Over the past several years, stockholders have increasingly used Section 220 of the Delaware General Corporation Law to seek access to books and records of Delaware corporations. This trend is due in part to Delaware courts strongly encouraging stockholders to use this tool to investigate potential wrongdoing prior to filing a lawsuit. These demands can prove burdensome if the company does not take care in communicating with its board and recording the board process and decision making.
Section 220 Books and Records Demands
Under Delaware law, a stockholder has a right to seek access to books and records of a Delaware corporation. To obtain access, the stockholder is required to assert a “proper purpose," which can include investigating potential wrongdoing such as a mismanagement or fiduciary duty breaches. To establish “proper purpose," the stockholder merely needs to show that there is a “credible basis” from which the court can infer there was possible mismanagement or breaches that would warrant further investigation. In recent decisions, the Delaware Supreme Court has clarified that this showing is a low bar under Delaware law.1 As a result, Section 220 disputes now largely center around whether the stockholder can access electronic records such as emails and texts.
What Books and Records May Be Inspected
Whether the court will permit stockholder access to emails and other electronic communications could well depend on the robustness of the formal board-level records (e.g., minutes, presentations) relating to the matter being investigated. Do those materials actually contain the information the board received relating to the matter being investigated? Do the agendas and minutes evidence the board’s deliberations and decisions?
In contrast, if the formal board materials do not evidence the board’s deliberations and decision-making involving the matter being investigated, access to emails might be found to be necessary to the stockholder investigation. Where the evidence indicates that the company and the board communicated through informal channels and the deliberations were not confined to the board room, there is a greater risk the company will be required to search emails and text messages, including those of board members and senior executives.
Given where Delaware law stands on the issue, there is little doubt that stockholders will seek access to such informal communications. The ability of the company to avoid or limit such access will largely depend on disciplined board practice and record keeping.
The importance of robust board minutes and materials will also impact the ability to defend against potential litigation. A recent Delaware Court of Chancery decision (Goldstein v. Denner, 2022 WL 1671006 (Del. Ch. May 26, 2022)) relating to a public company acquisition illustrates the interaction of board materials provided in response to a Section 220 demand and resulting breach of fiduciary duty litigation. The complaint focused in part on alleged discrepancies between the board minutes and materials and the disclosures in the background section of the Schedule 14D-9 sent to stockholders. The court ruled, for purposes of the motion to dismiss, that it was reasonably conceivable that updates to the board on the sale process that were disclosed in the background section did not occur because they were not reflected in the board minutes.
There are several key takeaways from the recent Delaware cases, that largely follow best practices for the board being informed regarding, and deliberating and deciding, significant corporate matters. As Section 220 demands primarily relate to the investigation of M&A transactions or potential Caremark claims relating to “mission-critical” risks, the formal board materials should reflect the board processes around these matters:
- The board agendas, decks and other materials should demonstrate the information the board received and considered.
- Informal communications to the board should be avoided or limited such that there is not a record of the board conducting its business through informal channels. Recognizing that the court may permit inspection of informal records, executives and directors should be reminded regularly to take care with deliberations outside the board room and discussions by email or text message.
- Board minutes should be detailed and document the board’s deliberations and decisions regarding such matters. Summary minutes may not be sufficient to limit access to informal communications and may impact the ability of the company to defend against a lawsuit.
1 See, AmerisourceBergen Corp. v. Lebanon Cnty. Emps.’ Ret. Fund, 243 A.3d 417 (Del. 2020) and NVIDIA Corp. v. City of Westland Police and Fire Ret. Sys., 282 A.3d 1 (Del. 2022).