M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, October 7, 2009

DGCL 220 Books and Records Action

In City of Westmoreland Police & Fire Retirement System v. Axcelis, Inc. the plaintiffs attempted to use a section 220 books and records demand to get Axcelis' board to turn over board minutes and materials relating to the board's decision to turn down an unsolicited acquisition proposal (HT: Morris James, LLP). 

This case is interesting for a couple of reasons.  First, the Delaware Supreme Court is always encouraging plaintiffs to use the "tools at hand"  (i.e. Sec. 220 actions) in conducting pre-suit investigation of suspected mismanagement or corporate waste. So, it's worthwhile looking at a case where the plaintiffs try the avenue that the court recommended to see how successful they are.  

Second, this case is an attempt to use the "tools at hand" to  gain more information about director deliberations with respect to an unsolicited takeover proposal that the board ultimately decided not to pursue.  While that's neither obviously mismanagement nor waste at play here, theirs is a common enough complaint.  Following Lyondell though, there isn't much question left how a court will rule on this kind of claim, but the Sec. 220 action keeps the plaintiffs in the game for a little while longer. 

Sec. 220(b) defines "proper purpose" as "a purpose reasonably related to such person's interest as a stockholder."   In Westmoreland, the court lays out the procedural requirements for securing books and records via Sec. 220, including a discussion of "proper purpose" that adds more gloss to what kind of purpose is reasonably related to a stockholder's interest.

Our courts have recognized that investigation of suspected wrongdoing on the part of a corporation’s management or board is a proper purpose for inspection of the corporation’s books and records. Yet, a plaintiff must do more than simply state its suspicion of wrongdoing; a Section 220 demand made merely on the basis of suspicion or curiosity is insufficient. Rather, the plaintiff must present “some evidence to suggest a credible basis from which [this Court] can infer that mismanagement, waste, or wrongdoing may have occurred.” This “credible basis” standard has been described as “‘the lowest possible burden of proof’ in Delaware jurisprudence.” The plaintiff may make a credible showing that legitimate issues of wrongdoing might exist “through documents, logic, testimony or otherwise,” and is not required to prove any wrongdoing actually occurred.  

While the "credible basis" standard in a Sec. 220 demand is relatively low, it's not nothing.  In Westmoreland, even that low standard proves too high. The plaintiffs unsuccessfully try - through "logic" - to hang their hat on a Blasius-like claim that the board thwarted the will of a majority of the stockholders by following the board policy with respect to board members following their inability to secure more than 50% of the vote in a board election. The court wasn't having any of it.  

I think what this case says is that 220 "tools" aren't really available to all plaintiffs.  plaintiffs with Lyondell-like challenges are going to need more facts going in and can't rely on a 220 to help with discovery - notwithstanding exhortations from the Delaware Supreme Court otherwise.  Even the "tools at hand" aren't going to get plaintiffs very far with these kinds challenges.  



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