Court Of Chancery Rejects Common Company Defenses To Stockholder Inspection Demands, Creating Split Of Authority Within Delaware

Morrison & Foerster LLP

Morrison & Foerster LLPOn January 13, 2020, the Delaware Court of Chancery (Laster, V.C.) ordered AmerisourceBergen Corp. to turn over formal board materials to stockholder plaintiffs regarding its compliance with laws and regulations relating to the distribution of controlled substances.[1] The stockholders sought to inspect AmerisourceBergen’s books and records pursuant to §220 of Delaware General Corporation Law. In so ordering, the court rejected AmerisourceBergen’s defenses to production, including the company’s contention that stockholder plaintiffs’ §220 demand had to satisfy a “purpose-plus-an-end” test or an “actionable-wrongdoing” requirement, as had been previously endorsed by other Delaware courts. Ultimately, the opinion did not change Delaware law on §220 books and records demands, but, based on a unique set of facts involving an area of intense political and judicial scrutiny, did reject attempts to impose on stockholders various heightened burdens, potentially creating a split of authority on the matter that may need to be resolved by the Delaware Supreme Court.


Since the mid-2000s, AmerisourceBergen has been a frequent target of government investigations and lawsuits concerning its practices and policies around detecting and preventing the diversion of controlled substances like opioids for improper uses.

On May 21, 2019, AmerisourceBergen stockholders made a §220 demand for inspection of books and records, which sought board and board committee materials that would aid their investigation into whether the company’s directors and officers had committed mismanagement or breached their fiduciary duties in connection with the distribution of opioids. AmerisourceBergen refused the demand in its entirety, arguing that the stockholder did not state a “proper purpose” for the demand as required by §220. Moreover, AmerisourceBergen contended that the stockholders did not have a “credible basis” to suspect any wrongdoing on the part of the company’s directors or officers and that the scope of their demand was “overly broad.” On July 8, 2019, the stockholders filed an action pursuant to §220 in the Delaware Court of Chancery to compel AmerisourceBergen to produce the requested documents.

Court of Chancery Opinion

Plaintiffs’ Credible Basis to Infer Wrongdoing

The Court of Chancery held that the stockholder plaintiffs had shown by a preponderance of the evidence that there is a credible basis to infer possible wrongdoing by AmerisourceBergen, thereby demonstrating a “proper purpose” for their books and records inspection demand. In support of its ruling, the court noted the flood of government investigations and lawsuits related to AmerisourceBergen’s opioid-distribution practices. In response, AmerisourceBergen argued that these other proceedings did not establish a credible basis to infer wrongdoing because the investigations and lawsuits were directed at the entire pharmaceutical industry, not merely AmerisourceBergen. The court was unconvinced, commenting that “‘everyone else is doing it’ is rarely a persuasive response” and recognizing that many of the investigations and lawsuits discussed AmerisourceBergen’s practices in particular and how they differed from those of industry competitors.

The court reasoned that stockholder plaintiffs did not approach AmerisourceBergen as part of an “indiscriminate fishing expedition.” Instead, plaintiffs pointed to strong circumstantial evidence that AmerisourceBergen knew or should have known that its compliance efforts were inadequate and opioid products were being diverted for illegal uses. This in turn gave stockholder plaintiffs a credible basis to suspect a possible violation of law. In addition, AmerisourceBergen had suffered a significant corporate trauma, as evidenced by its offer to settle a pending multidistrict litigation for $10 billion and analysts’ estimates that a global settlement could cost as much as $100 billion. The court reasoned that all of these facts taken together showed a “proper purpose” for inspecting AmerisourceBergen’s books and records under §220.

Merits-Based Defenses

AmerisourceBergen argued that a stockholder who seeks to investigate corporate wrongdoing must state up front what it plans to do with the fruits of that investigation. AmerisourceBergen cited a line of Delaware cases that discussed this “purpose-plus-an-end” test. In rejecting AmerisourceBergen’s arguments, the court reasoned that Section 220 requires only that stockholders state a proper purpose for the requested inspection and that there is no express requirement that stockholders state precisely what they will do once they receive the requested documents.

AmerisourceBergen also argued that the stockholder plaintiffs failed to present evidence demonstrating a “credible basis” to suspect actionable wrongdoing on the part of the board of directors, as required by numerous Delaware cases interpreting §220. The court rejected AmerisourceBergen’s position. First, it noted that stockholder plaintiffs were not limited to bringing a failure-of-oversight claim (i.e. a Caremark claim) against the board and that they could use the results of their books and record inspection to seek changes at the company or pursue other non-litigation remedies. Second, the court reasoned that a requirement stockholders show “actionable wrongdoing” would impose an onerous burden on stockholders and run contrary to the teaching of other Delaware cases where courts encouraged prospective derivative plaintiffs to use §220 to develop the facts necessary to plead an actionable claim before pursuing litigation.

AmerisourceBergen argued that the stockholder plaintiffs were not entitled to inspect books and records because the company had an exculpatory provision in its certificate of incorporation and there was not enough evidence presented to support an inference of a non-exculpated claim. The Court of Chancery rejected this argument because stockholder plaintiffs were free to use the fruits of their investigation for other non-litigation purposes. It also concluded that the stockholder plaintiffs’ investigation could potentially uncover non-exculpated claims, such as a knowing failure to monitor or other breach of the duty of loyalty.

Finally, AmerisourceBergen argued that the stockholder plaintiffs lacked a proper purpose in bringing their §220 books and records demand because any claims they could bring based on the information sought would be time-barred. As with the other defenses, the court reiterated that stockholder plaintiffs were not limited to pursuing derivative litigation.The court also stated that it was not clear based on the §220 trial record that the stockholder plaintiffs’ claims would necessarily be timed-barred.

Scope of Inspection

AmerisourceBergen also challenged the scope of stockholder plaintiffs’ §220 books and records demand. Notably, during the limited fact discovery allowed by §220, AmerisourceBergen refused to provide information about what types of records it maintains and who has them. AmerisourceBergen relied on KT4 Partners LLC v. Palantir Techs. Inc.,[2] for the proposition that a plaintiff in a §220 proceeding may not obtain discovery into what types of books and records a corporation may or may not have.

The Court of Chancery in AmeriscourceBergen declined to interpret Palantir as establishing a bright-line rule regarding permissible discovery in a §220 action that would run contrary to Delaware’s traditional, case-by-case approach to §220 proceedings. Instead, the Court of Chancery held that these stockholder plaintiffs had shown that they were entitled to at least AmerisourceBergen’s formal board documents. In order to ascertain what other types of books and records exist and who has them, the court allowed stockholder plaintiffs to conduct a Rule 30(b)(6) deposition so that they could make the determination of whether they also needed other documents, such as informal board materials or officer-level documents.

Key Takeaways

Ultimately, the court ordered AmerisourceBergen to produce formal board documents requested by stockholder plaintiffs because their §220 books and records demand presented a credible basis to suspect mismanagement or wrongdoing by the company in connection with its compliance with laws and regulations relating to the distribution of controlled substances like opioids. The opinion is most notable for declining to apply certain potential defenses based on prior Delaware cases that imposed more stringent parameters around the requirement that stockholders state a “proper purpose” when making a §220 demand. As a result, this decision represents a potential split of authority that may ultimately need to be resolved by the Delaware Supreme Court. It is important to note, however, that the court’s opinion was supported by robust evidence concerning high-profile, long-running government investigations and lawsuits related to AmerisourceBergen’s role in the opioid crisis. This level of unfavorable, publicly available information about a topic of national concern is unusual and unlikely to be the norm going forward. But the court’s reliance primarily on the existence of related government proceedings in holding that a stockholder had stated a “proper purpose” is something companies should discuss with experienced counsel when determining how to respond to a stockholder’s §220 demand.

[1] Lebanon Cty. Emp. Ret. Fund v. AmerisourceBergen Corp., No. CV 2019-0527-JTL, 2020 WL 132752 (Del. Ch. Jan. 13, 2020).

[2] 203 A.3d 738 (Del. 2019)

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