Last week’s Corporate Guide discussed one circumstance — in the context of stockholder litigation — where directors’ and officers’ emails may be requested and produced, a books and records demand under Section 220 of the Delaware General Corporation Law. While this Corporate Guide provides some explanation of books and records demands that is not the sole focus. Thus, please refer to last week’s Corporate Guide for more detail regarding demands under Section 220.
What is a books and records demand?
Under Delaware General Corporation Law Section 220, stockholders have the right to inspect corporate records. The philosophy underlying inspection rights is that “[a]s a matter of self-protection, the stockholder [is] entitled to know how his agents [are] conducting the affairs of the corporation…” Shaw v. Agri-Mark, Inc., 663 A.2d 464, 467 (Del. 1995).
What are the basic requirements of a books and records demand?
- The demanding party must be an owner of record or beneficial owner of the stock.
- The 220 demand must be written and under oath.
- The 220 demand must state a proper purpose.
- The books and records that are sought must be identified with rifled precision and be necessary and essential to the purpose stated. Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016) (quoting Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570 (Del. 1997); Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 371-72 (Del. 2011).
Do emails qualify as corporate records?
Usually, directors’ emails are not corporate records. Indeed, Delaware courts have held that emails and other electronic communications shall not be produced in response to demands under Section 220 when other materials (e.g., traditional board-level materials, such as minutes) would accomplish the petitioner’s proper purpose. KT4 Partners LLC v. Palantir Technologies Inc., 203 A.3d 738, 752-53 (Del. 2019). And board-level materials typically suffice when the board handles its work through typical corporate processes and the meeting minutes are sufficient to understand the board’s deliberation and analysis.
In what circumstances would emails and other electronic materials be considered corporate records?
For emails and other electronic materials to be considered corporate records, they must be necessary and essential to accomplishing the stockholder’s purpose. A stockholder’s chances of demonstrating that electronic communications are necessary and essential increase when:
- The board generally, or with respect to the specific issue to be probed, appears to conduct its corporate business over email and other electronic media.
- The alleged wrongdoing appears to have occurred over or have been memorialized in email.
- There is no evidence that other materials — particularly more formal, board-level documents — would be sufficient to accomplish the stockholder’s purpose.
The need for or entitlement to the electronic communications of directors and officers is bolstered upon a showing that the company tends to ignore corporate formalities, as was the case in KT4 Partners LLC v. Palantir Technologies Inc., 203 A.3d 738, 756 (Del. 2019), where the Delaware Supreme Court found that the stockholder was entitled to emails and other electronic materials because the corporation had a habit of failing to hold annual meetings. It is important to note that the stockholder does not need to show that the corporation acted only through electronic means.
Are there any circumstances (beyond books and records demands) where emails among directors and officers could be required to be produced and disclosed in litigation?
The short answer is yes!
It is not uncommon for an outside director of a company to also serve as an executive or director of another company. If an outside director sends or receives emails relating to company A via an email address belonging to or managed by company B, there could be a waiver of privilege that requires production in litigation.
One example of such a situation was In re WeWork Litig., 2020 WL 7624636 (Del. Ch. Dec. 22, 2020):
- SoftBank owned a significant portion of WeWork and entered into a stock purchase transaction, pursuant to which, SoftBank agreed to acquire additional WeWork stock.
- When the deal collapsed, WeWork and its minority stockholders sued, accusing SoftBank of breaching the transaction agreement.
- SoftBank owned approximately 84% of Sprint.
- SoftBank’s COO served as chairman for both Sprint and WeWork.
- Sprint’s CEO assisted SoftBank’s COO on matters related to WeWork.
- In discovery, WeWork sought documents and emails involving SoftBank’s in-house and outside counsel, regarding SoftBank’s business, which were sent to or from the Sprint email accounts for SoftBank’s COO and Sprint’s CEO.
- The court held that privilege over the emails was waived in large part, due to use of the Sprint email accounts and because the Sprint Code of Conduct stated: “[e]mployees should have no expectation of privacy in information they send, receive, access or store on any of Sprint’s computer systems or networks” and “Sprint reserves the right to review workplace communications (including but not limited to Internet activity, email, instant messages, social media or other electronic messages, computer storage and voicemail) . . . at any time.”
- Given the code of conduct, the court held that the officers had no expectation of privacy when conducting business unrelated to Sprint on Sprint’s email servers.
- Because the officers did not ensure the confidentiality of SoftBank’s privileged information, they waived privilege and the plaintiffs were entitled to the documents at issue.
How does my company protect emails and other electronic communications of directors and officers from production?
- Respect corporate formalities. When a company ignores corporate formalities, it is easier for a court to conclude that a company does not necessarily do its business at board meetings, and that emails or other materials are necessary to understand corporate decision-making.
- Do not use emails to do anything other than schedule board meetings and share board-level documents. Refrain from engaging in deliberation or analysis over email.
- Craft detailed and timely board minutes. The more pertinent information a company includes in or attaches to board minutes, the less likely courts are to give credence to the notion that emails and other electronic materials are necessary to investigate or understand corporate conduct.
- Be proactive and intentional about the types of information to include in the corporation’s books and records concerning a transaction or other corporate conduct. If a company’s records contain enough information to address a stockholder’s purpose for inspecting those records, courts are unlikely to allow stockholders to review anything else.
- Develop, maintain, and adhere to policies prohibiting the use of third-party emails to conduct corporate business. Even when using company-issued email addresses, limit the amount of deliberation and analysis that occurs over email regarding the corporation’s transaction or strategy.
- Use secure data portals. There are many commonly used board portals and email services that can be used to communicate sensitive information to directors and officers.