Page 22 - Delaware Lawyer - Winter 2020

FEATURE
willingness to order the production of electronic communications where board members acted informally through such means. While the types of documents stockholders are entitled to access have, in appropriate circumstances, expanded, the core inquiry — whether the docu- ments are “necessary and essential” to achieve the stockholder’s purpose — re- mains the same. These rulings therefore suggest that electronic communications may properly be within the scope of Sec- tion 220 to the limited extent that they are not duplicative of information avail- able through traditional sources, such as formal board materials and minutes.
No Presumption of Confidentiality for Books-and-Records Inspections
In Tiger v. Boast Apparel, Inc.,14 the Delaware Supreme Court recently of- fered guidance on the confidential status of documents produced in a Section 220 action, holding that there is “no presump- tion of confidentiality in Section 220 pro- ductions.” The plaintiff in the case filed its complaint after making two books-and- records demands, both of which the com- pany rejected because the parties were un- able to negotiate a confidentiality agree- ment. The Court of Chancery imposed an “indefinite confidentiality period” lasting up to and until the plaintiff filed suit based on facts learned through his inspection, and the plaintiff appealed. On appeal, the Delaware Supreme Court upheld the confidentiality order, clarifying that “the Court of Chancery may — and typically does — condition Section 220 inspections on the entry of a reasonable confidentiality order,” but such inspections are “not sub- ject to a presumption of confidentiality.” The court further explained that in order to determine the degree and duration of confidentiality, the Court of Chancery must “assess and compare benefits and harms” and “cannot conclude reflexively that the need [for confidentiality] is read- ily apparent” in every case. The Supreme Court remanded the case, instructing the Court of Chancery to make “specific find- ings” as to whether the documents are confidential.
Following this precedent, in Kosinski v. GGP Inc.,15 the Court of Chancery or-
As deal litigation in Delaware has changed over the past decade, stockholder demands to inspect corporate books and records pursuant to Section 220 have proliferated.
dered inspection, but declined to address whether the documents sought should be subject to reasonable confidentiality restrictions, explaining that “this Court does not presume that they should be” and instructing the parties to confer re- garding confidentiality.
Developments Regarding ‘Proper Purposes’
Section 220 permits stockholders and directors of Delaware corporations to in- spect books and records only where they have identified a “proper purpose” for doing so.16 Accordingly, whether a stock- holder’s purpose for seeking documents is proper is often a focus in books-and- records litigation.
For example, in Lebanon County, the Court of Chancery ordered the produc- tion of books and records sought for the “well-established” purpose of investigat- ing wrongdoing or mismanagement by the company’s directors and officers. The plaintiffs’ demand followed “a flood of government investigations and lawsuits” related to the company’s role in “a matter of national significance.” In holding that the plaintiffs had established a credible basis to support their demand, the court explained that “[o]ngoing investigations and lawsuits can provide the necessary
evidentiary basis to suspect wrongdoing or mismanagement warranting further investigation.” In addition, the court re- jected the company’s argument that the plaintiffs’ purpose was confined to inves- tigating claims “with the sole objective of bringing litigation,” explaining that under Section 220 “a stockholder need not both articulate a proper purpose” and “commit in advance to the ends to which it will put the books and records.”
In another recent case, High River Limited Partnership v. Occidental Petro- leum Corporation,17 the Court of Chan- cery rejected a novel purpose for pursu- ing books and records, refusing to permit affiliates of activist investor Carl Icahn to inspect corporate documents for use in a proxy contest to replace members of Occi- dental’s board of directors. The court de- clined to “recognize a new rule entitling stockholders to inspect documents under Section 220 if they can show a credible basis that the information sought would be material in the prosecution of a proxy contest,” as opposed to another proper purpose, such as the investigation of cor- porate wrongdoing or mismanagement. In addition, the court held that “a fish- ing expedition into the boardroom” was not “necessary and essential” to the plain- tiffs’ stated purpose because the plaintiffs sought documents related to transactions that already had been “widely publicized.” The decision is currently on appeal. Conclusion
As deal litigation in Delaware has changed over the past decade, stockholder demands to inspect corporate books and records pursuant to Section 220 have pro- liferated, not only for use in drafting de- rivative complaints, but also as a means of back-door discovery to aid in challenging mergers and other corporate transactions. With the mounting frequency of Section 220 demands, Delaware courts have clari- fied the types of documents, including electronic communications, that consti- tute corporate records and are required to be produced. Equally instructive are recent decisions addressing other Sec- tion 220 issues, such as confidentiality in books-and-records productions and, per- haps most essentially, proper purposes for obtaining books and records.
20 DELAWARE LAWYER WINTER 2020