The Delaware Supreme Court recently handed down a significant decision implicating several common defenses raised to a books and records demand made under Section 220 of the Delaware General Corporation Law. The opinion is AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60, 2020 (Del. Supr. Dec. 10, 2020).
The decision is an important read in that it invalidates two common defenses relied upon by corporations to oppose an inspection demand. The decision holds that:
- “[W]hen a Section 220 inspection demand states a proper investigatory purpose, it need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing.” Slip op. at 4.
- “[A]lthough the actionability of wrongdoing can be a relevant factor for the Court of Chancery to consider when assessing the legitimacy of a stockholder’s stated purpose, an investigating stockholder is not required in all cases to establish that the wrongdoing under investigation is actionable.” Id.
The defendant-corporation appealed the Court of Chancery’s ruling, arguing that plaintiffs’ inspection demand, aimed at investigating possible breaches of fiduciary duty, mismanagement, and other wrongdoing, was deficient because it did not disclose their ultimate objective, i.e. “what they intended to do with the books and records in the event that they confirmed their suspicion of wrongdoing.” Slip op. at 3. Defendant also contended that the Court of Chancery erred by holding that plaintiffs were not required to establish a credible basis to suspect actionable wrongdoing.
Addressing the matter en banc, the Delaware Supreme Court affirmed the lower court’s decision in full. The High Court ruled that a stockholder need not know the specific “ends” of the inspection, provided that a “credible basis” to suspect possible wrongdoing has been shown. The Court further held: “we have stated that a stockholder is not required to prove that wrongdoing occurred, only that there is possible mismanagement that would warrant further investigation.” Id. at 26 (internal quotation omitted).
Delaware corporations opposing an otherwise proper books and records demand should carefully take the AmerisourceBergen opinion into account. This decision makes clear that if a stockholder puts forth a “credible basis” to suspect mismanagement or wrongdoing, then a “proper purpose” has been demonstrated. A stockholder need not know exactly how it will use the fruits of the investigation, and a stockholder seeking books and records may pursue the same for non-litigation purposes.