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Investor’s Desire to Criticize Proxy Contest Transactions Does Not Sustain Books and Records Request

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November 22, 2019
K. Tyler O'Connell

The Delaware Court of Chancery’s recent decision in High River Limited Partnership v. Occidental Petroleum, (Del. Ch. Nov. 14, 2019) considers whether a stockholder’s desire to investigate questionable—but not actionable—transactions and to communicate about them in an ongoing proxy contest constitutes a proper purpose to obtain books and records under 8 Del. C. Section 220. In denying the stockholder’s inspection request, Vice Chancellor Joseph R. Slights III acknowledged that the law is “murky” in this area, but reasoned that the court need not answer the question in the abstract, because the circumstances of this case counseled in favor of denying the inspection.

The Court’s Decision

The case arose out of the decision by defendant Occidental Petroleum Corp. (Occidental) to acquire Anadarko Petroleum Corp. in a $38 billion transaction (the transaction). To finance the cash portion of the purchase price, Occidental sold $10 billion in preferred stock to Berkshire Hathaway and agreed to sell Anadarko’s assets based in Africa to a third-party for $8.8 billion.

During these developments, Carl Icahn and his affiliated funds—who were the plaintiffs in the case—purchased over $1 billion in Occidental shares. In light of prevailing market conditions, the stockholder-plaintiffs were critical of Occidental’s decision to be a buyer, rather than a seller. They also took issue with the terms of the transaction and the related deals entered into to raise the needed cash. They initiated a proxy contest to elect directors. They also sought books and records under 8 Del. C. Section 220 to investigate these decisions in order to help them in the proxy contest, requesting all board materials—i.e., what the court described as “the journal of the board’s decision-making process with respect to all aspects of the Anadarko transaction.”

In a post-trial decision, the court first reasoned that, under existing Section 220 jurisprudence, the stockholder-plaintiffs lacked the requisite “credible basis to suspect” actionable wrongdoing in connection with the transaction. While the court emphasized that this is a low burden, the stockholder-plaintiffs did not allege that Occidental’s directors were “conflicted, disloyal or in some way interested in the transactions at issue.” Their allegations of mismanagement were “nothing more than disagreements with how Occidental’s directors exercised their business judgment.”  While they thought the transaction and related financings were bad for Occidental, a stockholder’s disagreement with the wisdom of business decisions was not, in itself, a reason to suspect wrongdoing.

The stockholder-plaintiffs otherwise “urge[d] the court to recognize a new, or at least expanded, rule that would allow a stockholder to inspect books and records relating to targeted, board-level business decisions that are questionable, but not actionable” in furtherance of a proxy contest. Surveying precedent, the court reasoned that “the law in this area is unsettled and could use some clarity.” The court continued to explain, however, that where documents sought “relate to a dispute with management about substantive business decisions, pleading an imminent proxy contest is not enough” to obtain (as the plaintiffs requested) all materials presented to the board. This was particularly so, the court reasoned, where the decisions at-issue are “subject to the business judgment rule, and the facts of record reveal that the plaintiffs already have what they need to fulfill their stated purpose.”

In that regard, the court also found that the non-public information sought was not “necessary and essential” to the proxy fight. The court reasoned the Transaction and related financings were widely-publicized and well-known to Occidental’s stockholders. “Indeed,” the court reasoned, the plaintiffs “have already made their assessment of the Board’s decision-making and have found it wanting.” Similarly, to the extent the stockholder-plaintiffs believed that Occidental should pursue a sale process, they did not need its internal records to make that case.

The court accordingly held that, while there may be a future decision that sustains an inspection request made to facilitate an ongoing proxy contest, this was not the “right case.” It accordingly denied the requested inspection.

Key Takeaways

The court’s decision reaffirms the fundamental tenet that, absent a credible basis to suspect wrongdoing, a stockholder has no right to investigate suspected poor business decisions, regardless of whether the party requesting inspection believes that the stockholders should have the opportunity to know of such information in connection with a proxy contest. The result is in accord with prior books and records decisions recognizing the issues that arise from requests to allow a stockholder to investigate and then publicly disseminate a corporation’s non-public information. At the same time, the court’s decision leaves open the possibility for a different result in future case, perhaps where the circumstances more strongly support the need for nonpublic information to make the case for change.

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