DealLawyers.com Blog

We’ve recently discussed two Chancery decisions addressing the oft-litigated proper purpose requirement for books and records inspection requests. Specifically, the Amazon and Paramount decisions addressing when a stockholder has a “credible basis” to infer wrongdoing.

This Cleary article says that the Amazon and Paramount decisions may initially appear to point in different directions. In Amazon:

The magistrate judge’s opinion reasoned that while investigations and lawsuits may provide the necessary evidentiary basis for an inspection, the mere fact of their existence is not enough to satisfy the credible basis requirement. Documents related to these investigations and lawsuits at most contained unproven allegations, and the court reasoned that such allegations alone are not sufficient to justify a demand. Indeed, the court reasoned that even detailed government complaints or reports are insufficient without some factual or evidentiary basis, such as attached exhibits, to support them.

Whereas, in Paramount:

To support its showing of a credible basis, the stockholder relied primarily on news articles published in the Wall Street Journal, New York Times, and Financial Times, among others, that reported on the sudden departure of four company directors . . . The Court of Chancery reasoned that, despite many of the news articles’ reliance on confidential, anonymous sources, the articles had been published in reputable news outlets, such as the Wall Street Journal, with a strong editorial reputation, and there were 47 such articles, many of which were lengthy and detailed in their description of the alleged wrongdoing. Because of these indicia of reliability, the fact that they relied on anonymous sources and hearsay statements did not preclude the news articles from constituting sufficient evidence to meet the credible basis standard. The Paramount court specifically contrasted its analysis with a case in which the news articles relied upon by the stockholder lacked external evidence.

But despite these differing outcomes, the article says they both underscore the same basic principle:

Like in Amazon, the Paramount decision reinforced that for third-party documents like subpoenas or news articles to support a Section 220 demand, such articles or other documents must reflect a reliable evidentiary basis for their claims, and not be based on speculation or conjecture. Documents that do not reflect their evidentiary basis should be given no weight in the “credible basis” analysis . . .  Mere allegations in unproven complaints or inquiries in subpoenas, standing alone, are not sufficient to satisfy this burden.

After Paramount, news articles too are not sufficient unless they reflect the evidentiary basis of the reporting or show other strong indicia of reliability. In Paramount, it was the detailed factual statements by witnesses and the number of articles in highly respected publications that together constituted sufficient evidence to meet the credible basis standard. Only public or third-party sources that solidly reflect the evidentiary basis for the claims can help a stockholder satisfy the credible basis requirement.

Two important notes on these cases: First, while Delaware’s recently adopted SB 21 changes Section 220, the article points out that these decisions will continue to be relevant. Second, last week, VC Laster certified interlocutory appeal in the Paramount case, saying the “Delaware Supreme Court’s insights on [post-demand evidence and confidential sources] would be helpful and can be obtained efficiently now through an interlocutory appeal.”

– Meredith Ervine