Page 21 - Delaware Lawyer - Winter 2020

One practical result of decisions per- mitting plaintiffs to obtain merger-re- lated documents under Section 220 is a departure from long-standing precedent that required plaintiffs to demonstrate a colorable claim or to withstand a motion to dismiss before obtaining discovery re- lating to a deal. As the Court of Chancery recently reiterated, “[t]he ‘credible basis’ standard applicable in [a] Section 220 ac- tion imposes the lowest burden of proof known in our law,” simply asking whether “the stockholder presented ‘some evi- dence’ to support an inference of wrong- doing.”6 That standard was developed at a time when Section 220 demands were used primarily in the derivative context to satisfy the stringent burdens of plead- ing particularized facts to demonstrate demand futility, thus justifying the stock- holder’s usurpation of the board of direc- tors’ inherent authority to control litiga- tion. Similar policy considerations argu- ably are not implicated in the class action merger context, but the law nevertheless has shifted to permit access to documents for the purpose of investigating wrongdo- ing in connection with a merger where stockholders formerly were required, at a minimum, to demonstrate a colorable claim before accessing discovery.7
Another general development, in the merger context and beyond, is that books- and-records demands now frequently seek not only formal board materials, such as minutes and presentations, but also elec- tronic communications, such as emails and text messages from personal accounts and devices. As a result, in a number of recent cases, Delaware courts have been forced to grapple with the types of elec- tronic documents, including communica- tions, that constitute corporate records and are required to be produced in re- sponse to a Section 220 demand. Recent decisions have also addressed the confi- dential status of documents produced in response to books-and-records requests and the proper purposes for obtaining books and records.
Accessing Electronic Communications: Pre-Litigation Discovery or Corporate Records?
Delaware courts have continued to clarify when certain types of electronic
One general development is that books-and-records demands now frequently seek not only formal board materials, such as minutes and presentations, but also electronic communications, such as emails and text messages from personal accounts and devices.
documents should be made available to a stockholder or director in response to a Section 220 demand. Specifically, a num- ber of recent cases address whether re- quests for emails from personal accounts and text messages stored on personal de- vices are properly within the scope of Sec- tion 220.
In Schnatter v. Papa John’s Internation- al, Inc.,8 the Court of Chancery granted a Section 220 demand made by the com- pany’s founder-director, ordering the company’s directors, CEO and general counsel to produce emails and text mes- sages from their personal accounts and devices. In reaching its decision, the court rejected a bright-line rule that such elec- tronic communications are not subject to production under Section 220, explaining that the scope of production pursuant to a Section 220 demand must be evaluated on a case-by-case basis.
Weeks later, in KT4 Partners LLC v. Palantir Technologies Inc.,9 the Delaware
Supreme Court ordered a company to produce electronic communications in response to a Section 220 demand. The court held that an order limited to formal board documents was insufficient because the plaintiff presented evidence that the company “conduct[ed] its corporate busi- ness informally over email and other elec- tronic media,” instead of through “more traditional means,” such as board meet- ing materials and minutes. The court further explained that production of elec- tronic communications was appropriate because the corporation failed to proffer “any evidence that other materials would be sufficient” to accomplish the plaintiff’s purpose. However, in so ruling, the court noted that a corporation should not be required to produce electronic communi- cations if other materials, such as board meeting minutes, exist and would accom- plish the petitioner’s proper purpose.
By contrast, in Lebanon County Em- ployees’ Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan v. AmerisourceBergen Corporation,10 the Court of Chancery limited the scope of production pursuant to a Section 220 demand to “formal board materials.” The court explained that “board-level docu- ments that formally evidence the direc- tors’ deliberations” are “[t]he starting point (and often the ending point) for an adequate inspection” under Section 220, and that a plaintiff must first make a “proper showing” to then access informal board materials such as “emails and other types of communication sent among the directors themselves.” Although the court found that the stockholder plaintiffs did not make such a showing, and therefore were not entitled to informal board ma- terials, it permitted the plaintiffs to take limited discovery into how the company maintained its books and records.
Other recent rulings — In re Facebook, Inc. Section 220 Litigation,11 Bucks Coun- ty Employees Retirement Fund v. CBS Cor- poration,12 and Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corpora- tion13 — have ordered the production of electronic communications in response to Section 220 demands. These cases fur- ther illustrate the Court of Chancery’s
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