- As technological advances have expanded the range of media used to conduct business, the law has also evolved regarding access to e-mail, text messages, and other forms of communication as books and records of the corporation.
- Although still evolving, some general principles have emerged that generally guide when the Delaware courts will permit access to electronic communications in section 220 proceedings.
- Producing e-mails in a books and records case cannot always be avoided, but there are steps corporations can take to mitigate the risk.
Since common law, stockholders have enjoyed a qualified right to inspect the corporation’s “books and records” for any “proper purpose”—i.e., a purpose reasonably related to the stockholder’s interests as a stockholder. Codified in state corporation statutes such as section 220 of the Delaware General Corporations Law (DCGL), these stockholder inspection rights were exercised infrequently until the Delaware courts began to encourage stockholders to utilize these “tools at hand” to obtain information necessary to plead demand excusal in derivative actions. As the Delaware Supreme Court noted in the seminal decision of Rales v. Blasband: “Surprisingly, little use has been made of section 220 as an information-gathering tool in the derivative context.” 634 A.2d 927, 935 n.10 (Del. 1993). Over the last 20 years, “Delaware courts have encouraged stockholders to use the ‘tools at hand’ (e.g., Section 220) to gather information before filing complaints that will be subject to heightened pleading standards.” Lavin v. West Corp., 2017 WL 6728702, at *9 (Del. Ch. Dec. 29, 2017). The significant increase in section 220 litigation over the last decade is a testament to the plaintiffs’ bar heeding the Delaware courts’ admonitions.
At the same time that section 220 books and records demands have become commonplace, rapid technological advances have driven the proliferation of the forms of media in which corporate information is kept, including, for instance, e-mails, text messages, and other electronic communications and records not traditionally viewed as a corporation’s “books and records.” The issue is only further complicated by the fact that officers’ and directors’ use of personal computers, smartphones, and personal e-mail accounts potentially renders communications beyond the direct control of the corporations whom the officers and directors serve. Until relatively recently, Delaware courts have been hesitant to compel the production of such “nontraditional” books and records in section 220 litigation, given that the extant jurisprudence dictates that a section 220 summary proceeding is far from coextensive in scope with Rule 34 discovery, and a stockholder is only entitled to those books and records deemed “necessary and essential” to achieving a proper purpose. Typically, board minutes, resolutions, and the like are deemed sufficient because the courts are mindful that a stockholder’s inspection rights must be balanced against the potential for burdensome and abusive “fishing expeditions” that mirror discovery requests in plenary corporate litigation. Nonetheless, as technological advances have expanded the range of media used to conduct business, the law has also evolved regarding access to e-mail, text messages, and other forms of communication as books and records of the corporation. Although still evolving, some general principles have emerged that generally guide when the Delaware courts will permit access to electronic communications in section 220 proceedings.
Who cares? Corporations and their officers and directors absolutely should. Section 220 demands have become virtually a necessary prerequisite to any stockholder derivative action, and the books and records that stockholders receive and use to draft their complaint can be outcome-determinative on a motion to dismiss. Whereas board minutes and more “formal” corporate records will allow little room for “creative interpretation” by the plaintiffs’ bar, the same cannot be said of e-mail communications where plans and decisions are informally deliberated in real time, perhaps satirically or within a context that may not be evident when portrayed with hindsight by counsel whose objective is to prove a breach of fiduciary duty. Although producing e-mails in a books and records case cannot always be avoided, there are steps corporations can take on a clear day to mitigate the risk.
The seminal decision granting access to e-mails is a 2013 nonpublished transcript ruling, Ind. Elec. Workers Pension Tr. Fund IBEW v. Wal–Mart Stores, Inc., 7779–CS, at 97–98 (Del. Ch. May 20, 2013) (Strine, C.), which ironically does not directly address the issue of whether e-mails are corporate records subject to section 220 inspection rights. In Wal-Mart, then-Chancellor Strine ordered the production of private communications between officers and directors concerning an alleged bribery scandal under investigation by the plaintiff. In the process, the issue arose as to whether e-mails and electronic documents created or maintained on personal devices were the appropriate subject of a section 220 demand. The court drew no distinctions between e-mails and documents created by employees upon their personal devices verses those generated within the company’s official systems, concluding that where the documents were created or maintained was not controlling: “In terms of this issue of the home devices . . . if you use your home computer to handle Wal-Mart information, I don't think that many companies would believe that . . . that makes it their personal information.” Given that the e-mails were deemed corporate records necessary for the plaintiff to conduct its investigation, they were to be produced irrespective of where they were physically created or maintained. Although the unpublished Wal-Mart decision did not directly address when the production of e-mails is appropriate in a section 220 action, its affirmance on appeal was routinely cited by the plaintiffs’ bar for that principle.
The issue arose again in Chammas v. Navlink, Inc., 2016 WL 767714 (Del.Ch. 2016), a case involving a director’s demand for books and records pursuant to the more expansive rights that directors have as compared to stockholders. In Chammas, the director plaintiff sought to “investigate whether ‘the other members of the Board and management are excluding them from board business and related communications,’ including emails prior to Board meetings and alleged Secret Meetings.” Consistent with Wal-Mart, Vice Chancellor Noble first observed that whether a document or communication is stored on the company’s servers is “not necessarily determinative of whether it constitutes a book or record of the company.” More important, the court concluded, is whether the book or record must be “in the possession or control of the corporation.” Second, recognizing the importance of burden considerations in the section 220 context, the court disclaimed that although its “holding is not to be interpreted as a blanket prohibition against inspection of private communications among directors, subjecting Section 220 proceedings to such broad requests, even by directors, runs contrary to the ‘summary nature of a Section 220 proceeding.’” Finally, the court observed that the books and records of the company are “those that affect the corporation’s rights, duties, and obligations . . . .” The court’s ultimate rejection of the demand for e-mails turned on the insufficiency of the plaintiff’s evidence of wrongdoing to warrant their production: “Mere suspicions of pre-meeting collusion among board members or board members and management, in the context of a Section 220 action, is insufficient to compel the production of private communications between such officers and directors . . . .”
The same year Chammas was decided, Vice Chancellor Laster analyzed whether e-mails may be within the scope of books and records obtainable pursuant to section 220. In Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016), a stockholder sought to investigate the hiring of Yahoo’s chief operating officer, and in that connection sought e-mails from the company’s CEO. The court began its analysis by categorically rejecting the argument that e-mails are per se beyond section 220’s scope. Vice Chancellor Laster observed the evolution of corporate record-keeping and the modern reality that virtually all books and records are now kept electronically: “Limiting ‘books and records’ to physical documents ‘could cause Section 220 to become obsolete or ineffective.’” The court then relied upon Wal-Mart to reject the argument that the company’s search for documents would be limited to the company’s devices, as opposed to a custodian’s personal device, holding that “a corporate record retains its character regardless of the medium used to create it.” As for the test to determine whether e-mails must be produced, the court limited itself to a single consideration: “As with other categories of documents subject to production under Section 220, what matters is whether the record is essential and sufficient to satisfy the stockholder's proper purpose, not its source.”
A few years later in Schnatter v. Papa John’s International, Inc., 2019 WL 194634 (Del. Ch. 2019), Chancellor Bouchard addressed the test suggested in Chammas as to whether e-mails (or any documents) are deemed books and records of the company—i.e., whether they are “those that affect the corporation’s rights, duties, and obligations . . . .” The defendant in Papa John’s resisted production of e-mails between directors discussing former director Schnatter, citing Chammas and claiming that “Schnatter is just curious about what his fellow fiduciaries were saying about him.” The court rejected the argument because the scope of documents ordered to be produced would be limited to those related to the plaintiff’s proper purpose, thus satisfying the standard. Commenting further, Chancellor Bouchard then effectively agreed with Vice Chancellor Laster’s reasoning for producing e-mails as articulated in Yahoo, albeit qualified by consideration of the additional costs inherent in producing electronic communications:
A further word is in order regarding emails and text messages from personal accounts and devices. The reality of today’s world is that people communicate in many more ways than ever before, aided by technological advances that are convenient and efficient to use. Although some methods of communication (e.g., text messages) present greater challenges for collection and review than others, and thus may impose more expense on the company to produce, the utility of Section 220 as a means of investigating mismanagement would be undermined if the court categorically were to rule out the need to produce communications in these formats.
Citing then-Chancellor Strine’s decision in Wal-mart, the court held that “if the custodians identified here . . . used personal accounts and devices to communicate about changing the Company’s relationship with Schnatter, they should expect to provide that information to the Company.” Expressly disclaiming the promulgation of any bright-line rule, Chancellor Bouchard grounded the analysis in “balanc[ing] the need for the information sought against the burdens of production and the availability of the information from other sources, as the statute contemplates.”
If there were any question about whether e-mails are properly within the scope of section 220 demands, the Delaware Supreme Court resolved it in KT4 Partners LLC v. Palantir Technologies Inc., 203 A.2d 738 (Del. 2018). In Palantir, after a potential sale of the company fell through because Palantir allegedly thwarted the deal and KT$ sought information pursuant to its far-reaching rights under an “Investors Rights Agreement,” Palantir allegedly amended the agreement to curtail KT4’s rights. KT4 made a demand to inspect Palantir’s books and records under section 220 of the DGCL for the purpose of investigating “fraud, mismanagement, abuse and breach of fiduciary duty.” Palantir rejected the demand, and KT4 commenced a section 220 action in the Delaware Court of Chancery. Following trial, Vice Chancellor Slights held that KT4 had shown a proper purpose of investigating potential wrongdoing in multiple areas, including Palantir’s amendment of the Investors’ Rights Agreement in ways that “eviscerated” KT4’s contractual information rights after KT4 sought to exercise those rights. The court specifically held that KT4 was entitled to “all books and records relating to” the amendments to the Investors’ Rights Agreement. After the parties were unable to agree on whether the books and records to be produced were to include e-mails, the court issued a final order that excluded e-mails from the documents that Palantir would be required to produce. The court reasoned in part that e-mails were not essential to fulfill KT4’s stated investigative purpose, based on the (mistaken) understanding that Palantir possessed and would produce formal board-level documents relating to the amendments of the Investors’ Rights Agreement, rendering a further production of e-mail unnecessary for KT4’s purpose.
KT4 appealed the Court of Chancery’s ruling. Importantly, on appeal, Palantir conceded that other than the amendments to the Investors’ Rights Agreement themselves, responsive nonemail documents did not exist, and that e-mails related to the amendments did exist. The Delaware Supreme Court held that the e-mails plaintiff sought were necessary and essential to investigating the alleged wrongdoing because the defendant admitted other, more traditional forms of books and records did not exist. Insofar as being required to produce e-mails was concerned, the Supreme Court viewed Palantir’s obligation as a self-inflicted wound. As the Supreme Court made clear, “if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions and official letters, it will likely be able to satisfy a Section 220 petitioner’s needs solely by producing those books and records.” The court conversely cautioned that “if a respondent in a § 220 action conducts formal corporate business without documenting its actions in minutes and board resolutions or other formal means, but maintains its records of the key communications only in emails, the respondent has no one to blame but itself for making the production of those emails necessary.”
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The foregoing cases illustrate several principles inherent in any analysis of whether electronic communications will be ordered produced in section 220 litigation. First, electronic communications are deemed corporate records that may be ordered in section 220 proceedings, but only to the extent that they are “necessary and essential” to the plaintiff’s investigation. Second, whether or not the electronic communications reside on the corporation’s servers or personal devices, if they are necessary and essential to the plaintiff’s investigation, they may subject to an order compelling production. Third, although e-mails may be ordered to be produced in section 220 litigation, the cost and burden of such a production will weigh considerably in the court’s final determination. And finally, Palantir serves as an admonition to corporate boards and their counsel to be mindful to observe corporate formalities and appropriately document board meetings and actions through minutes, resolutions, and other official materials, and avoid conducting “formal corporate business . . . through informal electronic communications.” Absent proper recordkeeping and formal documentation of the board’s decisions, there is risk that a corporate respondent in a section 220 action may be ordered to produce e-mails as “necessary and essential” to satisfying a stockholder’s books and records demand.