Section 220 of the Delaware General Corporation Law permits a stockholder to inspect corporate books and records for a “proper purpose” reasonably related to her interests as a stockholder. In AmerisourceBergen Corp. v. Lebanon Cty. Employees’ Ret. Fund, __ A.3d __, 2020 WL 7266362 (Del. Dec. 10, 2020), the Delaware Supreme Court held that a stockholder who has a “credible basis” to investigate potential wrongdoing or mismanagement need not identify a specific intended use or “end” for the information requested. In addition, the Court clarified that a stockholder need not show, as a matter of law, that the potential wrongdoing is actionable. Rather, a “credible basis” to suspect possible wrongdoing or mismanagement is sufficient.
Stockholder-plaintiffs of AmerisourceBergen Corporation (the “Company”), one of the nation’s largest distributors of prescription opioids, sought to inspect its books and records pursuant to 8 Del. C. § 220. The stockholder-plaintiffs wished to investigate potential wrongdoing or mismanagement relating to the Company’s alleged out-sized role in the opioid epidemic. Reports of government investigations and pending lawsuits alleged that the Company failed to comply with federal regulations by, inter alia, continuing to do business with suspicious pharmacies and failing to report suspicious orders to regulators. Over 1,500 civil lawsuits were then pending against the Company, with defense costs totaling over $1 billion, and the plaintiffs in those actions having rejected a $10 billion settlement offer. Analysts predicted that the Company may have to pay $100 billion to reach a global settlement.
The stockholder-plaintiffs sought books and records, with their demand letter (“Demand”) indicating purposes of investigating potential wrongdoing or mismanagement to enable them to “consider any remedies that may be sought” and to “evaluate litigation or other corrective measures[.]” Before the Court of Chancery, the Company argued that the stockholder-plaintiffs failed to sustain their burden to show a “proper purpose” because the Demand failed to specify the ultimate intended use of the documents or information sought. The Company also argued that a stockholder seeking to investigate potential wrongdoing must identify actionable wrongdoing, which the stockholder-plaintiffs allegedly could not due because their potential claims would be time-barred, and supposedly because the Company’s directors were independent and would be entitled to exculpation.
After a trial on a paper record, the Court of Chancery ruled for the stockholder-plaintiffs and rejected the Company’s arguments that they lacked a proper purpose. With regard to the relief granted, in the first instance, the Court of Chancery granted an inspection of formal board-level documents and a Rule 30(b)(6) deposition of the Company to determine what, if any, additional responsive documents existed, following which the stockholder-plaintiffs could request that the Court order a production of additional documents.
The Supreme Court's Decision
Although the Court of Chancery’s post-trial decision did not involve a final order, the Delaware Supreme Court accepted the Company’s interlocutory appeal, which it found raised substantial issues of material importance relating to the statutory “proper purpose” requirement and the scope of the Court of Chancery’s remedial discretion.
Addressing the matter en banc, the Delaware Supreme Court affirmed the Court of Chancery’s decision in all respects. The Court first confirmed that a stockholder seeking to investigate potential wrongdoing or mismanagement need not specify the intended uses of any documents requested in her demand. Some venerable precedent supported that a stockholder seeking stocklist materials must disclose the use – i.e., the types of communications – intended. See Northwest Indus. Inc. v. B.F. Goodrich Co., 260 A.2d 428 (Del. 1969). The Supreme Court reasoned that this rule made sense in the context of a request for stocklist materials, where it was necessary to assess the propriety of the purpose. It is inapt, however, when the purpose is to investigate potential wrongdoing, where precedent recognizes that permitting an inspection upon the requisite showing of a “credible basis” serves the interests of all stockholders. Defendant-corporations remain able to inquire into the stockholder’s purposes and any intended use, and the Court of Chancery remains able to find the facts concerning such issues – all of which may inform the “proper purpose” inquiry. A stockholder, however, need not know the specific “ends” of the inspection, provided that she has a “credible basis” to suspect possible wrongdoing.
Regarding the Company’s alternative argument – that a stockholder must identify a basis to suspect actionable wrongdoing that may be remedied by litigation – the Delaware Supreme Court reasoned that the Demand properly asserted non-litigation purposes, which rendered it unnecessary to address the issue. But, to provide clarity in this area, the Supreme Court further explained: “we have stated that a stockholder is not required to prove that wrongdoing occurred, only that there is possible mismanagement that would warrant further investigation.” Id. at *9 (internal quotation omitted). The Court reasoned that this approach struck the appropriate “balance” between stockholders’ informational rights and the rights of directors to manage the corporation without undue interference. It also was consistent with the intended “summary” nature of books and records proceedings to avoid evaluating merits-based defenses over the conduct stockholders seek to investigate. On the other hand, the Delaware Supreme Court reasoned that, in the rare case where bringing litigation is the sole purpose for a demand and such litigation would be barred due to an “insurmountable procedural hurdle,” the Court of Chancery remains able to deny an inspection. However, courts applying Section 220 generally should “defer the consideration of defenses that do not directly bear on the stockholder’s inspection rights, but only on the likelihood that the stockholder might prevail in another action.” The Delaware Supreme Court accordingly held “[t]o obtain books and records, a stockholder must show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement or wrongdoing warranting further investigation. The stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable.”
The AmerisourceBergen decision confirms that, if she has the requisite “credible basis” to suspect mismanagement or wrongdoing, a stockholder genuinely seeking to investigate such issues will have the necessary “proper purpose.” The Delaware Supreme Court’s decision makes clear that a stockholder need not know exactly how she will use the fruits of the investigation, and her use is not per se limited to pursuing actionable wrongdoing. Indeed, a stockholder seeking books and records may envision non-litigation purposes. The Delaware Supreme Court’s clarifications in this regard limit a defendant-corporation’s ability to made similar arguments to avoid or diminish its obligations in response to an otherwise proper books and records demand.
Delaware Business Court Insider l December 17, 2020