Friday, January 22, 2016

Court Closes Book on AbbVie Inspection Demand

By Anne Sherry, J.D.

The Delaware Supreme Court will not require drug maker AbbVie Inc. to turn its books and records over to an institutional investor. The pension fund plaintiff wanted to know whether director misconduct may have led to a failed corporate inversion deal that stuck shareholders with a $1.635 billion break-up fee. A majority of the court approved of the Chancery Court’s reliance on AbbVie’s exculpatory provision, but two justices expressed concerns about making exculpation a threshold issue in a Section 220 inspection case (Southeastern Pennsylvania Transportation Authority v. AbbVie, Inc., January 20, 2016, Strine, L.).

The proposed inversion deal with Shire plc, a Jersey-based biopharmaceutical company, would have allowed AbbVie to reduce its effective tax rate to approximately 13 percent by changing its country of residence. In September 2014, Treasury and the IRS announced their intent to close the inversion loophole, thwarting the deal. SEPTA demanded inspection of documents to inspect possible breaches of fiduciary duties and other corporate wrongdoing, but the Chancery Court shut down the request, holding that the plaintiff had no proper purpose for the information it sought.

Exculpation and inspection. The trial court’s decision interwove DGCL Section 220, which empowers shareholders to demand inspection of books and records, with Section 102(b)(7), which allows companies to exculpate directors from monetary liability for duty-of-care breaches. Because AbbVie had such an exculpatory provision, the inspection would only have a proper purpose if SEPTA could show a credible basis from which the court could infer a breach of the duty of loyalty.

On appeal, SEPTA protested that this holding heightened the threshold burden for parties seeking inspection, requiring them in effect to establish evidence of a non-exculpated breach. At oral argument, Justice Valihura pointed out that Section 102(b)(7) forecloses money damages only, not claims seeking equitable relief. By relying on this provision, she posed to AbbVie’s counsel, aren’t you asking the court to decide upfront that no equitable relief could be fashioned?

The high court ruling indicated that all five justices would affirm the Chancery Court’s decision because SEPTA did not meet its burden of showing a credible basis to conclude that even a breach of the duty of care had been committed. Justices Valihura and Holland would have stopped there, but the other three justices affirmed on the basis of the entire Chancery Court decision, including the 102(b)(7) facets. The Chancery Court’s reliance on 102(b)(7) was proper, in the majority’s view, because that was the primary ground on which AbbVie defended the case and the parties framed the issues.

The case is No. 239, 2015.