Corporate books and records demands are on the rise. And as the Delaware courts have made it easier for shareholders to demonstrate a proper purpose to seek inspection, corporations increasingly must defend these actions by challenging the scope of documents that may be sought. One category of books and records that has been the subject of much litigation over the past several years has been whether shareholders are entitled to informal board- and officer-level materials, such as emails and text messages. While all cases are fact specific, until recently, Delaware courts seemed to be heading in the direction of more liberally granting inspection of informal materials. But two decisions this summer (Amazon and National) may have put the brakes on this trend and may serve to protect against future shareholder demands that reach too far.
Informal Materials Were Becoming Easier to Obtain
In any Section 220 demand, once shareholders satisfy the procedural requirements of the statute, such as showing standing and certain oath requirements, and show a proper purpose for the demand, such as evaluating the possibility of initiating a shareholder derivative lawsuit, the focus then turns to whether the documents they seek are “necessary and essential” to achieving their purposes. And once a shareholder has what is sufficient for her investigation, inspection should stop. Courts start with ordering the production of formal board materials, but if these materials are insufficient, courts may also allow inspection of informal board materials. If those are still not sufficient, courts may extend inspection to officer-level documents.
In recent years, courts have demonstrated a greater willingness to allow access to informal board materials, more frequently finding that formal board materials alone are insufficient. In 2019, the Delaware Supreme Court held that a trial court abused its discretion in not allowing a shareholder access to emails because the company had a history of not complying with required corporate formalities and had conducted corporate business informally in connection with the alleged wrongdoing. KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738 (Del. 2019) (Palantir). The court left the door open for other corporate defendants to resist inspection of emails and other electronic communications if they could show that traditional, non-electronic documents were sufficient to satisfy the shareholder’s needs. But many of the cases that followed continued to require the production of informal communications.
For example, in Bucks County Employees Retirement Fund v. CBS Corporation, 2019 WL 6311106 (Del. Ch. Nov. 25, 2019), the Court of Chancery permitted shareholders to access emails between a controlling shareholder and certain directors before and after a critical committee meeting. In Employees’ Retirement System of Rhode Island v. Facebook, 2021 WL 529439 (Del. Ch. Feb. 10, 2021), the Court of Chancery ordered Facebook to produce emails and text messages between board members concerning a settlement with the Federal Trade Commission over data privacy breaches, finding that formal materials only revealed surface-level facts about Facebook’s negotiations and that the board regularly used informal communication methods to discuss the settlement.
Relatedly, the Court of Chancery in Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020) allowed inspection of some emails, noting that “wide-ranging mismanagement or waste” might require a “more wide-ranging inspection.” That case thus indicated that the scope of the alleged wrongdoing may affect the scope of the production. More recently, in a case that was tried before and nowhere cites to Amazon and National, the Court of Chancery allowed a limited email production after the formal board materials that were produced (consisting solely of board minutes) revealed serious inconsistencies between the company’s publicly-filed proxy and the board minutes relating to key events in the company’s sales process negotiations. See Loren Trent Hightower v. SharpSpring, Inc., 2022 WL 3970155 (Del. Ch. Aug. 31, 2022) (“inconsistencies provided Plaintiff the foothold to argue for a broader inspection”). And finally, in Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corporation, 2019 WL 479082 (Del. Ch. Jan. 25, 2019) (Calgon), which actually predated Palantir by four days, the Court of Chancery appeared to take things even further, requiring production of electronic communications even without finding that the board did not maintain traditional formalities or noting that wrongdoing was vast. In Calgon, the plaintiff sought to investigate merger communications between the company’s management and third parties to determine if management prioritized their own retention and compensation over the interests of shareholders. The company had produced no documents, formal or otherwise, in advance of the trial, however, and Vice Chancellor Zurn noted that the “nature of those communications mean[t] that the [plaintiff was] unlikely to uncover any meaningful answers in more traditional, formal books and records, like minutes or letters between the companies.”
In sum, and though not all the cases since Palantir have awarded inspection of informal materials, these cases thus suggested a shift toward a more liberal approach to the scope of inspection.
Amazon and National Buck the Trend
Two cases from 2022 may have slowed the momentum toward requiring production of informal documents. In June, Vice Chancellor Will, in Oklahoma Firefighters Pension & Retirement System v. Amazon.com, Inc., 2022 WL 1760618 (Del. Ch. Jun. 1, 2022) (Amazon), refused to require the production of several categories of documents spanning multiple years and including informal communications because the company, Amazon, had already produced sufficient formal board-level documents. Specifically, Amazon had produced minutes, agendas and other board materials. The court noted the plaintiff did not introduce evidence of “atypical circumstances necessitating a broader inspection” such as that the company did not “honor traditional corporate formalities” or that “‘traditional materials, such as board resolutions or minutes’ were wanting.” The court also pointed to the lack of “wide-ranging mismanagement providing grounds for an inspection of investigation-related documents not reviewed by the board.” The court in Amazon thus derived guideposts from prior cases, cabining inspection when formal materials were plentiful and alleged wrongdoing was limited.
Soon after, in July, Vice Chancellor Zurn applied Amazon’s framework in Frank v. National Holdings Corporation, C.A. No. 2021-0160-MTZ (Del. Ch. Jul. 22, 2022) (National) (Transcript ruling). The shareholder in National sought to investigate the company’s recent merger and whether management improperly interfered with merger negotiations in order to secure benefits for themselves, similar to the allegations by the plaintiff in Calgon. Both before and after the plaintiff filed his complaint seeking several categories of formal and informal documents, the company produced formal board-level materials and a small number of emails that had been specifically identified in the company’s Securities and Exchange Commission filings. But the plaintiff argued that unanswered questions remained, and that he could not trust that the formal materials were complete. He thus demanded an additional 18 categories of documents, at least 16 of which sought either board- or management-level communications. V.C. Zurn, who had previously awarded informal communications in Calgon, rejected the plaintiff’s justifications after a bench trial: “I believe [the plaintiff]’s position is that so long as he has questions that are left unanswered, or rocks he has not overturned, he is entitled to more. That is not our law, particularly in the context of board and management communications.” Relying on the factors described by the court in Amazon, the court noted that detailed public records related to the merger existed, “extensive and sufficient formal materials and minutes were produced,” and the plaintiff did not show that these materials were deficient or incomplete, or that the board communicated informally in ways that were not documented in those minutes. Additionally, similar to the court in Amazon, the court noted that this case presented no “vast wrongdoing tainting the entire enterprise” nor “extreme facts,” but rather that the facts were “commonplace, not atypical: A stockholder wishe[d] to investigate why his board entered into the tender offer at the price it did.” V.C. Zurn distinguished her earlier decision in Calgon by noting that in that case, the corporation had not produced any documents, whereas in National, the company had already made a substantial production and the plaintiff had the opportunity to demonstrate that formal board materials were deficient, which he failed to do.
Scope of Section 220 Going Forward
The Court of Chancery’s recent decisions in National and Amazon provide helpful guidance to corporations seeking to limit the scope of inspection in books and records requests. They make it clear that formal board materials alone can still be sufficient for a shareholder’s purpose.
National and Amazon also provide lessons to defendants on how best to respond to demands when the shareholder has complied with Section 220 and has stated a proper purpose, suggesting that the Delaware courts appreciate when defendant corporations make an effort to satisfy demands with detailed formal materials when they exist, rather than rejecting demands outright. In fact, the court commended the defendants for doing so in Amazon and V.C. Zurn in National distinguished her own precedent on this point, as noted above. Finally, National suggests that in the M&A context in particular, the production of informal communications should not be ordered absent atypical circumstances and again assuming the other requirements of Section 220 are otherwise satisfied. In that context, detailed formal documentation is likely to exist in the form of both board minutes and public filings, like proxy statements, and should often be sufficient so long as this documentation is not inconsistent with itself in some material way. Under those circumstances, only if traditional corporate formal processes were not observed in the first place should informal communications be considered for production.
Ultimately, while requests for informal materials certainly are not going away, corporations are now in a stronger position to beat them back in negotiations and, if necessary, in the courtroom.
