Delaware case law in recent years has established that under appropriate circumstances, directors’ emails & text messages may be regarded as books & records required to be produced in response to a stockholder demand under Section 220 of the DGCL. However, in In re Zendesk Section 220 Litigation, (Del. Ch.; 8/23), a Chancery Court magistrate denied stockholder plaintiffs access to director texts & emails, despite finding that the plaintiffs had demonstrated a proper purpose for the request.
The case arose out of a sale of the company to a bidder at a price nearly 50% lower than an unsolicited offer received from the same bidder less than six months earlier – which the board had rejected as being undervalued. After the initial offer was rejected, an activist intervened and threatened a proxy contest seeking to replace the board and management. In light of the circumstances surrounding the sale, including the fact that a draft settlement agreement with the activist had been negotiated that provided for the resignation of the CEO & several directors, the plaintiffs claimed that management’s decision to move forward with a sale may have been motivated by a desire to protect their positions or reputations.
The Court agreed that the plaintiffs’ allegations were sufficient to establish a proper purpose for their request. However, it refused to order the company to supplement its production of formal materials with director texts and emails. This Shearman blog notes that the company’s adherence to the corporate norm played an important part in the magistrate’s decision:
The Court held that plaintiffs failed to establish that the electronic communications they sought were essential to accomplishing their purported purpose. The Court noted that the “scope of inspection” is “fact-specific” and that the court has “broad discretion,” but the stockholder “bears the burden of proving that each category of books and records is essential” and is not entitled to more than what is “sufficient.” The Court highlighted that “Formal Board Materials are the starting point—and typically the ending point—for a sufficient inspection.”
The Court found that the board “honored corporate formalities in the process leading to the Transaction” and that the Company’s production of Formal Board Materials was sufficient to serve the purpose of plaintiffs’ purported investigation. The Court ordered the supplemental production of a limited set of additional financial information, but rejected plaintiffs’ demands for email searches and productions. As the Court explained, “[w]hile incremental details could be helpful to flesh out [p]laintiffs’ theories, that does not support [p]laintiffs’ request for comprehensive, discovery-style email production through a books and records action.”
The volume & scope of the formal materials produced by the company appears to have played an important role in the Court’s decision. That production was comprised of 335 documents totaling nearly 5,300 pages, and included board minutes and presentations, bid process letters and written offers, director questionnaires, projections, and agreements with potential acquirers.
– John Jenkins