In the recent DGCL Section 220 books and records decision of The City of Cambridge Retirement System v. Universal Health Services, Inc., C.A. No. 2017-0322-SG (Del. Ch. Oct. 12, 2017), the Court of Chancery considered the propriety of a condition imposed by the defendant corporation in a confidentiality agreement that any subsequent litigation relying on corporate records produced in the action be deemed to incorporate by reference all such records produced (the “Incorporation Condition”). Stated differently, the defendants and/or its directors wished to be able to rely on all documents produced in the books and records action to move to dismiss an anticipated derivative action.
Vice Chancellor Glasscock upheld the Incorporation Condition. Section 220(c) of the Delaware General Corporation Law (“DGCL”) conveys on the Court discretion to “prescribe any limitations or conditions” on the inspection of corporate records by a demanding stockholder “as the Court may deem just and proper.” 8 Del. C. § 220(c).
The Court noted that “imposition of such a condition has been found appropriate in previous cases in this Court under Section 220, on the ground that it appropriately permits a defendant to respond to ‘cherry-pick[ed] documents’ that are taken ‘out of context,’ by pointing the Court to other documents already produced for assistance in determining the reasonableness of inferences drawn in any follow-on complaint.” Slip op., at 6. The Court held that an incorporation condition “provides a remedy for the unreasonable anti-contextual use of a limited subset of the documents produced, in support of a complaint untenable when examined under the full universe of documents obtained.” Id. at 6-7.
Plaintiff objected on the grounds that a defendant may manipulate the universe of documents by producing only a self-selected subset of documents of its choosing, without any punishment for failing to produce harmful documents. The Court observed that the same could be said of a motion for summary judgment, in which a defendant wrongfully withholds documents in bad faith. Vice Chancellor Glasscock posed the question: “does the risk of such potential malfeasance outweigh the benefits of allowing the court to eliminate complaints involving misleading citations to a limited subset of records?” Id. at 8. The answer was no. The Incorporation Condition of the confidentiality agreement was upheld by the Court under 8 Del. C. § 220(c).
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 firstname.lastname@example.org.