Last year, we highlighted the risks of filing a Section 220 books and records request post-litigation, citing a case where the Delaware Chancery Court found that such use was an improper attempt to "sue first, ask questions later."
Recently, the Delaware Chancery Court opined on this issue again in Lebanon County Employees' Retirement Fund v. AmerisourceBergen Corporation – this time, the Vice Chancellor took a more expansive view in favor of the parties seeking information under Section 220. Section 220 of the Delaware General Corporation Law allows stockholders to inspect books and records of a Delaware corporation for any proper purpose and to compel inspection if such inspection is refused.
In Lebanon, Vice Chancellor Laster refused to expand the "proper purpose" requirement as also implying a "purpose-plus-an-end" requirement. Although the Court of Chancery has held that the most important factor in the Section 220 analysis is the stockholder's purpose in seeking such information, VC Laster held that the proper purpose requirement did not include a condition that a requesting party specifically state in the initial demand what will be done with documents that are received (e.g., to evaluate potential claims, initiate litigation, seek other corrective measures, etc.). In fact, VC Laster's opinion is particularly instructive because it provides a list of previously accepted purposes under which a stockholder can seek information which satisfy the "proper purpose" requirement, including (among others):
- To investigate allegedly improper transactions or mismanagement;
- To clarify an unexplained discrepancy in the corporation's financial statements regarding assets;
- To communicate with other stockholders in order to effectuate changes in management policies; and
- To determine an individual's suitability to serve as a director.
Further, Vice Chancellor Laster spoke to the "credible basis" standard derived from established Delaware law, which states that a stockholder must show a credible basis that there is "possible mismanagement" that warrants investigation. VC Laster held that defendants cannot rely on the defense that plaintiffs "only-want-to-sue" as a way to avoid producing documents in response to a Section 220 request by cabining that request to the merits of a potential shareholder derivative claim – a plaintiff may still have an additional credible basis of wrongdoing worthy of further investigation to justify the demand for relevant information.
Separately and importantly, VC Laster noted that relevant emails between members of a corporation are subject to production in response to a Section 220 request even if those emails were sent using personal accounts.
The Lebanon opinion is extremely informative in elucidating the parameters of Section 220's requirements. This decision illustrates various views that courts may take in evaluating Section 220 requests in favor of the stockholder, and is indicative of the ambiguities of Section 220. Litigants should remain cautious in the event that a plaintiff casts a wide net by seeking a broad range of information wrapped in the cloak of a Section 220 request.
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