December 2023 in Brief: Corporations, LLCs & Partnerships

Court of Chancery Grants Section 220 Books and Records Demand Directed to Public Company’s Private Subsidiary, but Limits Scope of Documents Available to Plaintiff

Greenlight Capital Offshore Partners, Ltd. v. Brighthouse Financial, Inc., C.A. No. 2022-1067-LWW (Del. Ch. Nov. 20, 2023).

By Benjamin Stowers, Potter Anderson & Corroon LLP

In an opinion evaluating the Section 220 books and records demand plaintiff Greenlight Capital Offshore Partners, Ltd. (“Greenlight”) made on defendant Brighthouse Financial, Inc. (“Brighthouse”), the Court of Chancery held that Greenlight had established a proper purpose for inspection of Brighthouse’s books and records, but that such inspection would be limited to the materials necessary, essential, and sufficient to satisfy such purpose. 

Brighthouse is a public holding company that provides annuity and life insurance products through layers of subsidiaries and relies on capital inflows from its subsidiaries to meet obligations and pay dividends. Greenlight stated that the purpose of its Section 220 books and records demand was to determine the value of its Brighthouse shares, and in connection therewith, mainly requested financial information of Brighthouse Reinsurance Company of Delaware, Brighthouse’s captive subsidiary (the “Captive Subsidiary”), to assess the likelihood that Brighthouse would issue future dividends, similar to dividends paid in 2020 and 2021. Greenlight also requested minutes from meetings of the board of directors of Brighthouse and its subsidiaries. Brighthouse argued that the information requested by plaintiff was proprietary and unnecessary for the valuation of Greenlight’s shares.

The Court disagreed, noting that a “proper purpose” for a Section 220 books and records demand is one that is “reasonably related to such person’s interest as a stockholder,” with the valuation of shares well settled as a proper purpose. Further, the likelihood of a dividend being issued is an integral component of a corporation’s value. Section 220 demands will be denied, however, to the extent that adequate public information is available to satisfy the stockholder’s stated purpose, with the Court reaffirming that inspection “should be circumscribed with precision” and only include the documents that are “necessary, essential and sufficient to the stockholder’s purpose.”

Although the bulk of Brighthouse’s financial information is publicly available via regular Securities and Exchange Commission (SEC) filings, the Captive Subsidiary files its financial information with the Delaware Department of Insurance (the “Delaware Insurance Department”), which is not publicly available, but which includes cash flow information that the Delaware Insurance Department uses to assess requests to hold reserves or to declare and pay dividends.

Noting that the financial information of the Captive Subsidiary is already factored into the valuation of Brighthouse, the Court held that the broad financial information of the Captive Subsidiary being requested was therefore not necessary or essential for Greenlight to value its Brighthouse shares. The Court noted further that the financial information of the Captive Subsidiary was too attenuated to aid this determination.

The Court therefore determined that the necessary, essential, and sufficient documents made available to plaintiff would be limited to those that provided further clarity regarding the likelihood of a dividend, holding that Greenlight was entitled to the responsive documents (if any) sufficient to show that (1) the board of Brighthouse or its subsidiaries determined to request approval from the Delaware Insurance Department to pay a dividend in the near term, as reflected in meeting minutes, or (2) Brighthouse or its subsidiaries engaged with the Delaware Insurance Department regarding a formal request for approval to pay a dividend in the near term. The Court’s determination to cabin the scope of documents available to Greenlight is consistent with recent Delaware case law limiting the documents available for stockholder inspection to board documents and other formal communications versus emails and other types of informal internal communications.

Brighthouse then argued that the Court should bind Greenlight to a confidentiality order preventing Greenlight from trading on any non-public information that plaintiff may receive. The Court explained that such confidentiality orders protecting non-public information are common but that a trading restriction goes too far. The Court explained that Greenlight’s trading is already subject to federal law and that Delaware law should not engage in duplicative efforts, and it held that a standard confidentiality order, such as the form the parties had negotiated prior to litigation, was sufficient to protect Brighthouse’s interests.