DELAWARE SUPREME COURT REJECTS LIMITING PRINCIPLES RELATING TO SECTION 220 DEMANDS

In AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund, 2020 WL 7266362 (Del. Dec. 10, 2020), the Delaware Supreme Court rejected two common objections advanced by corporations when faced with stockholder inspection demands pursuant to Delaware General Corporation Law, 8 Del. C. § 220 (“Section 220”).  The Court held that a stockholder is not required to specify the “ultimate objectives” of the investigation, nor does the stockholder need to establish that the alleged wrongdoing is judicially “actionable.”

AmerisourceBergen (“Amerisource”) received a Section 220 demand from a stockholder which alleged corporate misconduct and sought inspection of certain books and records.  Amerisource refused to produce the records, and as a result, the stockholder commenced a Section 220 proceeding in Delaware’s Court of Chancery.  Amerisource argued that (i) the stockholder’s Section 220 demand did not demonstrate a “proper purpose” because the stockholder failed to specify the “ultimate objectives” of the investigation and (ii) the stockholder did not demonstrate that any of the alleged misconduct was judicially “actionable.”  The Delaware Court of Chancery disagreed and ordered Amerisource to produce certain records and permitted further discovery. Amerisource appealed to the Delaware Supreme Court. 

While affirming the Court of Chancery’s order, the Delaware Supreme Court recognized that the investigation of alleged misconduct is encompassed by Section 220 because it relates to a stockholder’s interest as a stockholder.  However, the Delaware Supreme Court reiterated that “bare allegations” made by a stockholder do not warrant a Section 220 inspection.  In agreement with the Court of Chancery, the Delaware Supreme Court rejected Amerisource’s arguments and held that stockholders are not required to disclose what they intend to do with corporate records.  Stockholders seeking a Section 220 inspection with credible allegations of corporate wrongdoing have demonstrated a proper purpose.  Additionally, the Delaware Supreme Court agreed with the Court of Chancery that a stockholder seeking to inspect corporate records is not required to demonstrate that the alleged wrongdoing is judicially “actionable” because there are numerous reasons for a stockholder to seek inspection under Section 220.  

This decision by the Delaware Supreme Court further exemplifies Delaware’s prevailing view that the ability of a stockholder to inspect corporate wrongdoing serves as an essential oversight function.