Plaintiffs cited Tactron, Inc. v. KDI Corporation and High River Ltd. Partnership v. Forest Labs, Inc., but the court distinguished each case. In Tactron, the court granted a demand for records to aid in a proxy contest, but limited plaintiffs to reviewing only logistical information and not information on business decisions.
The Occidental plaintiffs had already succeeded in similar claims in Forest Labs. The court granted their demand to inspect books and records related to business decisions when the purpose was to prepare a proxy contest, but limited the grant to documents that were “essential and sufficient” for the proxy contest purpose. In Occidental, by contrast, significant information about the underlying acquisition was highly publicized and freely available. Plaintiffs asserted that an information gulf impaired their proxy contest efforts, but the court found that they already had all of the essential information they needed without access to Occidental’s internal documents. Therefore, unlike in Forest Labs, the information plaintiffs sought was not “essential and sufficient.”
Plaintiffs also argued, more traditionally, that their purpose was to investigate corporate mismanagement; however, plaintiffs’ pretrial brief argued that they did not allege intentional breach of fiduciary duty by the board, so the court dismissed this argument summarily. The court declared that disagreement with business judgment is insufficient to establish a credible basis for mismanagement; some allegation of fiduciary breach is required.
The court clarified the proper purpose requirement for a Section 220 demand: (1) various proper purposes include an investigation of wrongdoing or mismanagement beyond a disagreement with business judgment if the stockholders demonstrate a credible basis for their suspicion; and (2) if the purpose propose is to engage in a proxy contest, then any documents requested must be “essential and sufficient” to the proxy contest.
The court left open the possibility that a proxy contest may be a proper purpose in a case with different facts. The court determined that with the right facts, it “might endorse a rule that would allow a stockholder to receive books and records relating to questionable, but not actionable, board-level decisions . . . in aid of a potential proxy contest.” According to the court, information sought through a Section 220 demand would need to be “essential and sufficient” to pursuing a proxy contest to allow stockholders access to the records.