancellor reasoned that Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117 (Del. 2006) only requires a stockholder to demonstrate a credible basis to suspect corporate wrongdoing – not to “t[ie] the mismanagement or wrongdoing to the board[.]”Share