In addressing the disclosure of the Covington Report, the Supreme Court was to some degree hemmed in. It could not find the absence of a proper purpose. As the opinion noted: "It is uncontested that, as a matter of law, Espinoza has stated a proper shareholder purpose under Section 220 —to investigate possible wrongdoing." Similarly, the plaintiff provided a credible basis for the claim. Id. ("Nor is it contested that he has made the required factual showing of a credible basis to infer possible mismanagement."). As a result, "entitlement to inspection relief is not at issue."
Then there was the reason given by the lower court -- that plaintiff "had not demonstrated a need to inspect the Covington Report sufficient to overcome the attorney-client privilege and work product immunity protections." The lower court's reasoning had two problems. First, it was hard to justify a finding of an absence of need. The Report went to both the informed nature of the decision and the "red flags" available to the Board, something that implicated good faith.
Second, the opinion was narrow. It allowed for the withholding of the Report only when it conflicted with privilege. Given that Chancery Court's characterization of the Report as potentially "helpful" to plaintiffs, cases dealing with similarly sensitive material that did not implicate privilege would likely be subject to disclosure.
The Supreme Court, therefore, did not rely on the lower court's analysis. Instead, it relied on common law standards designed to allow courts to limit the scope of an inspection. In effect, the court concluded that "scope" was limited to those documents that were "essential" to the alleged purpose (corporate wrongdoing) and that plaintiff had not made a sufficient showing to justify disclosure of the Report. See Id. (Plaintiff has not "shown that the Covington Report is essential to his stated purpose, which is to investigate possible corporate wrongdoing.").
The Court gave three reasons for affirming the right of the Company to withhold the Report. First, the Report, according to defendants, "does not discuss the 'for cause' issue."
- If the Covington Report discussed the "for cause" termination issue, then Espinoza's claim would stand on a significantly different footing. But, as HP represented to both the Court of Chancery and this Court, the Covington Report contains no discussion or analysis of the "for cause" issue.
In other words, the Court considered the absence of any specific language about a "for cause" dismissal to be outcome determinative.
Second, plaintiff had not shown "by a preponderance of the evidence" that the Report was "central" to the Board's decision to enter into the separation agreement, rather than terminate [the CEO] for cause."
- It is conceivable that the Board consulted the Covington Report when it deliberated whether or not to terminate Hurd "for cause." Even if that were so, it is undisputed that the Report was not prepared for the purpose of the Board considering the "for cause" issue. Nor does it otherwise appear from the record what role, if any, the Report actually played in the Board's termination decision.
The third reason given by the Court was that HP had already "disclosed the information contained in the Covington Report that is essential to Espinoza's Section 220 stated purpose." This included "considerable documentation of the circumstances of [the CEO's] departure." The "considerable documentation" included records documenting much, if not all, of the misconduct that the Board's investigation uncovered and that the Covington Report chronicled."
We will discuss the implications of the decision in the next post. Primary materials for the case at the trial level can be found at the DU Corporate Governance web site.