January 31, 2020

Books & Records: Del. Chancery Decision Broadens Inspection Rights

This Nixon Peabody memo reviews the Chancery Court’s recent decision in Lebanon County Employees’ Ret. Fund v. AmerisourceBergen, (Del. Ch.; 1/20), which involved a books & records demand arising out of the company’s role in the opiod crisis. Certain of the company’s shareholders issued a demand for inspection “to inform themselves” regarding potential wrongdoing committed by the company’s board of directors, “and to identify and evaluate their alternatives.”

Vice Chancellor Laster granted the books & records request, and the memo notes that in doing so, he broke new ground:

In reaching the court’s decision, Vice Chancellor Laster addresses and potentially weakens a number of defenses that corporate defendants traditionally raise in such “books and records” suits. One common defense is an assertion that the plaintiff’s sole objective in inspecting the books and records is to bring litigation.

Under the court’s interpretation of Delaware law in this case, however, inspection is permissible so long as the stockholder states that it may also use the fruits of the investigation for “other purposes,” such as to seek an audience with the board to discuss proposed reforms, to prepare a stockholder resolution for the next annual meeting, or to mount a proxy fight to elect new directors. More broadly, the court criticized and rejected “a line of authority in which this court has required stockholders who wanted to investigate mismanagement to state up-front what they planned to do with the fruits of the inspection.” Id. at 25 (citing W. Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 646 (Del. Ch. 2006)).

The court opined that this line of cases “turn[s] the purpose-plus-an-end concept into a requirement that goes beyond what Section 220 and the Delaware Supreme Court precedent require.” Id. at 27. In essence, then, the court ruled that stating a proper purpose is sufficient, and the stockholder does not need to go further to state what it will do with the documents it receives.

The memo points out the potential for an appeal of this decision to the Delaware Supreme Court, since it essentially creates a split within the Chancery Court concerning the application of a “purpose-plus-an-end” requirement to the Section 220 analysis. However, the memo suggests that the decision is likely to embolden stockholder-plaintiffs to seek Section 220 discovery whenever signicant events occur, including an M&A transaction.

John Jenkins