In one of the more lengthy decisions issued in a books and records case commenced under 8 Del. C. § 220, Lebanon County Employees’ Retirement Fund, et al. v. AmerisourceBergen Corporation, Vice Chancellor Laster ordered  AmerisourceBergen Corporation (“AmerisourceBergen” or the “Company”) to make available for inspection board-level documents formally evidencing the directors’ deliberations and decisions and the materials that the directors formally received and considered (the “Formal Board Materials”) relating to whether AmerisourceBergen engaged in wrongdoing in connection with the distribution of opioids.  C.A. No. 2019-0527-JTL (Del. Ch. Jan. 13, 2020)

As the 63-page opinion notes, two congressional investigations concluded that AmerisourceBergen, one of the world’s largest wholesale distributors of opioid pain medication, failed to identify and address suspicious orders of opioids, in violation of federal law requirements.  Slip op. at 1.  The opinion further notes that  the Company is subject to multiple subpoenas, government investigations, and lawsuits, and is the defendant in multi-district litigation brought by cities, counties, and attorney generals of virtually every state.  Id.

In opposing the books and records demand, AmerisourceBergen took the position that plaintiffs lacked a proper purpose, and in the alternative, the scope of the requested inspection was overly broad.  More specifically, the Company argued that plaintiffs needed to not only demonstrate an acceptable purpose, but also had to provide indications of their intended use of the materials in the demand letter itself.  Against this backdrop, AmerisourceBergen argued that plaintiff’s purpose, as set forth in the demand, should be limited to commencing a Caremark claim (which are notoriously difficult to prove).

The Court of Chancery disagreed, noting that AmerisourceBergen’s position ran contrary to Delaware Supreme Court case law, which has held that the fruits of an investigation of wrongdoing could include non-litigation purposes, including to “seek an audience with the board to discuss proposed reforms, or failing in that, [to] prepare a stockholder resolution for the next annual meeting, or [to] mount a proxy fight to elect new directors.”  Slip op. at 24 (quoting  Saito v. McKesson HBOC, Inc., 806 A.2d at 113, 117 (Del. 2002), and citing Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006) and White v. Panic, 783 A.2d 543, 557 n.54 (Del. 2001) for their identification of other potential non-litigation purposes for books and records resulting from an investigation of corporate wrongdoing).

To summarize Vice Chancellor Laster’s disagreement with the Company’s position:

“AmerisourceBergen’s approach would require a stockholder to commit in advance to what it will do with an investigation before seeing the results of the investigation.  An investigator who proclaimed the outcome of an investigation at the outset would be viewed as biased. . . . We would not want a prosecutor to commit to bringing charges before learning whether the evidence supported them.”

Accordingly, the Court permitted inspection of the Formal Board Materials.  Further, in light of the Company’s refusal to provide discovery into what types of books and records exist, the Court authorized plaintiffs to conduct a Rule 30(b)(6) deposition to determine whether other relevant information exists.

Key Takeaway: This decision is significant because it clarifies that a plaintiff stockholder need not commit to bringing litigation in the demand letter before receiving the results of the inspection.  A defendant corporation opposing the inspection of its books and records that may support a potential Caremark claim will need to take note that raising merits-based challenges to a Caremark lawsuit it expects the plaintiff to file will not alone suffice to defend a Section 220 claim to investigate corporate misconduct.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.