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The Supreme Court of Delaware recently affirmed a decision by the Court of Chancery that ordered a corporation to produce certain books and records to a shareholder, and which granted leave to the shareholder to take a corporate representative deposition under Rule 30(b)(6). The case, AmerisourceBergen Corp. v. Lebanon County Emps.’ Ret. Fund, — A.3d –, 2020 WL 7266362 (Del. Dec. 10, 2020), continues the trend of encouraging shareholders to make these requests of corporations before filing derivative suits on behalf of the corporation.

The governing statute is Section 220 of the Delaware General Corporation Law, which provides shareholders of Delaware corporations the right to request that the corporation produce certain books and records upon written request. Section 220(c) provides that a shareholder who wishes to inspect a corporation’s books and records must meet the following requirements: (1) the requesting person is a shareholder of the corporation; (2) the shareholder has made a written demand in the required form and manner; and (3) the inspection is requested for a “proper purpose.” Id. at *4.

This case focuses on the last requirement, whether a shareholder has identified a proper purpose. Here, AmerisourceBergen was one of the country’s largest opioid distributors, and in the wake of the opioid crisis, faced a panoply of regulatory investigations and lawsuits. To date, the corporation has spent more than $1 billion on “opioid-related lawsuits and investigations,” and analysts estimated that AmerisourceBergen could spend more than $100 billion to reach a global settlement. Id. at *3. The shareholder in this case sought to inspect thirteen categories of books and records related to the corporation’s opioid practices, and it identified four investigatory purposes:

1. To investigate possible breaches of fiduciary duty, mismanagement, and other violations of the law by officers and directors;
2. To consider any remedies to be sought related to this conduct;
3. To evaluate the independence and disinterestedness of the members of the Board of Directors; and
4. To use information obtained through inspection to “evaluate possible litigation or other corrective measures with respect to some or all of these matters.”

Id. at *3. The corporation rejected the request on the ground that the plaintiff-shareholder’s reason for requesting the books and records failed to articulate a proper purpose. The Court of Chancery sided with the shareholder and ordered the corporation to produce books and records, and also granted leave to the shareholder to conduct a corporate representative deposition under Rule 30(b)(6).

On appeal, the Supreme Court had the opportunity to confirm the broad scope of Section 220. The primary arguments advanced by the corporation were the following: (1) that the inspection demand was deficient because it did not disclose the ultimate objective, i.e. what the shareholder intended to do with the documents; (2) that the shareholder was required to show a credible basis that actionable wrongdoing had occurred; and (3) a corporate representative deposition was improper. All of these arguments were rejected.

With respect to the question of a proper purpose, the Court noted that investigating corporate wrongdoing, such as allegations of possible mismanagement, waste, or wrongdoing, is a proper purpose under Delaware law. But the Court rejected the corporation’s arguments that the shareholder also needed to explain how the information would be used, or explain why the alleged wrongdoing would be “actionable” in litigation. The Court explained that a shareholder may have more than one purpose, for instance, a shareholder may use information for litigation, but also for taking corrective measures outside of litigation. Id. at *8. Likewise, the Court held that a shareholder does not bear the burden of establishing that the suspected wrongdoing would be “actionable” in court, or put differently, that it would state a valid legal claim. Given that a shareholder need only establish a “credible basis” of wrongdoing under Section 220, which has been described under Delaware law as the “lowest possible burden of proof,” a shareholder is not also required to show that its legal claims would succeed. Id. at *13-14. That is especially true in a summary proceeding under Section 220.

Finally, the Court held that the Court of Chancery did not abuse its discretion in ordering a corporate representative deposition. While such a deposition is not available in every case, the corporation had refused to disclose in discovery the types of records it maintains. Under these facts, granting leave to conduct a deposition was not an abuse of discretion. Id. at *15.

Takeaways: this case continues the broader trend of encouraging shareholders to seek documents under Section 220 before filing derivative claims. The applicable legal standard of “proper purpose” remains relatively low, and shareholders are not required to prove their case in advance or describe with specificity what they intend to do with the books and records that they obtain.