DealLawyers.com Blog

Last week, in Paramount Global v. Rhode Island Office of the Treasurer, (Del.; 3/26), a divided Delaware Supreme Court affirmed a prior Chancery Court ruling holding that, under appropriate circumstances, a stockholder could establish a credible basis for suspected wrongdoing based on post-demand evidence and anonymous sources. This excerpt from Gibson Dunn’s memo on the case summarizes the Court’s decision:

Post-Demand Evidence: The Delaware Supreme Court held “under exceptional circumstances, the Court of Chancery may, in the exercise of its sound discretion, consider post-demand evidence that is material to the court’s credible-basis inquiry and not prejudicial to the corporation.”  The Court reasoned that there is nothing in Section 220’s text that prohibits the consideration of post-demand evidence.  However, the Court endorsed the general rule “that when a stockholder seeks relief under § 220, it will be limited to evidence identified in the demand and the information available to the stockholder when the demand was made.”

Hearsay in Confidentially Sourced News Reports: The Court affirmed that hearsay from anonymous sources in news articles, if found to be sufficiently reliable, can support a credible basis.  The Court expressed unease with the Vice Chancellor’s suggestion that “[n]ews articles from reputable publications that rely on anonymous sources will generally be sufficiently reliable for a court to consider when assessing whether a stockholder has a credible basis to suspect wrongdoing,” but was satisfied that the Vice Chancellor did not rely exclusively on the news outlets’ reputations in reaching his conclusion.  The Court noted that an inquiry into the reliability of hearsay evidence is “fact-specific” and concluded that the Vice Chancellor’s reliability determination fell “within the permissible range of choices available in this case.”

Chief Justice Seitz and Justice Valihura dissented from the Court’s decision to permit consideration of post-demand evidence. The dissenters noted that “confining stockholders to evidence in existence at the time of the demand discourages stockholders from filing Section 220 litigation lacking a concrete basis at the time of the demand” and incentivizes them “to bring books and records disputes only after the dispute has matured into a concrete dispute or transaction.”

– John Jenkins