Shareholder Inspection Rights Out of Control

Professor Geeyoung Min at Michigan State University College of Law and Alexander M. Krischik, an associate at Richards, Layton & Finger, P.A., recently published an article summarized in the CLS Blue Sky Blog entitled “Realigning Shareholder Inspection Rights.” The article discusses Section 220 of the Delaware General Corporation Law and notes that two recent shifts in the law present challenges for both corporate defendants and stockholder plaintiffs.  For corporate defendants, the article notes that Delaware courts “have expanded the scope of books and records available under Section 220 to include emails, text messages, and other electronically stored information.”  For stockholder plaintiffs, the article notes that “Delaware plaintiffs have become more vulnerable to a risk of preclusion due to the extra time … required to exercise their inspection rights” in light of the Delaware Supreme Court’s decision in California State Teachers’ Retirement System v. Alvarez, 179 A.3d 824 (Del. 2018).

I would suggest that this paper overstates the problem facing stockholder plaintiffs pursuing Section 220 demands vis-a-vis stockholders who do not pursue such demands  For stockholder plaintiffs who make Section 220 demands, they can address in large part the issues faced from the risk of preclusion by moving to intervene in lawsuits filed by stockholders who do not. 

On the other hand, the article understates the problem facing companies faced with Section 220 demands.  The Delaware courts have not just expanded the scope of the books and records available to stockholders, they are also holding that the absence of discussion of specific details in board minutes permits adverse inferences to be drawn against corporate defendants and their directors and officers in plenary litigation that follows productions under Section 220.  See, e.g., Goldstein v. Denner, 2022 WL 1671006, at *7, *8, *9, *18, *21-22, *56 (Del. Ch. May 26, 2022).  Courts are also holding the absence of production of emails on specific issues in connection with a Section 220 demand – whether the scope of such production resulted from an agreement between the parties or was ordered by a court -- allows for an inference that such emails do not exist.  Significantly, these developments are contrary to other decisions in Delaware holding that “there is no requirement under Delaware law that board minutes adopt any level of particularity.”  See, e.g., Feuer v. Redstone, 2018 WL 1870074, at *14 n. 146 (Del. Ch. Apr. 19, 2018); see also In re GGP, Inc. Stockholder Litig., 2021 WL 2102326, at *27 (Del. Ch. May 25, 2021) (“[i]n the real world, meeting minutes need not contain the level of detail contained in a proxy issued to inform stockholders of all material issues related to a transformative transaction”), rev’d on other grounds by __ A.3d __, 2022 WL 2815820 (Del. July 19, 2022).

Furthermore, Delaware courts at one point seemed to suggest that corporate defendants who produced documents under Section 220 could use such documents in pleading motions to argue that stockholder plaintiffs were taking language in a particular document out of context and/or were taking a particular document out of context.  See, e.g., Amalgamated Bank v. Yahoo, Inc., 132 A.3d 752, 796-98 (Del. Ch. 2016).  In application, however, the courts are quite reluctant to look at Section 220 documents produced by the corporate defendants in determining whether allegations and inferences therefrom suggested by plaintiffs are “reasonable.”  Rather, courts are more likely to view such arguments by defendants as raising “factual conflicts” or “competing interpretations” that are not appropriate on a motion to dismiss.  Id.; see also Goldstein, 2022 WL 1671006, at *4.

I believe that courts are wrongly applying all of these concepts.  It should be the rare case where a stockholder plaintiff can obtain books and records from a corporate defendant beyond formal board minutes and presentations.  Except in unusual circumstances, courts should not assume that the lack of a particular detail in board minutes or presentations means that such detail was not discussed.  Indeed, it would seem contrary to the business judgment rule itself for courts to second guess what boards include in minutes and presentations.  And, courts should judge whether an allegation or claim is reasonable in light of what is included in documents produced in accordance with a Section 220 demand such that “reasonable” inferences are actually “reasonable” and not just possible.  Alternatively, the Delaware legislature needs to revisit Section 220 and consider limits on who can make such demands (and/or who can make such demands and obtain documents beyond formal board minutes and presentations) and provide more specific rules as to how Section 220 documents can be used in connection with pleading motions.

In the meantime, it would seem that it is no longer safe to rely on the general understanding “there is no requirement under Delaware law that board minutes adopt any level of particularity.”  It would now seem that board minutes must reflect all of the material issues discussed by the board with sufficient particularity so that “missing” information does not result in adverse inferences being drawn against the board.