Source: https://www.clearymawatch.com/2019/03/the-rise-of-books-and-records-demands-under-section-220-of-the-dgcl/
Timestamp: 2019-04-25 14:02:37+00:00

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In recent years, in part in response to decisions like Corwin that have raised the pleading standard for stockholder plaintiffs, the Delaware courts have encouraged stockholders to seek books and records under Section 220 of the Delaware General Corporation Law (DGCL) before filing stockholder derivative or post-merger damages suits, and – in response – each year more stockholders have done so. As a result of this trend, we have already seen several important decisions addressing books and records demands in 2019. These decisions have (i) clarified the types of documents that may be obtained, including (in some limited circumstances) personal emails or text messages; (ii) explained when a stockholder’s demand will be denied as impermissibly lawyer-driven (and when it will not be); and (iii) described the threshold showing of suspected wrongdoing that stockholders must make. As the plaintiffs’ bar makes more use of Section 220, these are important issues for boards of directors to consider.
Another important decision on the scope of Section 220 arose out of litigation brought by the founder of the Papa John’s pizza chain, John Schnatter against the Papa John’s board. Schnatter, who was ousted as CEO and board chairman following his controversial comments about the NFL player protests during the national anthem, sought various documents relating to his termination, including a request to obtain certain emails and text messages from directors’ personal accounts and devices.
The company resisted the demand as too personal and too broad, arguing that “Schnatter is just curious about what his fellow fiduciaries were saying about him.” However, Chancellor Bouchard noted that the production was limited to communications reflecting any consideration by the board of changing Schnatter’s relationship with the company, including assessments of Schnatter’s behavior or performance in his various roles at the company, during the specified time period. The Court found that to be sufficiently precise for the purposes of Section 220.
After Calgon Carbon Corporation merged with Kurarary Company, Ltd., an investment fund and former Calgon stockholder sent a books and records demand requesting information about the retention of Calgon’s chairman and CEO, bonuses for certain board members, and equity awards to directors and officers. The fund sought to investigate whether these incentives were the true motivation for the merger. Calgon declined to produce any books and records, and the fund sued.
In defense, Calgon argued that the fund did not have a proper purpose under the statute, and the Section 220 demand was an impermissibly lawyer-driven effort. In particular, Calgon noted that the fund had portfolio monitoring agreements with its counsel at Robbins Geller—the law firm who drafted and sent the books and records demand—to monitor its investments, identify potential mismanagement or wrongdoing, and pursue appropriate legal action. Based on testimony at trial, the Court of Chancery held as a factual matter that the fund’s purpose was not different from that of counsel, and thus permitted a limited inspection to go forward. But the case is a helpful reminder that books and records actions may be dismissed if discovery shows that there are differences between the stockholder’s and its counsel’s purposes in bringing such actions.
Vice Chancellor Zurn also determined that, given the nature of the information sought, the fund was unlikely to uncover any meaningful answers in the more traditional, formal books and records, such as minutes or letters between the companies. Thus, the Court found that the production of emails by the company was necessary and essential to the fund’s proper purpose. This included the personal emails of management, but only to the limited extent that they were not duplicative of emails from company emails and devices.
These decisions show that, at the same time that the Delaware courts are raising the pleading bar for many kinds of stockholder lawsuits, they are increasingly willing to permit stockholders to gain access to board documents, including emails (even, in some cases, personal emails and text messages) where there are gaps in the board’s minutes and other formal materials, although such stockholders must continue to make a threshold showing that they have a proper purpose and legitimate need before the court will order such records turned over. Boards should therefore be aware that their emails and/or text messages may be subject to stockholder inspection rights, and should take steps to ensure their minutes and other means of formal recordkeeping are robust enough to ward off any future argument that such records are incomplete, thus requiring the production of emails and/or text messages.
 KT4 Partners LLC v. Palantir Techs. Inc., No. 281, 2018, 2019 WL 347934 (Del. Jan. 29, 2019).
 Schnatter v. Papa John’s Int’l, Inc., C.A. No. 2018-0542-AGB, 2019 WL 194634 (Del. Ch. Jan. 15, 2019).
 Stockholders have also begun to seek books and records relating to board investigation and response to sexual misconduct allegations. See, e.g., Morrell v. Alphabet Inc., C.A. No. 2019-0081-KSJM (Del. Ch. 2019).
 The court cited Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 792-93 (Del. Ch. 2016) (granting access to CEO’s personal email account) and In re Lululemon Athletica Inc. 220 Litigation, 2015 WL 1957196, at *6-7 (Del. Ch. Apr. 30, 2015) (denying access to directors’ personal email accounts).
 Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corp., C.A. No. 2017-0910-MTZ, 2019 WL 479082 (Del. Ch. Jan. 25, 2019).
 Hoeller v. Tempur Sealy Int’l, Inc., C.A. No. 2018-0336-JRS, 2019 WL 551318 (Del. Ch. Feb. 12, 2019).

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