Delaware Supreme Court Clarifies Scope of Relief A Shareholder Is Entitled For Inspection Of Corporate Books And Records Pursuant To A Section 220 Demand

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In Espinoza v. Hewlett-Packard Co., No. 208, 2011 WL 5838882 (Del. Nov. 21, 2011), the Delaware Supreme Court held that shareholders seeking inspection of corporate books and records under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220 (“Section 220”), must demonstrate that the records sought are “essential” to the “articulated purpose for the inspection.” In so holding, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s holding that a report prepared in connection with an internal investigation into sexual harassment allegations made against Hewlett- Packard’s (“HP”) former Chief Executive Officer was not “essential” to plaintiff’s “articulated purpose for the inspection.” The decision provides insight into the limits of corporate documents a shareholder may obtain pursuant to a Section 220 demand and the proper legal analysis for determining whether a shareholder is within his or her right to inspect such documents.

The action centered around the resignation of HP’s former chief executive officer, Mark Hurd (“Hurd”). On or about June 29, 2010, HP received a letter claiming that Hurd had sexually harassed a female contractor over the two-year period. The letter threatened legal action against both Hurd and HP. Thereafter, the HP Board began an internal investigation of the allegations. The Board was presented with a report by independent counsel retained to investigate the matter (the “Covington Report”), which contained interim factual findings and analysis arising out of the investigation. One week later, on August 5, 2010, Hurd reached a confidential settlement with the former contractor. The following day, HP announced Hurd’s departure from HP. In that announcement, the Board explained that although its internal investigation did not show that Hurd had committed sexual harassment, the investigation did reveal that Hurd had breached HP’s Standards of Business Conduct. The Board did not terminate Hurd “for cause.” Instead, the Board approved a separation agreement under which Hurd received, among other benefits, severance payments estimated as worth over $30 million.

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