In AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund1, the Delaware Supreme Court recently addressed the issue of whether a stockholder seeking inspection of a corporation’s books and records pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”) for the purpose of investigating mismanagement or wrongdoing by the corporation or its fiduciaries must demonstrate that the alleged mismanagement or wrongdoing is actionable in order to establish a proper purpose for the inspection.
There is a divergence in decisions of the Delaware Court of Chancery as to this issue. Some Court of Chancery opinions have held that a stockholder must demonstrate that alleged corporate mismanagement or wrongdoing is actionable in order to state a proper purpose under Section 2202. Other Court of Chancery decisions have held that stockholders are not required to demonstrate that the alleged mismanagement or wrongdoing is actionable in order to assert their Section 220 inspection rights3. The position that stockholders must demonstrate actionable wrongdoing found some support in the Delaware Supreme Court’s summary affirmance of the Court of Chancery’s decision in Southeastern Pennsylvania Transportation Authority v. AbbVie, Inc.4. In AbbVie, the Supreme Court summarily affirmed a Court of Chancery decision holding that a stockholder had not stated a proper purpose for the requested inspection because the corporation’s directors were protected by an exculpatory provision of the corporation’s certificate of incorporation that was authorized by Section 102(b)(7) of the Delaware General Corporation Law (“DCGL”).5
However, in AmerisourceBergen, the Supreme Court squarely addressed the issue of whether a stockholder must establish the actionability of mismanagement or wrongdoing in order to demonstrate a proper purpose under Section 220 and held that a stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable6. To the extent that its summary affirmance in AbbVie suggested otherwise, the AmerisourceBergen Court expressly overruled that decision.7
Section 220(c) of the DCGL provides that stockholders who seek to inspect a corporation’s books and records must establish that “(1) [s]uch stockholder is a stockholder; (2) [s]uch stockholder has complied with [Section 220] respecting the form and manner of making demand for inspection of such documents; and (3) [t]he inspection such stockholder seeks is for a proper purpose.”8 A proper purpose is defined in Section 220 as a “purpose reasonably related to such person’s interest as a stockholder.”9 If the corporation, or an officer or agent thereof, refuses to permit the requested inspection, the stockholder may apply to the Court of Chancery for an order to compel such inspection.10 The Court may then summarily order the corporation to permit the stockholder to inspect the corporation’s books and records.11
For over twenty-five years, the Delaware Supreme Court has repeatedly encouraged stockholders suspicious of a corporation’s management or operations to exercise their right to inspection of books and records in order to develop sufficient evidence to adequately meet the stringent pleading requirements applicable to stockholder derivative litigation under Delaware law.12 In adjudicating cases brought under Section 220, Delaware courts have attempted “to maintain a proper balance between the rights of stockholders to obtain information based upon credible allegations of corporation mismanagement and the rights of directors to manage the business of the corporation without undue interference from stockholders.”13 The standard developed by the Delaware Supreme Court to balance these competing concerns is the “credible basis” standard, pursuant to which “a stockholder seeking to investigate wrongdoing must show, by a preponderance of the evidence, a credible basis from which the court can infer there is ‘possible mismanagement as would warrant further investigation.’”14 The Court has described the credible basis standard as “not an insubstantial threshold” but still “the lowest possible burden of proof”.15
The AmerisourceBergen Facts
AmerisourceBergen is a pharmaceutical company that is one of the country’s largest opioid distributors.16 The Company has been investigated by numerous law-enforcement and government agencies and, since 2012, has been the subject of several governmental reports, investigations, and state and federal lawsuits.17 The Company has spent more than one billion dollars in connection with opioid-related lawsuits and investigations and analysts estimate that it could spend up to one hundred billion dollars to reach a global settlement.18
The plaintiffs are an employee retirement fund and a union health services and insurance plan, both of which owned stock in AmerisourceBergen. Pursuant to Section 220, the plaintiffs sought to inspect books and records related to certain settlements, acquisitions, investigations, and other events related to the Company’s potential involvement in the opioid crisis.19
Pursuant to Section 220, the plaintiffs served the Company with a demand that listed four investigatory purposes (the “Demand”):
- to investigate possible breaches of fiduciary duty, mismanagement, and other violations of law by members of the Company’s Board of Directors and management … in connection with [the Company]’s distribution of prescription opioid medications;
- to consider any remedies to be sought in respect of the aforementioned conduct;
- to evaluate the independence and disinterestedness of the members of the Board; and
- to use information obtained through inspection of the Company’s books and records to evaluate possible litigation or other corrective measures with respect to some or all of these matters.20
AmerisourceBergen rejected the Demand in its entirety, claiming that it did not state a proper purpose.21 The plaintiffs then filed an action pursuant to Section 220 in the Court of Chancery to enforce their inspection rights.22 The Court of Chancery held that the plaintiffs had stated a proper purpose and ordered AmerisourceBergen to produce certain formal board materials.23 AmerisourceBergen was then granted leave to file an interlocutory appeal.24
On appeal, AmerisourceBergen raised two principal arguments. First, it argued that the plaintiffs were required to identify in the Demand the objectives of their investigation and their planned use of the records once received.25 However, the Supreme Court rejected that argument holding that “when the purpose of an inspection of books and records under Section 220 is to investigate corporate wrongdoing, the stockholder seeking inspection is not required to specify the ends to which it might use the books and records.”26
Second, like the defendant in AbbVie, AmerisourceBergen argued that the plaintiffs’ claims of corporate wrongdoing were not actionable because of an exculpatory provision in its certificate of incorporation and, therefore, the plaintiffs had not stated a proper purpose.27 However, the Supreme Court also rejected that argument.
First, the Court first noted that, while the plaintiffs’ demand referenced possible litigation, it also identified other legitimate potential uses of the records including evaluating other corrective measures and making a demand on the Company’s Board of Directors to take action.28 As the plaintiffs had established a credible basis that AmerisourceBergen had engaged in wrongdoing and as the plaintiffs had set forth non-litigation purposes for their inspection demand, the Court held the fact that the wrongdoing may not be actionable does not negate the propriety of the plaintiffs’ purpose.29
Second, while noting that the fact that the plaintiffs had set forth non-litigation purposes for their demand was sufficient in and of itself to establish a proper purpose, the Court stated that it would “nevertheless take this opportunity to dispel the notion that a stockholder who demonstrates a credible basis from which the court can infer wrongdoing or mismanagement must demonstrate that the wrongdoing or mismanagement is actionable.”30 The Court explained that Section 220 proceedings “are intended to be ‘summary’, and thus ‘managed expeditiously.’”31 The Court further explained that, based on its review of Court of Chancery decisions addressing defenses to Section 220 actions on the ground that the wrongdoing for which investigation was sought was not actionable, it has become evident that the interjection of merits-based defenses to Section 220 actions interfere with the intended summary nature of those actions and prevent them from proceeding expeditiously.32 The Court further explained that “a Section 220 proceeding is not the time for a merits assessment of [a plaintiff’s] potential claims against the corporation’s fiduciaries.”33
The Court, therefore, held that to obtain books and records a stockholder must show by a preponderance of the evidence that there is a credible basis to infer that wrongdoing occurred but a “stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable.”34 As discussed above, the Court made clear that, to the extent that its summary affirmance in AbbVie suggested otherwise, it was overruling that decision.35 The Court did carve out an exception to that rule for the “rare case” in which the stockholder’s sole reason for investigating mismanagement or wrongdoing is to pursue litigation and the court can determine that the action resulting from that investigation would be barred on purely procedural grounds such as lack of standing or the expiration of the statute of limitations.36 However, the Court made clear that, in all other cases, the court should “defer the consideration of defenses that do not directly bear on the stockholder’s inspection rights, but only on the likelihood that the stockholder might prevail in another action.”37
Thus, in AmerisourceBergen, the Delaware Supreme Court cleared up any confusion as to whether a stockholder must demonstrate that claimed wrongdoing is actionable in order to establish a proper purpose for an inspection of books and records related to that alleged wrongdoing. Other than in cases where the stockholder’s sole purpose is to initiate litigation and the court can determine that such litigation would be barred on solely procedural grounds, a stockholder need not demonstrate that the wrongdoing is actionable in order to establish a proper purpose for the inspection.
1 243 A.3d 417, 421 (Del. 2020).
2 See e.g., Beatrice Corwin Living Irrevocable Trust v. Pfizer, Inc., 2016 WL 4548101 (Del. Ch. Sept. 1, 2016).
3 See e.g., Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016), abrogated on other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019); Lavin v. West Corp, 2017 WL 6728702 (Del. Ch. Dec. 29, 2017); Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020).
4 132 A.3d 1, 2016 WL 235217 (Del. Jan. 20, 2016) (TABLE).
6 AmerisourceBergen, 243 A.3d at 437.
8 8 Del. C. § 220(c).
9 Id., § 220(b).
10 Id., § 220(c).
12 Id. at 436 citing Ca. State Teachers’ Ret. Sys. v. Alvarez, 179 A.3d 824, 839 (Del. 2018); Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1056-57 (Del. 2004); Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 122 (Del. 2006); Grimes v. Donald, 673 A.2d 1207, 1216 & n.11 (Del. 1996); Rales v. Blasband, 634 A.2d 927, 934 n.10 (Del. 1993).
13 Id. quoting Seinfeld, 909 A.2d at 122.
14 Id. quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 568 (Del. 1997).
15 Id. at 26.
16 Id. at 421.
19 Id. at 423.
24 Id. at 424.
25 Id. at 427-28.
26 Id. at 430.
27 Id. at 431.
31 Id. at 437 citing Brehm v. Eisner, 746 A.2d 244, 267 (Del. 2000).