Delaware Court Provides Guidance for Books and Records Demands to Limit Producing Electronic Data to Stockholders

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

Section 220 of the Delaware General Corporation Law allows stockholders to inspect various books and records of a company upon showing a proper purpose for the request, among other statutory requirements. In this electronic era, often the most important question becomes when are emails and other electronic data subject to a books and records demand. On January 29, 2019, the Delaware Supreme Court, in KT4 Partners LLC v. Palantir Technologies Inc., No. 281, 2018, entered a decision that provides helpful guidance for any company wanting to minimize the risk of producing informal board and executive communications in a books and records demand.

The Delaware Supreme Court recognized that electronic communications can be subject to a books and records demand; however, the stockholder must present “some evidence that those documents are indeed necessary” for the stated purpose. Importantly, Delaware courts are instructed to only allow inspection of documents which are “essential and sufficient to the stockholder’s stated purpose.” As a result, whena corporation has traditional, non-electronic documents sufficient to satisfy the petitioner’s needs, the corporation should not have to produce electronic documents.” (emphasis added).

In KT4 Partners LLC, the company had a “history of not complying with required corporate formalities” and “conducted other corporate business informally, including over email.” As a result, the Delaware Supreme Court allowed the inspection of company emails, and it reversed the lower court’s decision to “deny[] wholesale [the stockholder’s] request to inspect emails.”

In allowing the inspection of the emails, the court observed that emails normally should not be produced in a limited and targeted books and records demand if “other materials (e.g., traditional board-level materials, such as minutes) would accomplish the petitioner’s proper purpose.” The court also stressed that a board should document “its actions through board minutes, resolutions, and official letters” to avoid producing informal electronic communications. However, if a company uses informal communications, such as emails, to “conduct formal corporate business,” the company “cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which § 220 entitles them.”

This case serves as a great reminder for companies that boards of directors should adequately memorialize their decisions through formal minutes and other traditional board documents in this age of electronic communications. Otherwise, the company might be required to produce informal board and executive communications—including the board’s emails, text messages, or other electronic data—along with the burdens associated with adequately searching for and producing such electronic data.

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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