Delaware Supreme Court Orders Production of Emails in Response to Section 220 Demand
By Christopher Walsh, Gibbons P.C.
In KT4 Partners LLC v. Palantir Technologies Inc., decided on January 29, 2019, the Delaware Supreme Court required a corporation to produce internal emails—in addition to traditional corporate records such as meeting minutes and board resolutions—in response to a shareholder’s “books and records” demand under 8 Del. C. §220 as part of the shareholder’s investigation into potential wrongdoing by the corporation’s management. While cautioning that “§220 inspections are not tantamount to ‘comprehensive discovery’” and are “much less extensive than would likely be produced in discovery under the standards of Rule 26,” the Court held that, under the particular facts presented to it, emails exchanged among the corporation’s management must be produced in response to the §220 request. The facts that helped sway the court included the following: that management had conducted “its corporate business informally over email and other electronic media,” that “the potential wrongdoing appeared to have occurred by email,” and that “there [were] no board-level documents” relating to the areas of the shareholder’s investigation.
Delaware Court of Chancery Denies Section 220 Bid for Lack of a Credible Basis of Corporate Wrongdoing
By Christopher Walsh, Gibbons P.C.
A stockholder seeking corporate records under 8 Del. C. §220 for the purpose of investigating corporate wrongdoing must present a credible basis that wrongdoing may have occurred. On February 12, 2019, the Delaware Court of Chancery held in Hoeller v. Tempur Sealy Int’l, Inc. that evidence that management had failed to retain the corporation’s largest customer, allegedly because management engaged in “hard-ball negotiating tactics” with the customer, failed to establish a credible basis for wrongdoing. A credible basis that management had breached its duty of loyalty was lacking because the stockholder failed to provide evidence that management had a conflict of interest with respect to the customer relationship. And a credible basis that a duty of care had been breached was lacking because a mere disagreement with management’s business decisions does not justify an inference that management breached a duty of care. The court also found that evidence that management had previously touted the strength of its customer relationship in public statements was insufficient to establish a credible basis that management had knowingly misled investors because there was no evidence that management believed the statements were false when they were made.
Limited Liability Companies
Delaware Supreme Court Rules on Minority Members' Rights in the Sale of LLCs
Tarik J. Haskins
In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, the Delaware Supreme Court affirmed in part and reversed in part a decision by the Court of Chancery that used the implied covenant of good faith and fair dealing to permit minority members (the “Minority Members”) of a Delaware limited liability company (the “LLC”) to cause a sale of the LLC despite the right of certain holders (the “Small Holders”) to block the sale. The dispute in this case relates to the proper interpretation of the Minority Members’ rights, under the terms of the LLC’s limited liability company agreement (the “LLC Agreement”), to cause a sale of the LLC so long as each member of the LLC has received distributions equal to or higher than 1.5 times such member’s initial capital contributions. At the time that the Minority Members exercised their “exit” rights, all members of the LLC had received the 1.5x return except the two Small Holders. The Court of Chancery held that the plain language of the Minority Members’ exit rights under the LLC Agreement supported only one interpretation. According to the Court of Chancery, under the plain language of the LLC Agreement, the Minority Members could only force a sale if each member, including the Small Holders, received the highest amount necessary to cause each member to receive its 1.5x return and the LLC Agreement did not support a so-called top-off option, which would allow the Minority Members to allocate sale proceeds to Small Holders first until they receive their 1.5x return. Yet, the Court of Chancery determined that there was a gap in the LLC Agreement relating to how the Small Holders were admitted to the LLC, specifically the Court of Chancery held that “[b]y deferring until a later point the question of what rights subsequent members would have, the LLC Agreement created a gap.” The Court of Chancery used the implied covenant to fill such gap by finding that the Small Holders could receive a top-off payment to satisfy the 1.5x capital contribution return condition. The Delaware Supreme Court agreed with the Court of Chancery’s interpretation of the LLC Agreement but found that there was no gap in the LLC Agreement and therefore the implied covenant claim was meritless. The Delaware Supreme Court determined that a gap did not exist because the delegation by the LLC Agreement to the LLC’s board to determine the rights of subsequent holders did not result in a gap but rather was a “contractual choice to grant authority” to the board. Further, the Delaware Supreme Court stated that the implied covenant is not “an equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not, that later adversely affected one party to the contract.” The Delaware Supreme Court reiterated the point that under Delaware law, the implied covenant should be used sparingly and not to rebalance economic interests, particularly when sophisticated parties are involved.