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Most Recent Section 220 Decisions Amplify Stockholders’ Broad Rights to Inspect Corporate Books and Records—NVIDIA, SharpSpring, and Hauppauge Digital

M&A/PE Briefing | September 12, 2022

In recent years, the Court of Chancery’s docket increasingly has been occupied with Section 220 actions by stockholders seeking to inspect corporate books and records to investigate possible corporate wrongdoing or mismanagement. In part to curtail premature or frivolous litigation, the Court of Chancery has encouraged stockholders to conduct such investigations before deciding whether to bring litigation. Stockholders have heeded this call, and in many cases the information obtained through a Section 220 investigation has provided a basis for more particularized allegations, which has resulted in more cases surviving the pleading stage of litigation than in the past (particularly in the Corwin, MFW and Caremark contexts). At the same time, the Delaware courts have been wrestling with the proper contours of stockholders’ rights in Section 220 cases. In this Briefing, we discuss the three most recent Section 220 decisions and offer related practice points.

The Most Recent Section 220 Decisions

  • In NVIDIA v. Westmoreland (July 19, 2022), [i] the Delaware Supreme Court upheld the Court of Chancery’s ruling that hearsay evidence (if reliable) can be used by stockholders in a Section 220 proceeding not only to show the requisite “credible basis” (which Supreme Court precedent already had established) but also to show the requisite “proper purpose.”
  • In Hightower v. SharpSpring (Aug. 31, 2022), [ii] after the company provided formal board materials in response to a Section 220 demand relating to the company’s sale process, the Court of Chancery ordered the production of additional documents in light of the failure of the stockholder disclosure regarding certain key events to “match up” with the board minutes.
  • In Rivest v. Hauppauge Digital (Sept. 1, 2022), [iii] the Court of Chancery, emphasizing that there is no “presumption of confidentiality” for documents produced in response to a Section 220 demand, rejected the company’s request for confidentiality that was based only on a “standard” concern (that all companies would have) about use of its information by competitors.

Section 220

Delaware General Corporation Law Section 220 permits a stockholder (who complies with the “form and manner” requirements of making a demand) to access corporate books and records for a “proper purpose”—which, most commonly, is to investigate suspected corporate wrongdoing (such as potential fiduciary breaches by directors or officers) or mismanagement. The stockholder must demonstrate some “credible basis” for suspecting wrongdoing or mismanagement—which the courts have interpreted as imposing a relatively low bar to meet. If the stockholder shows a proper purpose and credible basis, the stockholder is entitled to inspect books and records—but only those that are “necessary or essential” to investigate the suspected wrongdoing or mismanagement it has specified.

Historically, companies generally were successful in defeating Section 220 demands on the basis that the stockholder was merely engaging in a “fishing expedition” to find evidence of wrongdoing or mismanagement; and, when a stockholder was successful in establishing entitlement to an inspection, the courts typically would grant access only to a narrow universe of material, generally “formal board materials” (such as board meeting minutes and presentations made to the board). In recent years, however, the courts have taken a more expansive approach to Section 220, construing it to permit access to investigate wrongdoing so long as there is any reasonable basis for suspecting it; and now more frequently granting access to “informal materials,” including, at times, directors’ and officers’ personal emails, particularly where the formal board materials do not address the subject at issue and/or the plaintiff has made particularized allegations with respect to the existence of relevant communications.

Moreover, the courts have reprimanded corporations that have responded to Section 220 demands with “overly aggressive” litigation strategies in seeking not to produce appropriately requested books and records. Further, decisions have been issued establishing that a demand cannot be resisted on the grounds that the alleged wrongdoing or mismanagement would not withstand a motion to dismiss if litigation were brought; and that there is no “presumption” of confidentiality for documents produced under a Section 220 demand. With more Section 220 demands being made, and as some issues (particularly relating to the scope of the document production) are especially difficult to resolve amicably, the Delaware courts’ dockets increasingly have been occupied with Section 220 litigation.

NVIDIA—Delaware Supreme Court Holds that Hearsay Evidence Can Be Used to Establish a “Proper Purpose” for Section 220 Demands

In NVIDIA Corporation v. City of Westmoreland Police and Fire Retirement System, the Delaware Supreme Court, in an en banc opinion written by Justice Tamika Montgomery-Reeves, largely upheld the post-trial judgments of the Court of Chancery in favor of the stockholder-plaintiffs.

Key Points

  • The Delaware Supreme Court held that hearsay evidence, if reliable, can be used in a Section 220 proceeding not only to support that the stockholder-plaintiffs have the requisite “credible basis” (as the Supreme Court has previously held) but also to support that they have the requisite “proper purpose.” However, the Supreme Court held that, in this case, the hearsay evidence the stockholders offered could not be used because the stockholders had engaged in “misleading litigation tactics” relating to the calling of witnesses that effectively deprived NVDIA of the opportunity to depose and cross-examine the alleged hearsay witnesses and thus to “test” the stockholders’ stated purpose.
  • The Delaware Supreme Court also held that the stockholder-plaintiffs were entitled to obtain NVIDIA executives’ emails. The Supreme Court held that the Court of Chancery did not abuse its discretion in ruling that any “informal” board materials or officer-level materials, including certain specific emails, might be “necessary or essential” documents, based on the stockholders’ “specific and concrete” allegations that the CEO-director and another company executive “had communicated about…the subject matter of the Stockholders’ [Section 220] request.”

Background. NVIDIA designs, makes and sells “graphics processing units” (“GPUs”). (GPUs are computer chips that perform rapid mathematical calculations.) Historically, NVIDIA sold its GPUs for video gaming (“Gaming GPUs”). In early 2017, however, NVIDIA experienced an increase in sales of Gaming GPUs as consumers began buying them to use for cryptocurrency mining. (Cryptocurrency mining is a process where computers run software to solve complex mathematical problems in order to verify cryptocurrency transactions so that they can be recorded on an online blockchain.) To protect the supply of Gaming GPUs for its gaming customers, NVIDIA began to make a new type of GPU, without the graphics capabilities needed for gaming (“Crypto GPUs”)—but crypto miners nonetheless continued to buy Gaming GPUs. As demand for the Gaming GPUs continued to increase, the supply became scarcer; NVIDIA’s multi-level channel of distributors (who controlled pricing and sales) raised the price for the Gaming GPUs; and gamers (NVIDIA’s traditional and primary customers) were increasingly priced out of the market. By early 2019, with a decline in demand for cryptocurrency, there was a sharp decline in demand for GPUs for crypto mining and, based on the excess inventory in the distribution channel that had developed, the company delayed the production of planned new products—with the result that revenues decreased sharply.

Earnings call statements. During 2017 and 2018, NVIDIA executives made a series of statements on earnings calls reassuring investors that the company was managing market changes in demand well, that crypto miners were continuing to buy Gaming GPUs, and that, although miners’ demand for GPUs was affected by a decline in cryptocurrency prices, there would be pent-up demand from gamers. From August 2017 to September 2018, as NVIDIA’s stock price rose (from about $156 to $281 per share), NVIDIA’s CEO and CFO sold some of their shares. (The CEO sold 110,000 shares in September 2017 for $18.2 million. The CFO sold a total of 36,333 shares from October 2017 through September 2018, pursuant to a 10b-5 plan, for $7.7 million.) On November 15, 2018, NVIDIA announced that the pent-up gaming demand it had expected had not materialized, leading to excess supply and a revenue miss. In the days following the call, NVIDIA’s stock price declined 28.5% (closing at $144.70 per share on November 19, 2018). In February 2019, NVIDIA announced that revenue for the fourth quarter of 2018 was down 45% year-over-year. By November 2019, however, the stock price had recovered to over $200 per share.

Federal securities class action suit. In June 2019, certain NVIDIA stockholders filed a securities class action in federal court in California, claiming that NVIDIA and certain of its directors (including the CEO and the CFO) made false or misleading statements during earnings calls about the effect of crypto mining on NVIDIA’s revenue and the demand for Gaming GPUs. After the federal court held that the plaintiffs failed to meet the pleading standards for falsity and scienter, the plaintiffs filed an amended complaint with anonymous testimony from a former NVIDIA employee (referred to as “FE 1”) who alleged that the CEO and other executives had specific knowledge of the impact of crypto mining on the company’s distribution channel; that, during a March 2017 meeting, FE 1 had warned the Head of Gaming and other NVIDIA executives of the growing “dangers” relating to increased reliance on miners in China; and that the Head of Gaming had a close relationship with the CEO, reported directly to him, and met with him weekly (suggesting that he certainly would have shared this information with the CEO).

Section 220 demand. In early 2019, certain NVIDIA stockholders (the “Stockholders”) made a Section 220 demand seeking, among other things, “all documents and/or communications used by NVIDIA’s CEO, CFO and/or other executives with direct reporting responsibility to the Board concerning the demand for the Company’s GPUs, GPU inventory levels, sales channel conditions and other key business metrics monitored by the NVIDIA Board during the time period from 2017 to 2019.” NVIDIA produced 78 documents, totaling about 530,000 pages. The Stockholders then requested the documents that formed the basis for the CEO’s and CFO’s public statements about the company’s ability to manage its GPU sales given the increased crypto-related demand. NVIDIA responded that it had not agreed to that request, and that it was too broad and could not be answered. The Stockholders then filed a Section 220 action with the Court of Chancery seeking additional documents.

The Court of Chancery and Delaware Supreme Court decisions. The Court of Chancery found that the Stockholders met the Section 220 requirements for having a “proper purpose” and a “credible basis,” and that that their document requests were not overbroad and were tailored to their stated purpose. The Court of Chancery ordered NVIDIA to produce “informal” documents, including the “Top 5” emails sent by or to the CEO and the CFO relating to the topics covered by the demand. The Court of Chancery also held that the hearsay evidence offered by FE 1 was admissible to show a “proper purpose” as well as a “credible basis.” NVIDIA appealed. In its recent decision, the Delaware Supreme Court upheld the Court of Chancery’s judgment that hearsay evidence was admissible to show both credible basis and proper purpose—but the Supreme Court found that the hearsay evidence, in this case, was inadmissible because it was not sufficiently reliable. The decision was remanded to the Court of Chancery for further determinations with respect to the production documents.

Discussion

The Delaware Supreme Court held that hearsay evidence can be used in a Section 220 proceeding to show a “proper purpose.” NVIDIA had argued that FE 1’s testimony was not admissible because it was hearsay and none of the traditional exceptions to the non-admissibility of hearsay evidence in judicial proceedings applied. The Stockholders pointed to the Delaware Supreme Court’s 1996 decision in Thomas & Betts v. Leviton Manufacturing, and a string of cases following it, in which hearsay evidence, if sufficiently reliable, was held to be admissible in a Section 220 action for a stockholder to show a “credible basis” for suspecting wrongdoing. The Supreme Court reasoned that the Thomas & Betts decision would have specified that hearsay admissibility was limited to showing a “credible basis” (and could not be used to show a “proper purpose”) if it had intended that result. Absent that express limitation in Thomas & Betts, and as neither party had argued that Thomas & Betts was wrongly decided and should be overturned, the Supreme Court held that hearsay evidence, if sufficiently reliable, is admissible in a Section 220 action not only to establish a “credible basis,” but also to establish a “proper purpose.”

The Delaware Supreme Court held that in this case, however, the hearsay evidence offered was not admissible—due to “misleading” litigation tactics by the Stockholders that deprived NVIDIA of the opportunity to cross-examine the hearsay witness. When the Section 220 suit was filed with the Court of Chancery, NVIDIA asked the Stockholders to provide a list of witnesses they intended to call so that the company could depose them. The Stockholders responded that they were considering submitting affidavits in lieu of live testimony. NVIDIA deferred agreeing to the use of affidavits until it saw them, so that it could decide whether to depose the affiants. The Stockholders then failed to identify any witnesses by the deadline set by the court or to produce any affidavits for NVIDIA’s review. The Supreme Court stated that this litigation “gamesmanship” by the Stockholders effectively denied NVIDIA the opportunity to “test” the Stockholders’ stated purpose. The Supreme Court admonished that plaintiffs in a Section 220 proceeding “should not abuse” the benefit to them of the admissibility of hearsay evidence. “If stockholders are going to introduce sufficiently reliable hearsay to establish a proper purpose, they must communicate honestly and early with companies regarding their intent so as to allow companies to decide whether to depose the stockholders or to identify their own witnesses for trial,” the Supreme Court wrote.

The Delaware Supreme Court noted, in addition, that NVIDIA had raised reasonable doubts about the reliability of the hearsay evidence. The Supreme Court noted that nineteen months had elapsed between the Section 220 demand and the trial, during which time NVIDIA’s “channel inventory issue had proved to be short-lived” and its stock price had nearly doubled. The Supreme Court stated that it need not conclude whether the hearsay testimony was reliable or not, as the Stockholders’ litigation tactics regarding the calling of witnesses alone was sufficient to deny admission of the evidence. However, in “the interest of efficiency on remand,” the Supreme Court addressed the issue and held that the Court of Chancery had not erred in finding that the Stockholders established both a proper purpose and a credible basis.

Justice Traynor’s concurring opinion—suggesting that hearsay should not be admissible to show “proper purpose.” Justice Traynor issued a concurring opinion that raised issue with the majority’s view, based on Thomas & Betts, that “hearsay is admissible in a Section 220 proceeding when that hearsay is sufficiently reliable.” Justice Traynor questioned whether the general rule against hearsay, “premised as it is on hearsay’s perceived unreliability, should give way—absent a rule-based hearsay exception—to ad hoc reliability determinations.” Further, the Justice expressed that Thomas & Betts’s hearsay analysis was flawed; and that, in any event, while hearsay admissibility could be appropriate in the context of determining credible basis, in his view it would not be appropriate in the context of determining proper purpose. The Justice’s key point was that, to prove credible basis, the critical issue is not whether there actually was wrongdoing but whether the stockholder-plaintiffs are reasonable in believing that there may have been. Therefore, out-of-court statements relating to credible basis generally are not offered to provide the truth of the statement (and so are not hearsay). By contrast, with respect to “proper purpose,” the issue usually is whether the stockholder’s stated purpose is his or her actual purpose—thus, in this context, the truth of the stockholder’s statement of purpose is squarely at issue. Further, the Justice noted that a stockholder will rarely have first-hand knowledge of corporate wrongdoing, but “will always have knowledge of her purpose because it is, after all, her purpose.”

The Delaware Supreme Court emphasized the low burden for a plaintiff in a Section 220 proceeding to show a “credible basis.” The Supreme Court stressed that showing a credible basis in a Section 220 action involves “the lowest possible burden of proof under Delaware law.” A Section 220 plaintiff “need only show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation.” NVIDIA had argued that the Stockholders’ suspicion of wrongdoing was based on there being an “insider trading scheme,” and that the evidence was not sufficient to infer such a scheme. Specifically, the sales of stock by insiders did not involve large amounts and were made pursuant to 10b-5 plans; the securities class action did not include allegations of insider trading; and the public statements made were forward-looking, accurate, or immaterial. However, the Supreme Court agreed with the Stockholders, and the Court of Chancery’s holding, that the Stockholders’ purpose was not limited to investigating insider trading but covered wrongdoing more generally; and that a reasonable inference of wrongdoing could be inferred from the timing and size of the stock sales (which may have been “suspicious” despite being made pursuant to 10b-5 plans); the CEO’s and CFO’s public statements, when viewed in the light of other circumstances (such as the executives’ unfulfilled projections concerning NVIDIA’s ability to meet mining demands, the inventory backlog, and the stock sales); and the securities class action (because it alleged that the executives were aware of the discrepancy in demand between miners and gamers).

The Delaware Supreme Court also upheld the Court of Chancery’s rulings relating to the Stockholders’ document requests. The Supreme Court confirmed that (i) there is “no blanket rule” requiring that the Court of Chancery deny a Section 220 demand that is “overbroad” with respect to the documents requested (that is, the Court of Chancery has discretion to determine either to reject an impermissibly overbroad demand or to narrow it); and (ii) Section 220 plaintiffs can change their requests throughout the litigation if the changes “narrow” the requests. Also, the Supreme Court upheld the Court of Chancery’s order that the company had to produce documents beyond “formal board materials,” reasoning that “informal” board- and officer-level materials relating to the CEO’s communications with the Head of Gaming were “necessary because of the specific and concrete allegations in the Amended Securities Complaint that [these two persons] communicated about cryptocurrency and its impact on NVIDIA—the subject of the Stockholders’ request.” The matter of which emails and documents had to be produced was remanded for determination by the Court of Chancery in its discretion.

SharpSpring—Court of Chancery Grants Access to Documents Under a Section 220 Demand Where the Merger Proxy Disclosure About Key Events Did Not “Match Up” With Board Minutes

In Hightower v. SharpSpring, the stockholder-plaintiff made a Section 220 demand to inspect the books and records of SharpSpring, Inc. for the purpose of investigating possible corporate wrongdoing in connection with the company’s acquisition by Constant Contact, Inc. The stockholder asserted that the merger was tainted by conflicts of the CEO, who negotiated the transaction. In response to the demand, the company produced some formal board materials but declined to produce additional documents that the stockholder had requested. The stockholder filed a Section 220 action and, at trial, demonstrated that the descriptions of key events relating to the merger as described in the board minutes did not match up with the proxy statement’s description of those events “in important ways.” In a post-trial decision, Chancellor Kathaleen St. J. McCormick granted the stockholder “limited inspection of books and records concerning those key events.” While the inspection was limited to the key events at issue, the Chancellor stated that information needed to resolve the inconsistences likely would be found in directors’ and/or officers’ emails.

Background. After an extensive sale process, CCI was the only party to submit an indication of interest to acquire SharpSpring. The indication of interest was at $17 to $19 per share. The board directed SharpSpring’s CEO to seek a revised offer of around $20 per share. CCI responded that it would not offer more than $19 and would provide a letter of intent by June 1, 2021. To prepare the letter of intent, CCI asked its banker to provide an estimate of SharpSpring’s transaction-related costs, including a transaction bonus pool intended to induce the CEO and other employees to stay at the company through completion of the transaction. On May 30, 2021, SharpSpring’s board Chair and another director (and not the CEO) met with the company’s banker and legal counsel to discuss the transaction bonus pool. After the meeting, the board Chair and the other directors expressed support for a bonus pool of $1.5 million (of which $1 million would be paid to the CEO). On June 2, 2021, CCI submitted a letter of intent with a price of $17 per share, which assumed that the transaction expenses (including the bonus pool) would not exceed $10 million.  The board decided to proceed with the transaction. After considering the risk of CCI terminating its proposal if the board sought a higher price, the board determined to seek a price of $17.25 per share and a bonus pool of $3 million (the “Revised Proposal”). In response to communications from the CEO and SharpSpring’s banker, CCI increased its offer to $17.10 and agreed to the increased bonus pool of $3 million. At a June 4, 2021 meeting, the board considered the new offer. Shortly thereafter, the company’s 2021 projections were lowered, and the board accepted the new offer. The merger closed in September 2021.

Discussion

The court agreed with the stockholder-plaintiff that it was entitled to inspect documents that would resolve inconsistencies between the board minutes and the proxy with respect to the following:

  • Whose Idea the Revised Proposal Was. According to the minutes, before the board entered executive session at the June 2 meeting, the CEO proposed that he and the company’s banker go back to CCI to demand $17.25 per share and bonus pool of $3 million, and, “presumably out of the concern that an increased bonus pool might decrease merger consideration,” the board “expressed a desire to discuss the two requests separately.” The proxy stated only that the independent directors discussed in executive session the terms that would become the Revised Proposal. It “did not mention that [the CEO] himself proposed the increased per-share price and bonus pool[;] [n]or…that the independent Board members expressed concern about the proposal.”
  • Whether the Revised Proposal Was Actually Conveyed to CCI. According to the minutes, neither the CEO nor the banker ever conveyed to CCI a key term of the Revised Proposal, namely the increase in the per-share price to $17.25. The minutes reflected that the banker mistakenly conveyed to CCI a request of only $17.10 per share, and that the board, based on the CEO’s recommendation, then determined not to correct the mistake. The proxy did not state that the banker mistakenly demanded $17.10 instead of $17.25; rather, it stated that CCI offered $17.10 and that the banker then made a demand for $17.25 but CCI declined to further increase the price.
  • Why the Projections Were Lowered. The June 4 board meeting minutes stated, in connection with the 2021 projections, only that the CEO fielded a number of questions from the board regarding the status of the projections used by the company’s banker. The minutes said nothing about the board having instructed management to revise the projections or the reasons for doing so. The proxy, however, stated that, during the June 4 board meeting, the board determined that the January 2021 budget did not accurately reflect the likely future performance of the company and accordingly instructed management to update the 2021 projections to be consistent with management’s and the board’s expected performance of the business.

The court ordered “targeted” production of documents to resolve the inconsistencies about the key events, including directors’ and officers’ emails. The court emphasized that the analysis as to the scope of documents to be produced under Section 220 is highly fact-specific. The court stated that when a stockholder’s allegations of possible wrongdoing evidence “wide-ranging” misconduct or mismanagement, then a more wide-ranging inspection may be justified; but when the allegations target a single transaction or sale process, “then a targeted inspection” likely will be more appropriate. As to the type of documents to be produced, the court noted that formal board materials that include “contemporaneously prepared, long-form minutes…are often sufficient,” and that the court should not order emails to be produced when other traditional board-level materials (such as board minutes) “would accomplish the plaintiff’s proper purpose.” The court noted, however, that “any number of scenarios might lead to a broader” scope of documents being needed, such as if the stockholder demonstrates that the alleged wrongdoing happened exclusively or predominantly at the officer level, or that the formal board materials fail to provide sufficient details as to key events. In this case, the court wrote, “inconsistent accounts [in the minutes and the proxy] of the events of June 2 through 4, 2021…provided Plaintiff the foothold to argue for a broader inspection” than the formal board materials that the company had produced. To resolve the inconsistencies, the court stated, “it seemed likely” that in each case the most relevant documents were emails sent to or by directors and/or officers.

Hauppauge Digital—Court of Chancery Rejects Confidentiality for Section 220 Documents When Based on Generic Concerns About Competitors’ Potential Use of the Information

In Rivest v. Hauppauge Digital, the stockholder-plaintiff brought a Section 220 action seeking to inspect the annual and quarterly financial statements OF Hauppauge Digital, Inc. (for closed periods) for the purpose of valuing his shares. The company had once been publicly registered with the SEC but in 2014 “opted to ‘go dark’” and, thereafter, made no public disclosures, provided no financial information to any stockholder, and held no annual meetings. The company initially ignored the Section 220 demand and a default judgment was issued against it. The company successfully moved to re-open the default judgment, and then maintained that the stockholder lacked a proper purpose for the requested inspection and insisted that any production court might order should be subject to the strongest possible confidentiality restrictions and that the restrictions should last indefinitely.

After a one-day trial, a Master in Chancery recommended that the court find that the stockholder had the proper purpose of valuing his shares; and recommended that the court order that the company produce its annual and quarterly financial statements for periods from 2016 through 2020, subject to a confidentiality restriction on information less than two years old. The stockholder objected to the confidentiality restriction, on the basis that, to value his shares, he needed to communicate with the other stockholders about the company’s value and should be entitled to obtain a quotation from a broker-dealer in compliance with the SEC rules (which would require that the broker-dealer had access to the recent financial information). The company argued that confidentiality was required because competitors would use information they obtained to advantage themselves and harm the company.

Vice Chancellor Laster noted the Delaware Supreme Court’s 2019 Tiger v. Boast Apparel decision, which established that there is no “presumption of confidentiality” for documents produced under Section 220 and that the court must assess the parties’ respective arguments as to the benefits and harms of ordering confidentiality in the particular case. The Vice Chancellor concluded that, to order confidentiality based simply on a “standard risk associated with operating in a competitive industry,” which could be asserted by any company, would be the “functional equivalent of a presumption of confidentiality” for Section 220 productions. Further, the Vice Chancellor commented that the testimony of the company’s witnesses “bordered on the hyperbolic and lacked credibility,” and that “[i]t takes some chutzpah for a company to accept investors’ money by accessing the public equity markets, then claim that the disclosure of basic financial information would have apocalyptic consequences.” The Vice Chancellor stated, further, that, even if the company’s concern about competitor use of its information were valid in establishing an interest in confidentiality, it would not be sufficient in this case to outweigh the stockholder’s countervailing interest in “determining a value for his interest in this long dark corporation.” The court ordered production of the financial statements, with no confidentiality restrictions.

Practice Points

  • Emails may be discoverable in Section 220 (or other) litigation. The appropriate use and content of emails should be a routine part of, and emphasized during, the initial onboarding and ongoing training for directors and officers.
  • A board, together with legal counsel, should consider the benefits of more, rather than less, detailed board minutes. While there are many instances in which short-form board minutes are appropriate, the Delaware courts in recent years have emphasized that long-form minutes may be more appropriate in many circumstances. Notably, in several recent decisions, the courts have drawn negative inferences from the absence of certain details in board minutes.  Perhaps most importantly, including greater detail in board minutes dramatically reduces the risk, in a 220 action, that a court will order the inspection of emails or other communications.
  • Disclosure to stockholders, board minutes, contemporaneous emails, and other books and records should be consistent with one another In some decisions, the Delaware courts have compared the disclosure line-by-line or word-for-word with board minutes and have drawn negative inferences even from minor differences between them. Further, disclosure to stockholders should reflect the reality of what occurred, rather than an idealized version of events based on what should have occurred or a short-hand version that side-steps material information that may cast the board or others in a negative light.
  • A company seeking to subject Section 220 documents to confidentiality restrictions should be specific with respect to why confidentiality is needed. For example, the company should identify any actual trade secrets and explain why other information may be highly sensitive.  Broad, generic claims about the company not wanting information to become public may not be sufficient. If the company’s concern is use of the information by competitors, the company should articulate its specific concerns based on the specific information and the specific harms it may cause.
  • A company resisting the introduction of hearsay evidence in a Section 220 proceeding (whether to show credible basis or proper purpose) should consider challenging the validity of the Thomas & Betts precedent. In NVIDIA, the court seemed to suggest the possibility, and in his concurring opinion Justice Traynor emphasized, that Thomas & Betts may have been wrongly decided. Further, Justice Traynor’s arguments as to why hearsay admissibility may be appropriate with respect to showing credible basis but not with respect to showing proper purpose should be kept in mind. The Court of Chancery, majority Supreme Court, and concurring Supreme Court opinions in NVIDIA all noted that an overturning of Thomas & Betts was not considered because neither party in the case had requested that the court do so.
  • Possible effect of Manti decision on Section 220 rights. Based on the Delaware Supreme Court’s recent Manti Holdings v. Authentix decision (relating to the waiver by contract of appraisal rights under certain circumstances), there has been discussion with respect to whether stockholder rights provided under the DGCL (including under Section 220) may be eliminated or restricted by contract or in a company’s charter. Further judicial interpretation of Manti may clarify whether a restriction of Section 220 rights in a company’s charter when it goes public would be valid (to waive a right to inspection or, for example, to establish parameters with respect to the type of documents required to be produced, confidentiality for the documents produced, or the use of hearsay evidence in a Section 220 proceeding). A company considering such a restriction would have to consider, in addition to legal issues, the potential reaction of stockholders and proxy advisory firms and any possible effect on the marketability of the securities.

[i] Available here.

[ii] Available here.

[iii] Available here.


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