November 19, 2019

Books & Records: Del. Chancery Says Proxy Fight Not a “Proper Purpose”

Last week, in High River Limited Partnership v. Occidental Petroleum, (Del. Ch.; 11/19), the Chancery Court held that an intent to launch a proxy fight was not a “proper purpose” for a books & records request under Section 220 of the DGCL.  The case was prompted by a proxy contest being waged by entities affiliated with Carl Icahn.  In turn, that arose out of Occidental’s agreement to acquire Anadarko Petroleum, its issuance of $10 billion in preferred stock to Berkshire-Hathaway in order to fund the transaction, and a related agreement to sell Anadarko’s African operations.

The plaintiffs objected to a number of aspects of the Anadarko transaction, including the terms of the Berkshire financing & the adequacy of the price at which Occidental agreed to sell Anadarko’s African assets.  Accordingly, they filed preliminary proxy materials seeking four board seats & certain bylaw amendments.  They also issued a books & records demand for a variety of materials relating to the Anadarko deal.

The plaintiffs put forward two arguments in support of their position that they had a “proper purpose” for their books & records demand.  One argument was fairly typical – the plaintiffs’ inspection demand was prompted by a need to investigate mismanagement.  The other argument was somewhat novel –  that the plaintiffs’ intent to mount a proxy contest surrounding the transactions “is a proper purpose that justifies inspection of board-level documents relating to those transactions in order to enhance the quality of their communications with fellow stockholders.”

Vice Chancellor Slights rejected the first argument, observing that the plaintiffs failed to articulate a credible basis for alleged wrongdoing by Occidental’s board.  He also refused to recognize the proxy fight as providing a proper purpose for inspection. In doing so, he distinguished this situation from a few other decisions involving books & records requests made in connection with proxy contests – including High River Partnership v. Forest Labs, (Del. Ch.; 7/12), a bench ruling involving the same plaintiffs:

Forest Labs presented a distinct factual context, and the court there was careful to limit its ruling to the case sub judice.  In doing so, the court observed that the law in this area is unsettled and could use some clarity. I agree. But this case is not the vehicle to provide that clarity.

Where, as here, the documents sought by Plaintiffs relate to a dispute with management about substantive business decisions, pleading an imminent proxy contest is not enough to earn access to broad sets of books and records relating to the details of questionable transactions, particularly when the board’s decision-making is subject to the business judgment rule, and the facts of record reveal that Plaintiffs already have what they need to fulfill their stated purpose.

When the court in Forest Labs decided that the plaintiffs there had articulated a proper purpose, it turned to the well-settled limiting principle embedded within Section 220 that stockholders are entitled to inspect only those documents that are “necessary, essential and sufficient” to their stated purpose. Applying that limiting principle here, I am satisfied that Plaintiffs have failed to demonstrate that the broad set of books and records they have requested are necessary and essential.

The Vice Chancellor pointed out that the plaintiffs’ request related to a series of widely-publicized transactions that were well known to Occidental’s shareholders. Under the circumstances he concluded that it was “difficult to discern how a fishing expedition into the boardroom is necessary and essential to advance Plaintiffs’ purpose to raise concerns with their fellow shareholders about the wisdom of the Board’s decisions to engage in these transactions.”

John Jenkins