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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Del. Supreme Court Finds Emails May Be Subject to Production in Books-and-Records Actions
Section 220 of the Delaware General Corporation Law permits a stockholder to inspect the books and records of a corporation, provided that the demand for inspection meets certain form and manner requirements, and the inspection is sought for a proper purpose—e.g., one reasonably related to the interests of stockholders. Plaintiff stockholders bear the burden of proving that each category of documents sought is essential to accomplish the stockholders’ purpose for the inspection. Section 220 inspections of books and records are not intended to produce a comprehensive set of documents that would likely be produced under discovery rules in a plenary action. Rather, the goal in a 220 action is to provide stockholders with a discrete set of documents sufficient or necessary to accomplish their purpose.
In most cases, if a company adheres to traditional corporate record-keeping practices to document corporate actions in board minutes, resolutions, written consents or official letters, production of these type of paper documents will likely be sufficient to accomplish the stockholders’ purpose without having to produce emails or other electronically-stored information. But if the traditional, nonelectronic documents are insufficient or nonexistent, emails may be the only responsive documents available to accomplish the stockholders’ purpose, and thus, such emails are by definition necessary, and must be produced.
The Delaware Supreme Court’s recent decision in KT4 Partners v. Palantir Technologies, No. 281, 2018, ___ A.3d ___ (Del. January 29, 2019) (Strine, C.J.), directing the production of emails, summarizes and reaffirms these principles, which are reflected in prior Delaware decisions. While the production of emails has not been the norm in Delaware decisions, if Section 220 is to continue to have vitality, the Supreme Court’s decision in KT4 Partners reflects the practical reality that electronically stored information has evolved and has often replaced traditional paper mediums for maintaining corporate records. The Supreme Court explained that “if a company … decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which Section 220 entitles them.”
In KT4 Partners, the Supreme Court held that the plaintiff KT4 Partners had the right to inspect emails relating to amendments to defendant Palantir Technologies’ investors rights agreement under Section 220. The Supreme Court found that KT4 Partners had proved that emails were necessary to accomplish its purpose to investigate potential wrongdoing related to the amendments to the investors rights agreement. The Supreme Court reasoned that Palantir Technologies had not observed traditional corporate formalities, such as its failure to hold annual stockholder meetings, and had acted through email communications in connection with the alleged wrongdoing that KT4 Partners sought to investigate. To inspect emails, the Supreme Court pointed out that Section 220 does require a plaintiff to meet a “compelling evidence” standard, but rather a plaintiff may “prove necessity by identifying the categories of books and records she needs and presenting some evidence that those documents are indeed necessary.”
Here, Palantir Technologies failed to show that traditional, nonelectronic documents, such as board minutes or resolutions, existed in connection with the alleged wrongdoing KT4 Partners sought to investigate. In short, traditional, nonelectronic documents in connection with the alleged wrongdoing were nonexistent, and thus, emails through which Palantir Technologies acted in connection with the alleged wrongdoing were the only responsive documents available to accomplish the purpose of KT4 Partners. Accordingly, such emails were by definition necessary for production under Section 220.
Lastly, the Supreme Court invalidated the jurisdictional-use limitation imposed by the Delaware Court of Chancery that KT4 Partners could only use the documents produced in the 220 action in litigation in the Court of Chancery, or if the Court of Chancery declined jurisdiction, another state or federal court located in Delaware. Relying on its decision in United Technologies v. Treppel, 109 A.3d 553, 561 (Del. 2014), the Supreme Court cautioned that because Section 220 does not contain any statutory language restricting stockholders from using documents outside of Delaware, any jurisdictional-use restrictions on documents produced in a 220 action must be tied to case-specific factors.
In United Technologies, the plaintiff sought records in a 220 action to bring derivative claims for breach of fiduciary duties under Delaware corporate law, and in accordance with the forum selection provision in its organizational documents, defendant logically sought to limit the use of such records produced in the 220 action to litigation in the Court of Chancery. In contrast here, Palantir Technologies’ organizational documents did not contain a forum selection provision limiting suit to a particular jurisdiction, the agreements at issue contained California choice of law provisions, and thus a preference for a California court to address issues of California law made sense. Moreover, the party seeking the jurisdictional-use condition, Palantir Technologies, had already brought suit against KT4 Partners in California. Accordingly, the case-specific factors set forth by the Supreme Court in United Technologies did not support the jurisdictional-use limitation imposed by the Court of Chancery in this 220 action.
After the Delaware Supreme Court’s decision in KT4 Partners, the Court of Chancery will likely be more amenable to directing the production of emails necessary to accomplish a stockholder’s proper purpose in Section 220 books and records actions. To reduce the risk of having to produce emails in books-and-records actions, a company should adhere to traditional corporate record keeping practices to document corporate actions in board minutes, resolutions, written consents, or official letters. In KT4 Partners, the Supreme Court emphasized that if a corporation has traditional, nonelectronic documents sufficient to meet the needs or purpose of stockholders, “the corporation should not have to produce electronic documents.”
Delaware Business Court Insider / February 20, 2019