More Guidance on Books and Records Requests in Delaware
The recent case of Amalgamated Bank v. Yahoo!, Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016) offers useful guidance to those interested in the ever evolving law governing Section 220 books and record requests in Delaware.
In brief, the case involves a Section 220 request made by Yahoo investors seeking information about the hiring and firing of its z9now ex) Chief Operating Officer Henrique de Castro. Soon after taking over as CEO, Marissa Mayer received an email from Mr. de Castro who was then at Google as President of Media, Mobile, and Platforms. de Castro invited Mayer to dinner. During dinner, de Castro expressed interest in serving as Mayer‘s number two executive at Yahoo. Mayer liked the idea, and she and de Castro began discussing his compensation package.
The process by which the eventual hiring and firing of Mr. de Castro moved from that initial meeting to its ultimate conclusion of termination of de Castro’s employment and payment of a nearly $60 million severance package was the subject of the Section 220 request. Amalgamated contended that it had a legally recognized purpose for exploring these matters, namely the ―investigation of potential mismanagement, including mismanagement in connection with the payment of compensation to a corporation‘s officers and directors.
There are many important take-aways from the case. In no particular order—
1. Exculpatory Provisions do no automatically preclude a Section 220 request
We know after Southeaster Penns. & Trans. Auth v. Abbvie that plaintiffs will not prevail on a Section 220 request if their only purpose in seeking the books and records is to present a claim that is precluded by an exculpatory provision. In Abbvie, the court “held that a stockholder who sought books and records for the purpose of bringing a derivative action for breach of fiduciary duty lacked a proper purpose for conducting an inspection where the corporation had an exculpatory provision and the stockholder had not identified a credible basis for believing that that the directors had engaged in non-exculpated conduct.”
Amalgamated Bank makes it clear that if plaintiffs can point to other uses of the information requested Abbvie will not preclude their request. As long as plaintiffs do not limit “the potential uses of the fruits of its investigation” the request may still be proper. “The Delaware Supreme Court has stated that [s]tockholders may use information about corporate mismanagement, waste or wrongdoing in several ways. For example, they may institute derivative litigation; seek an audience with the board of directors to discuss proposed reform or, failing in that, they may prepare a stockholder resolution for the next annual meeting, or mount a proxy fight to elect directors. Seinfeld, 909 A.2d at 119-20 (quotation marks and alterations omitted); accord Saito v. McKesson HBOC, Inc., 806 A.2d 113, 117 (Del. 2002). Exculpation is not an impediment to the potential use of information obtained pursuant to Section 220 for taking action other than filing a lawsuit.
2. Inspection Rights are not limited to paper records but include electronically stored records.
Yahoo argued that electronic documents are beyond the scope of Section 220, because the statute does not mention ―electronically stored information. The Court disagreed, noting that “[s]tockholder inspection rights in Delaware date from the turn of the twentieth century, when the courts recognized them under the common law. See, e.g., State ex rel. De Julvecourt v. Pan-Am. Co., 61 A. 398 (Del. Super. 1904), aff’d, 63 A. 1118 (Del. 1904). In that era and for a long time afterwards, courts logically focused on paper documents, but times have changed” and citing numerous cases where electronic records have been required to be produced in response to a Section 220 request.
3. In a matter of first impression the Court agreed that a Section 220 request can be conditioned by requiring incorporation by reference of all documents produced in any complaint later filed by the investor
In a novel move, the Court conditioned the production of books and records on Amalgamated's agreement to incorporate by reference the resulting documents in any derivative complaint filed by the investor. The Court noted:
- Section 220(c) of the DGCL gives broad discretion to the Court of Chancery to condition a books and records inspection . . . .United Techs. Corp. v. Treppel, 109 A.3d 553, 557-58 (Del. 2014). By statute, the Court of Chancery ―may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.‖ 8 Del. C. § 220(c). ―The ability to limit the use of information gathered from an inspection . . . has long been recognized as within the Court of Chancery‘s discretion. United Techs., 109 A.3d at 558. This court has used conditions as part of its effort to ―maintain a proper balance between the rights of shareholders to obtain information based upon credible allegations of corporation mismanagement and the rights of directors to manage the business of the corporation without undue interference from stockholders. Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 122 (Del. 2006).
Here, incorporation by reference would prevent cherry picking by Amalgamated and thereby protect Yahoo’s legitimate interest in the fairness of use of the produced books and records.