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Court of Chancery Permits Section 220 Inspection, Notwithstanding Attorneys’ Heavy Involvement in Crafting Demand

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April 29, 2021
Delaware Business Court Insider

Lewis H. LazarusSection 220 of the DGCL enables a stockholder to obtain limited corporate information if they can state a proper purpose. Although in theory straightforward, Section 220 has spawned a “sprawling . . . jurisprudence” as stockholders test the breadth of their demands and correspondingly, corporations test the bounds of their defenses. See Wilkinson v. A. Schulman, Inc., C.A. No. 2017-0138-VCL, slip op. at 3 (Del. Ch. Nov. 13, 2017). Recently, Gross v. Biogen Inc., C.A. No. 2020-0096-PAF (Del. Ch. Apr. 14, 2021) presented the Court of Chancery with the question of how heavily may a stockholder rely upon counsel in seeking corporate books and records under Section 220?

Background

Gross, a stockholder, read a newspaper article indicating that Biogen had been implicated in an alleged Medicare kickback scheme, and Gross sought advice of counsel. Through counsel, Gross issued several demands to inspect Biogen’s books and records. Each time, Biogen rejected inspection. In his ultimate request, Gross sought to investigate possible breaches of fiduciary duty related to the alleged kickback scheme and to investigate the board’s independence relating to the scheme.

After Biogen again rejected inspection, Gross sued. Discovery indicated that Gross was aware of — and agreed with — the general contents of the demand and the Verified Complaint, but Gross was not involved in drafting or answering written discovery. Biogen relied heavily upon Wilkinson for its defense. In that case, the Court of Chancery denied inspection where the demand did not reflect the stockholder’s actual purpose, the stockholder was unaware of facts supporting the stated purpose, and the stockholder was uninvolved in the subsequent litigation. By analogy, Biogen asserted that Gross lacked a proper purpose because the stated purposes for inspection belonged to Gross’s counsel rather than Gross and because Gross let his counsel take the lead in the litigation.

Court of Chancery Rejects Biogen’s Wilkinson Defense

After trial, the Court rejected what it characterized as Biogen’s “overly aggressive defense strategy.” Gross at 5 (citation omitted). Drawing direct parallels to other recent cases, the Court rejected Biogen’s Wilkinson defense.Eric R. Hacker Wilkinson, the Court reiterated, was an “extreme case” where the plaintiff “simply lent his name to a lawyer-driven effort” in which the attorney-drafted demand differed substantially from the plaintiff’s actual investigatory purpose. Id. at *6 (quotation omitted). Going further, the Court noted that “every written decision from [the Court of Chancery] that has discussed Wilkinson has distinguished Wilkinson on its extreme facts.” Id. at 6 & n. 62. See, e.g., Pettry v. Gilead Sciences, Inc., C.A. Nos. 2020-0132-KSJM, 2020-0155-KSJM, 2020-0173-KSJM at 2 (Del. Ch. Nov. 24, 2020); Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corp., C.A. No. 2017-0910-MTZ (Del. Ch. Jan. 25, 2019), aff’d, 237 A.3d 818 (Del. 2020).

In the Court’s view, the facts in Gross were similarly distinguishable. Gross initiated the process, every demand reflected Gross’s actual purpose, and Gross understood the contents of the Verified Complaint, even if he did not read every word. That Plaintiff heavily relied on counsel did not make his purpose improper. To the contrary, Section 220 permits a stockholder to make a demand “in person or by attorney or other agent,” and Gross’s heavy reliance on his attorneys neither “undermine[d] his legitimate concern” nor “his right to use counsel to investigate that concern.” Gross at 7.

Court of Chancery Finds A Proper Purpose, Permits Limited Inspection of Biogen’s Books and Records

Having rejected Biogen’s Wilkinson defense, the Court concluded that Gross’s stated purposes were proper. Gross had a credible basis to suspect wrongdoing and mismanagement given the low evidentiary bar and the ongoing governmental investigation. And Gross was not required to demonstrate that the suspected wrongdoing was actionable because Gross’s purpose was not solely to pursue litigation. Similarly, Plaintiff was also entitled to investigate director independence since that issue bore on whether the board could properly evaluate a demand to pursue claims related to mismanagement or wrongdoing. For these reasons, the Court permitted Plaintiff to inspect Biogen’s books and records, although the Court limited the scope of the inspection.

Key Takeaways

As it has in several recent cases, the Court in Gross re-affirms that it will not easily deny a stockholder’s Section 220 rights merely because the stockholder relied heavily upon advice and assistance of counsel. The Court continues to view the Wilkinson decision as limited to its extreme facts. A stockholder whose demand reflects their actual purpose and whose purpose is proper likely will be able to obtain books and records, notwithstanding substantial reliance upon their chosen counsel in drafting the demand and a Section 220 complaint and in crafting written discovery.

Delaware Business Court Insider l April 28, 2021 

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