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February 19, 2021 Practice Points

The Delaware Supreme Court Provides Guidance Regarding Section 220 Inspection Requests to Investigate Corporate Wrongdoing

The decision rejects two objections commonly raised by corporate defendants seeking to resist or limit Section 220 inspection demands.

By Neeckaun Irani and Shireen Leung

A decision by the Delaware Supreme Court in AmerisourceBergen Corp. v. Lebanon Cty. Employee’s Ret. Fund & Teamsters Local 443 Health Servs. and Ins. Plan clarifies a stockholder’s burden in obtaining corporate records for the purposes of investigating corporate wrongdoing. Specifically, the court held that stockholders need not identify their intended objectives when investigating corporate wrongdoing and are not required to establish that the alleged wrongdoing is judicially actionable.

AmerisourceBergen is one of the largest opioid distributors in the country. Following a litany of lawsuits and investigations related to its opioid distribution and its alleged failure to address suspicious ordering, the plaintiffs served a Section 220 demand requesting inspection of books and records that relate to the company’s involvement in the opioid addiction crisis. AmerisourceBergen rejected the demand, claiming that the demand failed to state a proper purpose and was overbroad in its request.

In response, the plaintiffs filed an action in the Court of Chancery seeking to compel production of the requested documents. The Court of Chancery found that the plaintiffs had established a credible basis to suspect AmerisourceBergen of mismanagement. More important, the Court of Chancery held that a stockholder is not required to state the objectives of their investigation and rejected AmerisourceBergen’s contention that the plaintiffs were required to show that the wrongdoing they sought to investigate was judicially actionable. As to relief awarded, the Court of Chancery granted an inspection of formal board-level documents and a 30(b)(6) deposition of the company to determine if any additional responsive documents existed. AmerisourceBergen subsequently moved for and was granted interlocutory appeal.

On appeal, AmerisourceBergen asserted two common defenses against Section 220 inspection demands. AmerisourceBergen first contended that the demand failed to demonstrate a proper purpose because it did not disclose what plaintiffs intended to do with the fruits of the inspection. In the alternative, AmerisourceBergen argued that Chancery Court erred in not requiring plaintiffs to establish that the alleged wrongdoing was actionable.

Affirming the Chancery Court’s decision in all respects, the Court noted that AmerisourceBergen’s reliance on a line of cases that required disclosure of intended use, such as Northwest Industries v. B.F. Goodrich, 260 A.2d 428 (Del. 1969), was misplaced. Unlike the AmerisourceBergen plaintiffs, the Northwest plaintiffs requested materials where propriety of the purpose was unclear. In contrast, an inspection request to investigate corporate wrongdoing is inherently a proper purpose because it directly serves the interests of all stockholders and would increase stockholder return.

Regarding the company’s alternative argument, the Court clarified that a stockholder is not required to prove that actionable wrongdoing occurred, only that there was possible mismanagement that would warrant further investigation. On the other hand, where litigation is the sole purpose for a demand but an insurmountable procedural obstacle unrelated to the suspected wrongdoing bars the stockholder’s path, the demand lacks a proper purpose and “can only be seen as assuaging the stockholder’s idle curiosity or a fishing expedition.”

The outcome in AmerisourceBergen demonstrates Delaware courts’ protective view of stockholders’ right to inspect corporate books and investigate possible corporate mismanagement, waste, or wrongdoing. Notably, in making a Section 220 request, stockholders need not establish how they will use the fruits of their inspection, and their use is not limited to judicially actionable wrongdoing.

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Neeckaun Irani and Shireen Leung are associates with Weil, Gotshal & Manges LLP in Silicon Valley, California.

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