Last week, the Delaware Supreme Court issued an important decision effectively broadening the scope of stockholder pre-litigation inspection rights.
In January 2020, the Court of Chancery held in Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corp. that demanding stockholders had established a proper purpose under Section 220 of the Delaware GCL to inspect AmerisourceBergen’s books and records and ordered, sua sponte, a 30(b)(6) deposition to enable the plaintiffs to identify the types and custodians of documents to which they may be entitled. Vice Chancellor Laster’s decision is covered at length in a prior alert.
On Dec. 10, 2020, the Delaware Supreme Court (Supreme Court) issued a unanimous opinion affirming the Court of Chancery’s decision on all grounds. The Supreme Court held that (i) a Section 220 demand “need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing”; (ii) stockholders are not required to establish “actionable wrongdoing” to satisfy the statute’s “proper purpose” requirement – although “the actionability of wrongdoing can be a relevant factor for the Court of Chancery to consider when assessing the legitimacy of a stockholder’s stated purpose”; and (iii) “the Court of Chancery’s allowance of the post-trial deposition was not an abuse of discretion.” The Supreme Court’s decision resolves an “apparent tension” between two lines of authority at the Court of Chancery level by holding that courts should not consider merits-based – as opposed to “purely procedural” – defenses to the potential future claims stockholders might assert when assessing whether stockholders have satisfied the statutory test for exercising their inspection rights. In the Supreme Court’s view, it “has become evident” that interjecting merits-based defenses “interferes” with the purpose and nature of Section 220 proceedings, which are intended to be “summary” and thus “managed expeditiously.”
AmerisourceBergen asked the Court of Chancery to certify an interlocutory appeal from its January 2020 decision. On Feb. 12, 2020, Vice Chancellor Laster certified his decision for interlocutory review and on March 5, 2020, the Delaware Supreme Court accepted the appeal. The Vice Chancellor’s reasons for certifying the appeal, and the Supreme Court’s reasons for accepting it, are discussed in another prior alert. Among other justifications, as the Supreme Court again points out in the December 2020 decision, “the issues the Company had raised were ‘substantial issues of material importance relating to the scope of the statutory proper-purpose requirement when seeking books and records for the purpose of investigating management and the scope of the Court of Chancery’s remedial discretion in a Section 220 action.’”
On appeal, AmerisourceBergen challenged the Court of Chancery decision on three grounds. It argued that Vice Chancellor Laster (i) “erroneously found that the Plaintiffs had stated a proper purpose and need not ‘identify the objectives of the investigation’”; (ii) “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”; and (iii) “erred when it granted the Plaintiffs leave to conduct a post-trial Rule 30(b)(6) deposition.”
Each ground was subject to a different standard of review. The Supreme Court reviewed de novo whether the stockholders stated a “proper purpose” for the inspection. The Court of Chancery’s determination that there was a credible basis to infer wrongdoing “is a mixed finding of fact and law, to which we afford considerable deference.” And the decision to allow a deposition, which Vice Chancellor Laster ordered as a form of remedy to penalize AmerisourceBergen for withholding information requested in discovery, was reviewed by the Supreme Court under an abuse of discretion standard.
Section 220 requires stockholders to establish that the requested inspection is for a “proper purpose,” which the statute defines as any “purpose reasonably related to such person’s interest as a stockholder.” AmerisourceBergen argued that stockholders also must identify the objectives of their investigation – in other words, the use they would make of the requested materials – and asked the Court of Chancery to infer that the stockholders’ only objective in this case was to pursue derivative litigation, which the company said would be barred on multiple grounds. The Court of Chancery rejected AmerisourceBergen’s characterization of plaintiffs’ demand as “solely limited to pursuing derivative litigation,” and the Supreme Court agreed. More importantly, the Supreme Court also agreed with the Court of Chancery “that a stockholder is not required to state the objectives of his investigation” to satisfy the statute’s “proper purpose” requirement.
Conceding that the Delaware Supreme Court had never considered whether a stockholder must identify “the objectives of an investigation of corporate wrongdoing,” AmerisourceBergen relied on a 1969 Delaware Supreme Court decision in a case involving a request to inspect a company’s list of stockholders. The majority in that case held that the “mere statement” that plaintiff’s purpose was “to communicate with other stockholders” was inadequate because without knowing the substance of the intended communication, there was no way to know if the inspection related to the plaintiff’s interests as a stockholder. The Delaware Supreme Court found that the case did not support AmerisourceBergen’s position here because “a request to inspect a list of stockholders is fundamentally different than a request to inspect books and records in furtherance of an investigation of corporate wrongdoing.” Agreeing with the Court of Chancery, the Supreme Court explained that corporate wrongdoing is always “a legitimate matter of concern that is reasonably related to a stockholder’s interest as a stockholder.”
The Supreme Court noted that a stockholder’s intended uses are not always “irrelevant” to the “proper purpose” analysis and that it may even be “advisable, in the interest of enhancing litigation efficiencies,” to identify the intended uses in the inspection demand. The Supreme Court agreed with the Court of Chancery that, for example, “a corporation may challenge the bona fides of a stockholder’s stated purpose and present evidence from which the court can infer that the stockholder’s stated purpose is not its actual purpose.” But after making that qualification, the Court went on to reiterate its holding: When, as was the case here, “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.”
Echoing the Court of Chancery, the Supreme Court noted that AmerisourceBergen tried to characterize plaintiffs’ demand as limited to the pursuit of a possible Caremark claim merely to “set the stage” for its second argument – that stockholders “must establish that the wrongdoing they seek to investigate is actionable wrongdoing.” The Court of Chancery had rejected that argument on three grounds: (i) for the “threshold reason” that the demand identified other purposes; (ii) because in Vice Chancellor Laster’s view, “to obtain books and records, a stockholder does not have to introduce evidence from which a court could infer the existence of an actionable claim”; and (iii) because “in any event,” the company’s exculpation and laches defenses to the potential Caremark claim “were unavailing.” While affirmance “on any one of these three grounds would be sufficient to lay AmerisourceBergen’s argument to rest,” the Supreme Court concluded that “we happen to agree on all three.”
The Supreme Court agreed that AmerisourceBergen mischaracterized plaintiffs’ demand, which on a “fair reading” in fact “contemplated purposes other than litigation.” The Court explained that stockholders “may state more than one purpose for inspection and use the information obtained for more than one purpose.” Although that would have sufficed to dispose of AmerisourceBergen’s actionability argument, the Supreme Court went further, “tak[ing] 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.”
In support of its actionability argument, AmerisourceBergen relied on several cases in which the Court of Chancery had “disallowed inspections for the purpose of investigating mismanagement and wrongdoing when the stockholder’s sole objective is to pursue litigation that faces an insurmountable procedural obstacle.” The Supreme Court found these decisions to be “within the discretion that rests in the Court of Chancery’s hands when it assesses the bona fides of a stockholder’s stated purpose under Section 220.” As the Supreme Court explained: “If litigation is the stockholder’s sole objective but an insurmountable procedural obstacle unrelated to the suspected corporate wrongdoing bars the stockholder’s path, it cannot be said the stockholder’s stated purpose is its actual purpose” and reflects anything other than “the stockholder’s idle curiosity or a fishing expedition.”
AmerisourceBergen also relied on two more recent decisions – one of which the Supreme Court summarily affirmed – in which the Court of Chancery considered merits-based defenses to the stockholder’s anticipated claims. The Supreme Court noted that this arguable “trend” of examining merits-based defenses in addition to purely procedural defenses “has met with resistance in other Court of Chancery decisions,” including this case. The Court observed that this apparent divide in Court of Chancery authority could theoretically be harmonized based on whether the pursuit of litigation was the sole stated purpose for the inspection, as was the case in Polygon, West Coast Management, Graulich, AbbVie and Pfizer, or one of multiple stated purposes, as was the case in Yahoo! and Gilead. But the Supreme Court chose not to harmonize the case law in that way. Instead, the Court held that “the apparent tension that has developed between these two approaches should be relieved in a manner that better serves the purpose and nature of Section 220 proceedings, which, after all, are intended to be ‘summary,’ and thus ‘managed expeditiously,’” and “[i]t has become evident that the interjection of merits-based defenses – defenses that turn on the quality of the wrongdoing to be investigated – interferes with that process.” Explaining that a Section 220 proceeding “is not the time for a merits assessment of Plaintiffs’ potential claims against [the corporation’s] fiduciaries,” the Supreme Court held that a “stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable” to state a proper purpose under Section 220, and “[t]o the extent that our summary affirmance in AbbVie suggests otherwise, we hereby overrule it.”
The Court then explained that there may be “the rare case” in which a stockholder seeks to investigate wrongdoing solely to pursue litigation that would be barred by “a purely procedural obstacle” – such as standing or the statute of limitations – in which case “the court may be justified in denying inspection.” But the Court held that “in all other cases,” courts 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.”
Lastly, the Supreme Court held that “the Court of Chancery’s allowance of the post-trial deposition was not an abuse of discretion,” again rejecting all of AmerisourceBergen’s arguments. The Court noted that whether the stockholders are ultimately entitled to anything more than Formal Board Materials “awaits the Court of Chancery’s fact specific determination” after the deposition has taken place. The Court added that this decision likewise “is committed to the court’s sound discretion.”
The distinction the Supreme Court has drawn between “purely procedural” and “merits-based” defenses may not always be clear-cut, and could provide grounds for dispute in some cases. The Supreme Court could have confined its holding and analysis to the unique facts of this litigation and its connection to the underlying opioid crisis, as did the Court of Chancery, at least to a degree. It is notable that the Supreme Court did not do that, opting instead to issue a ruling with a broader and more generalized reach.
 2020 WL 132752 (Del. Ch. Jan. 13, 2020).
 ___ A.3d ___, 2020 WL 7266261 (Del. Dec. 10, 2020).
 Id. at *3 & n.22 (citing AmerisourceBergen Corp. v. Lebanon Cnty. Emps.’ Ret. Fund, No. 60, 2020, at 5 (Del. Mar. 5, 2020) (Order accepting interlocutory appeal)).
 Id. at *6 (citing Northwest Indus., Inc. v. B.F. Goodrich Co., 260 A.2d 428 (Del. 1969)).
 Id. at *9 (discussing Polygon Global Opportunities Master Fund v. West Corp., 2006 WL 2947486 (Del. Ch. Oct. 12, 2006) (inspection denied because stockholders lacked standing to bring the anticipated claim); Graulich v. Dell, Inc., 2011 WL 1843818 (Del. Ch. May 16, 2011) (denying inspection because the claims under consideration were time-barred); and West Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636 (Del. Ch. 2006) (plaintiff’s attempt to re-plead demand futility was barred by issue preclusion)).
 Id. at *10 (discussing Southeastern Pa. Transp. Auth. v. AbbVie. Inc., 2015 WL 1753033 (Del. Ch. Apr. 15, 2015) (denying inspection because plaintiffs did not allege viable non-exculpated claims for breach of the duty of loyalty or corporate waste), aff’d, 132 A.3d 1 (Table), 2016 WL 235217 (Del. Jan. 20, 2016)); id. at *11 (discussing Beatrice Corwin Living Irrevocable Tr. v. Pfizer, Inc., 2016 WL 4548101 (Del. Ch. Sept. 1, 2016) (denying inspection because stockholder’s contemplated claims could not succeed given the director’s good faith reliance on experts)).
 Id. at *12 (discussing Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016) (potential for exculpation does not defeat stockholder’s inspection rights), 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)); id. at *13 (“Delaware courts generally do not evaluate the viability of the demand based on the likelihood that the stockholder will succeed in a plenary action”); see also id. (citing Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020) (granting inspection request despite standing, statute of limitations and exculpation defenses to the contemplated claims)).