Source: https://www.bna.com/attorneys-advise-220-n17179923081/
Timestamp: 2018-08-20 19:27:34
Document Index: 362792561

Matched Legal Cases: ['§220', '§220', '§ 220', '§ 220', '§220', '§220', '§220', '§220', '§220', '§220', '§220']

Attorneys Advise on §220 Actions, Say ‘Wal-Mart' Likely a Rare Holding | Bloomberg Law
Attorneys Advise on §220 Actions, Say ‘Wal-Mart' Likely a Rare Holding
Feb. 9 — During a recent Bloomberg BNA webinar, practitioners discussed the implications of a Delaware Supreme Court ruling that Wal-Mart Stores Inc. was required to hand over internal documents under an exception to the attorney-client privilege.
The Wal-Mart decision marked the first time the state's high court held that the Garner doctrine applies in plenary stockholder/corporation proceedings, as well as in actions brought pursuant to Delaware General Corporation Law § 220 actions.
Kathaleen S. McCormick, a partner at Young Conaway Stargatt & Taylor LLP, said that although the decision gave corporations cause for concern, corporations typically will not be required under Delaware law to reveal privileged information in § 220 books and records actions. Instead, she added, the Wal-Mart outcome will be really difficult outcome for other stockholders to achieve.
According to McCormick, the Garner doctrine's application to §220 actions has been the law in Delaware for a long time, even though the Delaware Supreme Court had never directly applied it before the Wal-Mart decision.
The Supreme Court has referred to it in dicta several times, she said, adding that the reason the court had not applied it directly before was because it is always the last issue addressed in the context of a §220 demand.
According to the material included the presentation, before the court will apply the Garner analysis, several threshold events must be shown, including:
• a demand was made;
• it was in an appropriate form;
• the stockholder waited five days before commencing an enforcement action;
• the stockholder stated that the specific purposes were to investigate (i) mismanagement, (ii) the possibility fiduciary breaches and (iii) whether a pre-suit demand would be futile;
• such purposes were subject to the credible basis requirement;
• confidentiality restrictions and conditions were imposed; and
• an analysis of whether the documents sought were necessary and essential was undertaken.
The Wal-Mart court emphasized that the “necessary and essential” analysis always preceded the Garner analysis, McCormick said.
Additionally, the court emphasized the that the Garner exception to the attorney-client privilege is “narrow, exacting, and intended to be very difficult to satisfy.”
According to McCormick, it was critical in the Wal-Mart decision that the plaintiff identified the documents that were being withheld and wanted the privileged information for the purpose of investigating claims of misconduct.
In addition to discussing the implications of the Wal-Mart decision, the panel also gave an overview of Delaware's law regarding §220 books and records inspections.
Brian D. Hail, a partner at Goodwin Procter, LLP, said that §220 actions have almost become a prerequisite to alleging demand futility in derivative actions. He added that the chancery court will look at such demand futility claims very skeptically and will evaluate whether a §220 demand was made first.
James M. Yoch Jr., an associate at Young Conaway, noted that discovery is limited in §220 actions. The court is constantly balancing the need to move the proceeding at an accelerated pace with the liberality of discovery rules, he added. This balancing can sometimes lead to disputes over what documents are produced, said Yoch.
It is also important to realize that corporations are not the only ones with discoverable information, Hail said. A client bringing a §220 action demand should be prepared to have its motives questioned, and to engage in document and deposition discovery, he added.
In addition to the scope and availability of documents, whether the demand was made for a proper purpose is usually the subject of the most scrutiny, Hail said.
The company is more likely to challenge more-intrusive inspections, Hail said.
“It's almost like a sliding scale,” McCormick said. When a stockholder is seeking something unintrusive, such as a stocklist, the company almost never rejects the request, she said. But where the request relates to broad allegations, such as in the Wal-Mart case, Delaware law imposes a slightly higher requirement: that there is credible basis for investigation those facts.
Although having an ulterior purpose alone may not be a sufficient reason for the court to deny a books and records request, it important to have a good-faith basis for the request that is relatively targeted, Hail said. Starting too broadly may preclude a happy compromise, he added. Moreover, the chancery court may view the entire inspection as a fishing expedition and deny the request.