By: Jillian A. (Boberick) Tyson, DJCL Bluebook Editor and Schmutz Fellow at Widener University Delaware Law School.
A decision issued by the Delaware Supreme Court clarifies the duty of a corporation to produce electronically stored information (“ESI”) as part of a request for corporate books and records.[1] Stockholder requests for books and records are made pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”).[2] Section 220 has become the precursor to filing certain stockholder actions, including derivative claims and class action suits.[3] If a corporation receives such a demand for ESI, it may well mean that, upon a sufficient showing that the ESI is necessary to investigate potential wrongdoing, stockholders are entitled to inspect it.[4]
Stockholders of Delaware corporations enjoy “a qualified common law and statutory right to inspect the corporation’s books and records.”[5] In order for a stockholder to properly commence an action to inspect a corporation’s books and records, a stockholder must follow the procedures detailed in Section 220. In accordance with Section 220, a stockholder must make a demand for inspection, in writing and under oath, on the corporation.[6] Within the writing, the stockholder must sufficiently demonstrate that he is, in fact, a stockholder,[7] and must assert a “proper purpose” for the requested inspection.[8] The corporation then has five (5) business days to respond to a stockholder’s demand, or the demand is deemed rejected.[9] If either the corporation refuses, or does not timely respond to the demand, the stockholder may apply to the Delaware Court of Chancery to compel the corporation to allow inspection of the books and records.[10]
A key issue regarding Section 220 actions is whether the demand for books and records includes inspection of a corporation’s ESI.[11] A corporation’s ESI could include thumb drives, digital downloads, text messages, word processing documents, web pages,[12] and even management-level emails.[13] The issue of whether ESI is “necessary” to accomplish the stockholder’s purpose has come up explicitly in the Delaware Court of Chancery on several occasions.[14] In determining whether a request for ESI will be granted, the Court looks to whether the “traditional board-level materials” such as minutes, resolutions, and official letters, would accomplish the stockholder’s proper purpose.[15]
If a corporation retains documentation of formalities such as board minutes and resolutions in a hard-copy scheme, producing these records will likely satisfy a Section 220 request, and production of certain ESI, such as email, will be less likely.[16] However, when the only responsive corporate documents that are likely to exist are in the form of email, production of this ESI will more likely be required.[17] Whether hard copies of books and records will satisfy the specific purpose standard is “fact specific, and will necessarily depend on the context in which the shareholder’s inspection demand arises.”[18] A stockholder does not have an open-ended entitlement to inspect corporate books and records; Delaware Courts have emphasized that the requested documents must be sufficient to assist the stockholder’s stated purpose.[19] Therefore, it is important to remember that a Section 220 demand is not a substitute for discovery, and a reviewing court must tailor its order to cover “only those books and records that are ‘essential and sufficient to the stockholder’s stated purpose.’”[20] As a result, there may be some Section 220 cases in which the corporation is not required to produce any ESI because the hard copies are sufficient to assist the stockholder.[21] However, if a corporation “decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information which [Section 220] entitles them.”[22]
The full effect of electronic storage methods on Section 220 of Delaware General Corporation Law and on corporate business operations has yet to be fully understood. One reason for this is that individuals, and corporations alike, are “increasingly [doing] business electronically—using computers to create and store documents, make deals, and exchange e-mails.”[23] Technological advances will continue to expand the definition of what “books and records” includes.[24] This growing definition may lead to more nuances in law as the digital world progresses. In an effort to keep confusion at a minimum, the Delaware Supreme Court aptly provided the following advice: corporations should focus more on the substantive information that is being requested, and less on the format in which it is stored.[25]
About the Author: Jillian is a fourth-year Extended Division student and is expected to graduate in May, 2020. Jillian obtained an interim Judicial Clerkship with the Honorable Richard R. Cooch in the Leonard L. Williams Justice Center during the summer of 2018. Jillian spent her 2018-2019 academic school year working at Marshall Dennehey Warner Coleman & Goggin as a Law Clerk in the Professional Liability Department. Following this experience, she spent her 2019 summer participating in the Marshall Dennehey Warner Coleman & Goggin’s Summer Associates Program. Currently, Jillian is serving the Honorable Karen L. Valihura in the Delaware Supreme Court as a Judicial Extern. Jillian is the 2019-2020 Schmutz Fellowship Recipient, and she is also the Bluebook Editor for Volume 45 of the Delaware Journal of Corporate Law. Jillian is an active member of Transactional Law Honors Society, Phi Alpha Delta, and Moot Court at Delaware Law School. Upon graduation, Jillian is returning to the Leonard L. Williams Justice Center to serve as Law Clerk to the Honorable Andrea L. Rocanelli. Following her clerkship, Jillian will serve as Law Clerk to Justice Valihura in the Delaware Supreme Court for the 2021-2022 term.
Footnotes:
[1] See KT4 P’rs LLC v. Palantir Techs., Inc., 203 A.3d 738 (Del. 2019).
[2] 8 Del. C. § 220.
[3] See Paul v. China MediaExpress Hldgs., Inc., 2012 Del. Ch. LEXIS 3, at *31 (Jan. 5, 2012).
[4] See KT4 P’rs LLC,203 A.3d 742.
[5] Id. at 751.
[6] 8 Del. C. § 220.
[7] Id. § 220(a)(1) (defining “stockholder” as “a holder of record of stock in a stock corporation, or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person”).
[8] Id. § 220 (assigning the burden of proving “proper purpose” to the stockholder making the demand).
[9] Id. § 220(c).
[10] Id.
[11] See KT4 P’rs LLC, 203 A.3d at 747.
[12] Francis G.X. Pileggi, et al., Inspecting Corporate “Books and Records” in a Digital World: The Role of Electronically Stored Information, 37 Del. J. Corp. L. 163, 165 (2012).
[13] See KT4 P’rs LLC, 203 A.3d at 747.
[14] See id. at 752 n.71 (specifying Delaware Court of Chancery opinions in which the court granted inspection of various ESI, including emails).
[15] See id. at 752-53, 757.
[16] Id.
[17] Id. at 756 (finding that “[t]he Court of Chancery should not order emails to be produced when other materials . . . would accomplish the [stockholder’s] proper purpose”).
[18] KT4 P’rs LLC, 203 A.3d at 751 (quoting Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 372 (Del. 2011)).
[19] BBC Acquisition Corp. v. Durr-Fillauer Med., Inc., 623 A.2d 85, 88 (Del. Ch. 1992).
[20] KT4 P’rs LLC, 203 A.3d at 752 (internal quotations omitted).
[21] Id. at 752-53.
[22] Id. at 742.
[23] Pileggi, supra note 12, at 165.
[24] Id. at 165-66.
[25] KT4 P’rs LLC, 203 A.3d at 757 (noting that “it may be that a focus on this question of substance, rather than form, would provide a more concrete basis for the parties to resolve their differences and, at the very least, better help the Court of Chancery to decide any final disputes”).