In a recent opinion, the Delaware Supreme Court (the Court) eased the burden on stockholders of Delaware corporations seeking access to a corporation's books and records under Section 220 of the Delaware General Corporation Law (DGCL). In AmerisourceBergen Corporation v. Lebanon County Employees' Retirement Fund, 243 A.3d 417 (2020), the Delaware Supreme Court affirmed a Delaware Court of Chancery decision holding that (1) to state a proper purpose under Section 220, the plaintiff need not identify the particular course of action the stockholder will take with the information gathered if the books and records ultimately confirm the stockholder's suspicion of wrongdoing, and (2) the alleged wrongdoing does not need to be actionable to warrant inspection.
What this means for Delaware stockholders:
- A stockholder of a Delaware corporation is not required to state in its Section 220 demand the course of action it desires to take if its suspicions are confirmed by the books and records of the corporation;
- A stockholder initiating a Section 220 demand is not required to establish that the alleged wrongdoing being investigated is actionable; and
- Lastly, this decision could potentially signal that the Delaware Court of Chancery is willing to permit broader access to the stockholders of Delaware corporations as a means of evaluating potential courses of action, and Delaware corporations should keep this in mind when drafting any governing documents.
AmerisourceBergen Corporation v. Lebanon County Employees' Retirement Fund, 243 A.3d 417 (2020)
As a result of the continuing opioid epidemic, AmerisourceBergen Corporation (AmerisourceBergen), one of the largest suppliers of opioids in the U.S., became the subject of several investigations and lawsuits regarding its failure to maintain proper procedures in monitoring and reporting excessive orders of opioids. As of 2020, AmerisourceBergen spent in excess of $1 billion in connection with the settlement and disposition of these investigations and lawsuits.
In response to the mounting losses incurred by AmerisourceBergen, Lebanon County Employees' Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan, stockholders of AmerisourceBergen, sued under Section 220 requesting access to certain books and records, including "Board Materials from May 1, 2010 to date concerning certain settlements, acquisitions, investigations, and other events related to AmerisourceBergen's operations and its potential involvement in the opioid crisis." In the Section 220 demand, the stockholders listed four investigatory purposes for their inspection (i) to investigate possible breaches of fiduciary duty, mismanagement, and other violations of law by the board of directors and management; (ii) to consider remedies for that conduct; (iii) to evaluate the independence of the members of the board; and (iv) to use the information obtained through inspection to evaluate litigation or other corrective measures.
AmerisourceBergen rejected the stockholders' Section 220 demand claiming that "the [d]emand did not state a proper purpose and that, even if the stockholders' purpose were proper, the scope of inspection was overbroad." In accordance with Section 220(c) of the DGCL, the stockholders filed suit with the Delaware Court of Chancery to compel the production of the documents requested in the initial demand. The Delaware Court of Chancery ultimately sided with the stockholders. AmerisourceBergen appealed the lower court decision arguing, among other things, that (1) the lower court erroneously found "that the Plaintiffs had stated a proper purpose and need not 'identify the objectives of the investigation,'" and (2) that the lower court "erroneously determined that the Plaintiffs had established a credible basis from which the court could suspect wrongdoing and that such wrongdoing need not be actionable."
In the case, the Delaware Court of Chancery held that stockholders did not have to state their objectives or show that their claim was actionable to prove a proper purpose. The Court ultimately upheld this decision. To receive access to a corporation's books and records under Section 220, a plaintiff must prove, by a preponderance of evidence: (i) its status as a stockholder, (ii) compliance with demand requirements, and (iii) a proper purpose for the demand. This case hinged on whether the stockholders' purpose was proper. To prove a proper purpose, the stockholder must show, by a preponderance of evidence, a credible basis of wrongdoing or mismanagement that would warrant an investigation. Stockholders can establish that basis through circumstantial evidence.
Accessing corporate records when the stockholder's sole purpose is to pursue litigation is an improper purpose. Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 568 (Del. 1997). Improper purposes also include communicating with other stockholders Northwest Industries, 260 A.2d 428, 429 (Del. 1969) and acting on a mere suspicion of wrongdoing. The proper purpose requirement weeds out "fishing expeditions." Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 119 (Del. 2006).
But Delaware recognizes that investigations into wrongdoing serve the interest of all stockholders and can increase stockholder returns. Id. at 122. Determining the value of one's securities, contemplating an offer from a buyer to purchase one's shares, investigating a director's suitability for office, and investigating mismanagement and misdealing are all proper purposes sufficient to gain access to books and records.
Here, the evidence linking AmerisourceBergen to illegal sales of opioids was enough to establish a credible basis of wrongdoing. The corporation spent over $1 billion in settling lawsuits and conducting investigations, and the Drug Enforcement Administration had suspended its license to operate a distribution center in Orlando, Fla. The Court deemed this evidence, including the numerous investigations by governmental agencies, and various lawsuits brought as a result of AmerisourceBergen's actions throughout the burgeoning opioid crisis, to be credible, and opined that the company's actions were at least negligent. As such, the Court permitted the stockholders to access AmerisourceBergen's books and records.
The Court overruled prior holdings that established additional requirements that plaintiffs had to meet to prove a proper purpose. Stockholders previously had to include in their demand how they planned to use the information gathered from an investigation. A mere request for access was not enough. In this case, the Court affirmed the Court of Chancery's decision to effectively abolish the requirement that stockholders had to commit in advance the ends to their inspection. Rather, the party seeking access to a corporation's books and records need only state a proper purpose in accordance with Section 220. The Court also departed from precedent and held that the wrongdoing alleged need not be actionable. Even if the stockholders cannot recover in court, they may still receive access to books and records to pursue other remedies or simply decide to sell their stock.
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