Chancery Grants Leave to Move for Fees for Overly Aggressive Books and Records Defenses
Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020)
This case illustrates that the Court of Chancery will not accept overly aggressive defenses to books and records actions and may grant fees to discourage such tactics. Section 220 of the Delaware General Corporation Law permits a stockholder plaintiff who has a “credible basis” to suspect wrongdoing by officers and directors to demand inspection of books and records relating to that misconduct. In this case, plaintiff-stockholders of Gilead Sciences, Inc. (“Gilead”) sought to inspect Gilead’s books and records to investigate misconduct. Gilead was subject to numerous lawsuits and government investigations arising out of alleged anticompetitive conduct, mass torts, breach of patents, and false claims relating to the development and marketing of its HIV drugs. The plaintiffs sought books and records about Gilead’s (1) anticompetitive agreements, (2) policies and procedures, (3) senior management materials, (4) communications with the government, and (5) director questionnaires. Gilead refused to produce any documents, even though the plaintiffs had a credible basis to suspect wrongdoing and the records they sought related directly to the misconduct. The Court of Chancery found that “Gilead exemplified the trend of overly aggressive litigation strategies by blocking legitimate discovery, misrepresenting the record, and taking positions for no apparent purpose other than obstructing the exercise of Plaintiffs’ statutory rights.” The Court, therefore, granted plaintiffs leave to move for fee shifting.
An example of Gilead’s overreaching was its argument that the plaintiffs lacked standing to investigate wrongdoing. According to Gilead, this was because the plaintiffs’ only true purpose was to bring derivative claims and the Court was likely to dismiss the derivative claims because (1) the plaintiffs did not own shares at the time of the wrongdoing, (2) the derivative claims were time-barred, and (3) an exculpatory charter provision would bar the derivative claims. The Court discerned that Gilead’s “standing” arguments were actually about the merits of the underlying claims, which is beyond the scope of a books and records action. The Court also found that Gilead’s assertions about plaintiffs’ true purpose misapprehended the nature of a Section 220 demand. The Court held that that statute determines standing and that plaintiffs had standing because they all held Gilead stock at the time they filed the complaint. The Court also held that the records that plaintiffs sought reasonably related to their current interests as shareholders, even if they did not own stock at the time of the alleged wrongdoing.Share