The Boundary of “Proper Purpose” for Corporate Books and Records Review in Delaware

High River Limited Partnership, et al. v. Occidental Petroleum Corporation arises from Occidental Petroleum’s bidding war and high-profile acquisition of Anadarko Petroleum. Plaintiffs bought 26 million shares of Occidental stock worth $1.16 billion after the acquisition was announced. Plaintiffs disagreed with Occidental’s sale of some assets to be acquired in the deal and the price it paid to secure financing through preferred stock to avoid a shareholder vote, among other business decisions. Ten days after sending its demand, plaintiffs filed suit to enforce their demand and launched a proxy fight with intent to obtain consent to elect four members of Occidental’s board of directors, change Occidental’s bylaws, and modify the consent solicitation process. Occidental strongly contested their efforts.

Under case law interpreting title 8, section 220 of the Delaware Code (Section 220), stockholders can demand access to a company’s books and records only if they present a “proper purpose.” Although a court may deem as proper one of several purposes, a well-established proper purpose exists when a stockholder demonstrates a credible basis to suspect that the company has engaged in wrongdoing, such as by breaching its fiduciary duty. The issue lies in the boundaries of proper purposes.

Plaintiffs argued for expanding a proper stockholders’ purpose of communicating with others “in furtherance of a potential” or ongoing “bona fide proxy contest.” The rule would allow stockholders to employ Section 220 to obtain business documents upon showing “a credible basis that the information sought would be material in the prosecution of a proxy contest.” It would open the door for stockholders to inspect books and records regarding directors’ questionable but not actionable business judgment in furtherance of a proxy contest.

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.