March 26, 2019

Private Equity: Texts & Emails? No, Books & Records!

After all these years, the scariest movie I’ve ever seen remains “The Exorcist” – and I’ve seen it a lot, because one of my high school teachers had a part in it & he wasn’t shy about finding excuses to show it to us. Reading law blogs doesn’t typically send a chill down my spine like The Exorcist does, but there’s one exception – Weil’s “Global Private Equity Watch.”  Glenn West & his colleagues have a knack for coming up with scenarios involving seemingly inconsequential oversights that can turn into disasters.

This time, they’ve chosen a topic that is inherently terrifying – the perils of texts & emails.  And the blog warns that when it comes to those kinds of communications between PE Funds’ representatives on portfolio company boards, there’s a lot to be scared about.  Here’s an excerpt from the intro:

Unlike communications among the private equity firm’s professionals concerning the status and performance of its investment in a portfolio company, communications among two or more board members serving on behalf of a private equity firm regarding their actions as board members may constitute “books and records of the company” for which any other director may, with a proper purpose, demand the right to inspect under Section 220 of the Delaware General Corporation Law.

In this modern age, of course, those communications can include any of the various forms of electronic communications and social media now available, including text messages (by mobile carriers or via social media) and emails. And it matters not that those communications may have been sent through your or your firm’s phone, or on your firm’s email server or your private email account. Understanding this fact may cause some pause before pressing send on a text message to your colleague and fellow board member concerning another board member’s approach or competence in considering an appropriate course of action for the company.

Directors’ rights to inspect books & records are much broader than shareholders’ rights –  a director with a proper purpose has a virtually unfettered right to access the company’s books & records. The blog points out that in a recent decision involving the dispute between “Papa John” Schnatter & Papa John’s Pizza, the Delaware Chancery Court held that if directors use personal accounts and devices to communicate about corporate matters, they should expect to produce such information to the company.

Anybody who’s received communications from PE directors opining on their fellow board members will quickly realize what a horror show a books & records request might just turn out to be.

John Jenkins