By Joanne Cursinella, J.D.
In this interlocutory appeal from a Chancery Court memorandum opinion in an action brought under Delaware General Corporation Law Section 220 ordering a company to produce certain books and records and granting the plaintiffs leave to take a Rule 30(b)(6) deposition "to explore what types of books and records exist and who has them," the court found that when a Section 220 inspection demand states a proper investigatory purpose, there is no need to supply the course of action the stockholder will take (AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund, December 10, 2020, Traynor, G.).
Opioid litigation. In connection with a "flood of government investigations and lawsuits relating to AmerisourceBergen’s opioid practices," the plaintiffs served a Section 220 demand on AmerisourceBergen, one of the country’s largest opioid distributors, requesting inspection of 13 categories of books and records (the Demand). The plaintiffs requested board materials from May 1, 2010 to date concerning certain settlements, acquisitions, investigations, and other events related to AmerisourceBergen’s operations and its potential involvement in the opioid crisis. AmerisourceBergen rejected the demands.
Chancery Court. In its memorandum opinion following trial on a paper record, the Chancery Court found that the plaintiffs had demonstrated a proper purpose sufficient to warrant the inspection of Formal Board Materials, including that the plaintiffs had established a credible basis, through "strong circumstantial evidence. Among other things, the chancery court also rejected AmerisourceBergen’s contention that the plaintiffs’ sole purpose in seeking the inspection was to investigate a potential Caremark claim, noting that the plaintiffs’ demand "reserved the ability to consider all courses of action that their investigation might warrant pursuing." The court then granted sua sponte the plaintiffs leave to take a Rule 30(b)(6) deposition to seek answers to those questions and, if appropriate, seek additional documents.
This interlocutory appeal. On appeal of that order, AmerisourceBergen challenged the Chancery Court’s opinion on three grounds, including that the court erroneously found that the plaintiffs had stated a proper purpose and so need not "identify the objectives of the investigation. This court agreed with the lower court’s observation that a stockholder is not required to state the objectives of his investigation.
According to AmerisourceBergen, the objectives of the investigation will dictate whether the purpose is, in fact, a proper purpose. But when a stockholder investigates meritorious allegations of possible mismanagement, waste, or wrongdoing, it serves the interests of all stockholders "and should increase stockholder return," the court said, as long as the stockholder can supple a credible basis from which the court can infer wrongdoing or mismanagement.
Further, when the purpose of an inspection of books and records under Section 220 is to investigate corporate wrongdoing, the stockholder seeking inspection is not required to specify the ends to which it might use the books and records, the court affirmed.
Relevance of actionability. The court went on to dispel the notion that a stockholder who demonstrates a credible basis from which the court can infer wrongdoing or mismanagement must demonstrate that the wrongdoing or mismanagement is actionable. Although the actionability of wrongdoing can be a relevant factor for the Chancery Court to consider when assessing the legitimacy of a stockholder’s stated purpose, an investigating stockholder is not required in all cases to establish that the wrongdoing under investigation is actionable, the court said.
In this court’s view, the Chancery’s Court’s determination that the plaintiffs contemplated purposes other than litigation is supported by a fair reading of the Demand. To obtain books and records, a stockholder must show, by a preponderance of the evidence, a credible basis from which the Chancery Court can infer there is possible mismanagement or wrongdoing warranting further investigation. The stockholder, however, need not demonstrate that the alleged mismanagement or wrongdoing is actionable, the court said. In most cases, a court should—as the lower court did here—defer the consideration of defenses that do not directly bear on the stockholder’s inspection rights, but only on the likelihood that the stockholder might prevail in another action, the court concluded.
Rule 30(b)(6) deposition. This court also rejected AmerisourceBergen’s assertion that the court improperly expanded the scope of the plaintiffs’ Demand by allowing a post-trial deposition. The Chancery Court started its discussion of this issue by categorizing the types of documents falling within the definition of board materials set forth in the Demand that might be necessary and essential to satisfy the plaintiffs’ investigative purpose, this court noted. That court found that Demand encompassed books and records falling within each of the categories it defined but noting also that determining whether a stockholder is entitled to a particular category is a fact-specific inquiry. According to this court, whether any Informal Board Materials or Officer-Level Materials are necessary and essential is up to the Chancery Court’s "fact specific" determination, which is committed to that court’s sound discretion. Allowing the Rule 30(b)(6) deposition was a sound exercise of the court’s discretion, this court held.
In all respects, therefore, this court affirmed the Chancery Court’s interlocutory judgment as set forth in its January 13, 2020 Memorandum Opinion and remanded for further proceedings consistent with this opinion.
The case is No. 60, 2020.