Delaware Master Recommends Dismissing Books and Records Request by Activist Shareholder

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On August 16, 2013, a master in chancery issued a draft report recommending that the Delaware Chancery Court dismiss a request by an activist stockholder to inspect the books and records of a large corporation that produces and sells chocolate products. The report is notable because Delaware law gives stockholders wide latitude to inspect corporate books and records.

The stockholder, a large pension fund, stated in its inspection request that the company sourced a substantial amount of its cocoa beans from two West African countries where the use of child labor is widespread. According to the master, those facts were not in dispute. The report noted that the company had acknowledged publicly that child labor in West Africa is a major problem in the cocoa industry. Nevertheless, the company refused the stockholder's inspection request, which led to the proceeding in the Delaware Chancery Court.

Under Delaware law, a stockholder may inspect a corporation's books and records so long as the inspection is for a "proper purpose," which is defined as a purpose "reasonably related to such person's interest as a stockholder." 8 Del. Code Ann. §220(b). A proper purpose includes an investigation of possible corporate waste, mismanagement or wrongdoing. To obtain access to the corporation's books and records, a stockholder must provide "some evidence" to suggest a "credible basis" that there is mismanagement, waste or wrongdoing. See Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 118 (Del. 2006). The master's report noted that the "credible basis" standard has been described by the Delaware Chancery Court as the "lowest possible burden of proof" under Delaware law.

Despite this low pleading standard, the Delaware master concluded that, "[t]he stockholder failed to sustain its minimal burden of providing credible evidence from which the court may infer mismanagement or wrongdoing at [the company], rather than within the cocoa supply chain." The master's report explained that, "[a]t most, [the shareholder] has succeeded in alleging that [the company] purchases cocoa, directly or indirectly, from farms that utilize child labor," but the master found that there was no evidence that the company had violated foreign or domestic laws prohibiting the employment of children and human trafficking. The master also found that, "[h]aving failed to demonstrate any basis to infer illegal conduct, [the shareholder's] remaining allegations of mismanagement melt away" because there was no allegation of misconduct "outside the alleged violations of law."

The stockholder has notified the court that it will file exceptions to the report. After the briefing is complete, the master will issue a final report.

To view the master's report in Louisiana Mun. Police Employees' Ret. Sys. v. Hershey Co., No. 7996-ML (Del. Ch. Ct.), go to: http://www.delawarelitigation.com/files/2013/08/HersheyOp.pdf

Topics:  Books & Records, Corporate Governance, Corporate Records, Inspections, Shareholders, Supply Chain

Published In: Business Organization Updates, Civil Procedure Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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