Beyond Board Minutes and Stockholder Lists – Section 220 Books and Records Demands May Yield Much More
In 2019, Delaware’s Court of Chancery and Supreme Court expanded the potential fruits of a “books and records” demand under 8 Del. C. § 220 to reach the electronic communications among board members and other corporate officers. Deal planners and others advising corporate fiduciaries need to understand those circumstances or risk seeing their client’s informal (and often more revealing) communications featured in a complaint asserting breaches of fiduciary duty.
The right to review corporate records, codified from common law, has long been a fundamental tool with which stockholders may protect their interests. While the formalities of the demand are necessary, the essential requirement is a “proper purpose” for the inquiry, such as the investigation of suspected corporate mismanagement or wrongdoing. The burden is low, requiring only a “credible basis” to infer mismanagement or wrongdoing. While Section 220 demands made during the pre-digital age typically yielded only written correspondence, presentations and carefully sanitized minutes of meetings, inquiring stockholders are now seeking more because there is more to seek – and Delaware courts are wrestling with the limits of a stockholder’s right to see emails and text messages.
Schnatter v. Papa John’s, 2019 WL 194634 (Del. Ch. Jan. 15, 2019). “Papa John” Schnatter, in his efforts to challenge his ouster in the wake of his controversial statements, sought records of electronic communications among his fellow directors. Under Section 220, a director has “virtually unfettered” rights to access the corporation’s books and records. Rejecting any bright line test for the production of emails and text messages, the Court called for a “case-by-case … balance [of] the need for the information sought against the burdens of production and the availability from other sources.” As a result, the Court ordered production of electronic communications from personal accounts and devices used “to communicate about changing the Company’s relationship with [Schnatter].”
KT4 Partners LLC v. Palantir Technologies Inc., 203 A.3d 738 (Del. 2019). Shortly thereafter, the Delaware Supreme Court reversed the Court of Chancery’s denial of access to electronic communications in response to a Section 220 demand, citing the company’s failure to follow corporate formalities and its reliance, instead, on informal email communications. Noting that the maintenance of “board minutes, resolutions, and official letters” will normally restrict the scope of a Section 220 demand, the Court concluded that a company should not be able to use its reliance on electronic communications to “keep stockholders in the dark.”
Bucks County Employees Retirement Fund v. CBS Corporation, 2019 WL 6311106 (Del. Ch. Nov. 25, 2019). While KT4 Partners creates predictable consequences for the failure to maintain adequately a corporation’s traditional records, the CBS Court went farther, reciting a complex constellation of facts from which one might infer the improper interference, by a stockholder who controlled both constituents to a proposed merger, with one constituent’s consideration of the transaction. After finding the inquiring stockholder’s initial demands to be overly broad, the Court approved a narrower set, ordering the production of electronic communications between the controlling shareholder and certain directors two weeks before and after a critical committee meeting, as well as communications to and from in-house counsel who resigned immediately following that meeting.
What to do? Two lessons for corporate counsel emerge from these cases:
- Ensure the maintenance of fulsome records, fairly reflecting the substance of board decisions and the deliberations. Each of these cases include a measure of judicial irritation over incomplete, sloppy or purposefully inadequate records.
- Keeping in mind a lawyer’s duty to issue litigation hold memoranda if litigation becomes foreseeable, it seems sensible to ensure, as part of regular compliance briefings, that corporate fiduciaries are made aware that their electronic communications, even within private accounts, may be subject to production to stockholders prior to breach of fiduciary duty litigation.
Stay tuned. The much-publicized woes of Boeing and its 737 Max 8 jetliner have erupted recently in a Court of Chancery dispute over a stockholder’s Section 220 demand for, among other things, email communications from the accounts of 26 individual fiduciaries. We will keep you posted on the outcome of the Court’s post-hearing decision.
 See Construction and General Building Laborers' Union No. 79 General Fund v. The Boeing Co., C.A. No. 2019-0603-MTZ (Del. Ch.).