Often times, parties move to seek inspection of books and records under Section 220 in order to support a claim against management for corporate misconduct. However, the Court of Chancery has consistently held that a credible basis must be established that actionable corporate wrongdoing occurred in order to substantiate the demand.

This maxim was illustrated in the case of Southeastern Transportation Authority v. Abbvie, Inc., C.A. No. 10374-VCG (Del. Apr. 15, 2015), which was recently affirmed by the Delaware Supreme Court on January 20, 2016.  A link to the Supreme Court’s order can be found here.

In the Court of Chancery decision, the Court denied a Section 220 demand for inspection of books and records asserted by plaintiffs.  The moving party sought inspection to obtain documents to support a derivative claim for alleged wrongdoing against the directors of AbbVie, Inc. (“AbbVie” or the “Company”).  By way of background, the board of AbbVie decided to pursue a merger with a Jersey entity, Shire plc (“Shire”), in part to take advantage of favorable tax treatment of income that would result under the then-current interpretation of U.S. tax law as enforced by the Treasury Department.

The risk of the merger was that the law, or its interpretation by regulators, would change before sufficient tax advantages could be realized to offset the costs to stockholders of the transaction. As it turned out, the Treasury’s interpretation of applicable tax law changed in a way that eliminated the tax advantages of the merger before its consummation, and the board concluded that the Company would be better off withdrawing from the merger—and paying a substantial breakup fee—than proceeding.

As is consistently required by the Court of Chancery in books and records demand actions, the demand must state a credible basis to believe that as a result of the inspection nonexculpated conduct will be uncovered and suit filed.  Under Section 220, a plaintiff

[N[eed only produce evidence demonstrating a credible basis that actionable corporate wrongdoing on the part of the directors has occurred, a notably low standard of proof designed to ensure that the costs and effort required to answer the demand for documents does not outweigh the potential advantage to the corporation and its stockholders of production.

In denying the request, the Court found that a Section 102(b)(7) provision in the certificate of incorporation insulated the directors from liability for breaches of a duty of care, and the Plaintiffs have failed to establish a credible basis to believe that the directors have acted disloyally here—that is, were interested in the transaction, not independent, or were acting in bad faith.

The Delaware Supreme Court, following briefing on plaintiff’s appeal, affirmed the decision of the Court of Chancery.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.