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Stockholder Demands for Books and Records

Inspections Under Delaware Law:

Lessons From Recent Cases Responding to Inspection Demands, Limiting Scope of Inspection

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TUESDAY, MAY 12, 2015

Presenting a live 90-minute webinar with interactive Q&A

Jill K. Agro, Of Counsel, Womble Carlyle Sandridge & Rice, Wilmington, Del.

Sara B. Brody, Partner, Sidley Austin, San Francisco

B. Warren Pope, Partner, King & Spalding, Atlanta

Michael R. Smith, Partner, King & Spalding, Atlanta

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5

Contacts

SARA BRODY is a partner in Sidley’s San Francisco office and co-leader of the Securities and Shareholder Litigation practice. She has extensive experience in securities litigation, defending issuers, officers, directors, underwriters and venture capital firms in shareholder class actions and derivative actions in state and federal courts throughout the United States. Sara won one of the Top Ten Defense Verdicts of 2002, as selected by The National Law Journal. She is listed as one of the leading California litigators in the 2012 through 2015 editions of Chambers & Partners’ America’s Leading Business Lawyers, the 2012 through 2015 editions of The Best Lawyers in America, the Daily Journal as one of the Top Thirty Securities Litigators in California and was shortlisted as Litigator of the Year at the Chambers USA Women in Law Awards. Sara B. Brody

[email protected]

(415) 772-1200

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Purpose of and Trends in Books and Records Inspections

May 12, 2015

Sara Brody Sidley Austin LLP

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Philosophy Underlying Demands for Inspection of Company Books and Records

Delaware Corporation Law Section 220 provides shareholders the right to inspect corporate records.

Philosophy underlying inspection rights: “As a matter of self protection, the stockholder was entitled to know how his agents were conducting the affairs of the corporation…” Shaw v. Agri-Mark, inc., 663 A.2d 464, 467 (Del. 1995).

However there are limits to scope of demands.

All states have inspection statutes; not just Delaware.

o But check differences if you get a demand under another statute.

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Trends in Books and Records Inspection Demands

Becoming extremely common Precursor to shareholder derivative actions Delaware courts may dismiss fiduciary duty cases

that lack specificity if the plaintiff-shareholder did not seek books and records in advance. “After the repeated admonitions of the Supreme Court

(of Delaware) to use the ‘tools at hand’ (referring to §220) lawyers who fail to use those tools to craft their pleading do so at some peril.” Mizel v. Connelly, 1999 WL 550369, 5 (Del. Ch. Aug. 2, 1999)

Section 220 provides the “tools at hand to develop the necessary facts for pleading purposes.” Brehm v. Eisner, 746 A.2d 244, 266-67 (Del. 2000).

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Trends in Books and Records Inspection Demands (con’t.)

Most trends suggest increasing ease and scope of inspection. Loosening of Credible Basis Standard. LAMPERS v.

The Hershey Company, No. 7996-ML (Del. Ch., March 18, 2014) (the showing required for credible basis “may ultimately fall well short of demonstrating that anything wrong occurred.”)

Recent Delaware Supreme Court decision in Wal-Mart case ordered an expanded production.

May include production of privileged documents in some circumstances.

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Trends in Books and Records Inspection Demands (con’t.)

But, there are still limits Fuchs Family Trust v. Parker Drilling Company, C.A. No.

9986-VCN (Del. Ch., March 4, 2015) (“Even if a plaintiff demonstrates a proper purpose, that plaintiff is not entitled to inspect all documents that he or she believes are relevant or even likely to lead to information relevant to that purpose. The scope of inspection… is limited to those documents that are necessary and sufficient.”)

Southeastern Pennsylvania Transportation Authority v. Rizzolo, (Abbvie case) C.A. No. 10374 & 10408 (Del. Ch., April 15, 2015) (viability of fiduciary claim, if that is the alleged proper purpose, can be considered in a §220 action. If DGCL §102(b)(7) exculpates, then inspection demand can be denied).

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Procedure for Inspecting Corporate Books and Records Under Delaware Law

May 12, 2015

Jill Agro Womble Carlyle

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Contacts

Jill Agro is an experienced litigator in Delaware’s renowned Court of Chancery. She litigates and advises on an array of Chancery matters including breaches of fiduciary duties, books and records demands, receivership issues, contract law, and business tort claims. In this role, she works closely with corporate clients, their boards and executive leadership, and their legal teams to resolve corporate and commercial disputes. Jill also represents individual directors and officers in a variety of matters ranging from advancement to complex securities class action litigation. Beyond Chancery, Jill also has extensive experience in all of Delaware’s state and federal courts in cases involving the gamut of issues from constitutional rights to commercial sales subject to the Uniform Commercial Code. In addition, Jill guides clients in Delaware-based arbitration and mediation, with a focus on containing litigation costs. Finally, with a Bachelors of Science in computer information systems, Jill is well-prepared to assist clients with complex e-discovery needs. - See more at: http://www.wcsr.com/Professionals/Lawyer-Bios/Agro-Jill-K#sthash.oL0WQSdw.dpuf

Jill Agro

[email protected]

(302) 252-4325

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Procedure for § 220 Inspection

8 Del. C. § 220(b) sets forth the procedural requirements for a shareholder seeking to inspect corporate books and records.

Strict compliance with the statute is mandatory.

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§ 220 Requirements

1. Demand Must Be In Writing

A stockholder’s demand to inspect books and records must be in writing.

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§ 220 Requirements

2. Owner of Record or Beneficial Owner

If the stockholder seeking inspection is an owner of record, no documentary evidence of ownership is required.

If the stockholder seeking inspection is a beneficial owner, documentary evidence of ownership is required.

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Beneficial Ownership

A beneficial stockholder’s § 220 demand must:

state the person’s status as a stockholder, be accompanied by documentary evidence of beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be.

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Beneficial Ownership (con’t)

This language has been interpreted to require:

A power of attorney (if an attorney or agent is making the demand)

Documentary evidence of beneficial ownership

Sworn statement that the documentary evidence is a “true and correct copy of what it purports to be.”

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§ 220 Requirements

3. State a Proper Purpose for Inspection

The demand must state a proper purpose for the inspection.

A proper purpose is one “reasonably related to such person's interest as a stockholder.”

o If the stockholder is only seeking a stock list or stock ledger, the burden is on the corporation to establish that the stockholder does not have a proper purpose.

o If the stockholder is seeking to inspect documents beyond the stock list or stock ledger, the burden is on the stockholder to establish a proper purpose.

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Primary vs. Ulterior Purpose

If a proper purpose is established, it is irrelevant that the stockholder may have an ulterior or secondary purpose for seeking books and records.

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Proper Purposes To investigate allegedly improper transactions or

mismanagement;

To clarify an unexplained discrepancy in the corporation’s financial statements regarding assets;

To investigate the possibility of an improper transfer of assets out of the corporation;

To ascertain the value of his stock or explore a possible sale of stock;

To aid litigation he has instituted and to contact other stockholders regarding litigation and invite their association with him in the case;

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Proper Purposes (con’t)

To inform fellow shareholders of one’s view concerning the wisdom or fairness of a proposed recapitalization and to encourage fellow shareholders to seek appraisal;

To discuss corporate finances and management’s inadequacies and then, depending on the responses, determine stockholder sentiment for either a change in management or a sale pursuant to a tender offer;

To inquire into the independence, good faith, and due care of a special committee formed to consider a demand to institute derivative litigation;

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To communicate with other stockholders regarding a tender offer or to effectuate changes in management policies;

To investigate the stockholder’s possible entitlement to oversubscription privileges in connection with a rights offering;

To determine an individual’s suitability to serve as a director;

To obtain names and addresses of stockholders for a contemplated proxy solicitation;

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To inspect documents relating to a “market check” on the terms of financing that may have been influenced by an interested party;

To obtain particularized facts needed to adequately allege demand futility after corporation has admitted engaging in backdating stock options;

To evaluate the nonpayment of dividends when combined with a request to value shares of the corporation

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Improper Purposes

Mere suspicion or subjective belief of wrongdoing;

To assist in the prosecution of a federal action where discovery is stayed under the Private Securities Litigation Reform Act of 1995 (PSLRA);

To institute annoying or harassing litigation against the corporation;

To force the corporation to buy out a stockholder’s interest;

To bring economic pressure on a third corporation, the majority of whose stock is owned by the defendant corporation;

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Improper Purposes

To find missing stockholders for the purpose of soliciting payment from such stockholders;

To have a stock list available in the event that the stockholder might need it in the future;

To value the corporation for the sole purpose of acquiring it, unrelated and without regard to the acquirer’s particular and preexisting investment in the corporation;

To develop a cause of action against the company’s financial advisors during a transaction;

“Idle curiosity”

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§ 220 Requirements

4. Purpose Must Be Stated Under Oath

The stockholder must provide a statement of his or her purpose for seeking inspection under oath.

Alternatively, the stockholder can affirm the contents of the written demand under penalty of perjury.

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§ 220 Requirements

5. Specifically Identify Documents Sought

The demand must specifically identify the documents that the stockholder is seeking to inspect.

The documents sought must be “necessary and essential” to investigate the stockholder’s articulated proper purpose.

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Necessary and Essential

Documents are “necessary and essential” pursuant to a Del. Code Ann. tit. 8, § 220 (2014) demand if they address the crux of the shareholder’s purpose and if that information is unavailable from another source. Whether documents are necessary and essential is fact specific and will necessarily depend on the context in which the shareholder’s inspection demand arises.

Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund Ibew, 95 A.3d 1264, 1271 (Del. 2014).

29

Rifled Precision

The stockholder seeking inspection “[must] make specific and discrete identification, with rifled precision . . . [to] establish that each category of books and records is essential to the accomplishment of their articulated purpose . . .”

Brehm v. Eisner, 746 A.2d 244, 266-67 (Del. 2000).

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Rifled Precision (con’t)

“[R]ifled precision” . . . requires a fact specific inquiry and can only be determined in the context of a specific case. The term “rifled precision” requires the Court of Chancery to make a qualitative analysis of documents demanded. “Rifled precision” is not a quantitative limitation on the stockholder’s right to obtain all documents that are necessary and essential to a proper purpose.

Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund Ibew, 95 A.3d 1264, 1283 (Del. 2014).

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After the Demand…

Once a stockholder makes a proper demand, the corporation has 5 days to respond.

A corporation’s failure to respond is tantamount to refusing the stockholder’s demand.

The corporation can request that the stockholder sign a reasonable confidentiality agreement before it provides documents.

See Amalgamated Bank v. UICI, 2005 Del. Ch. LEXIS 82 (Del. Ch. June 2, 2005).

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§ 220 Litigation

If the stockholder’s demand is refused or the corporation fails to respond to the demand, the stockholder may apply to the Court of Chancery for an order to compel inspection.

The Court of Chancery has exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought.

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Stockholder Demands for Books and Records Inspections Under Delaware Law: Lessons From Recent Cases

Legal and Procedural Strategies for Responding to Demands and Limiting the

Scope of Production and Its Use

May 12, 2015 Michael R. Smith and B. Warren Pope KING & SPALDING, ATLANTA

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Contacts

Michael Smith is Co-chair of King & Spalding’s Securities Litigation Group, focusing his practice on securities and shareholder litigation and related board investigations. Mr. Smith has been a partner of the firm since 1990. Mr. Smith has litigation experience in a wide range of securities and shareholder litigation matters, including securities fraud class action litigation, shareholder derivative actions, audit committee and other board committee investigations, SEC enforcement actions, corporate takeover litigation, and related business tort litigation. Mr. Smith is a frequent speaker and writer on securities litigation topics. His recent publications in this area include “Dodd-Frank’s Unintended Consequences: Lawsuits Seeking To Enjoin Say-On-Pay and Equity Plan Shareholder Votes,” The Metropolitan Corporate Counsel (July 2013).

Michael R. Smith

[email protected]

(404) 572-4824

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Contacts

Warren Pope is a partner in King & Spalding’s Business Litigation Practice Group. Mr. Pope’s practice focuses on complex commercial litigation, including securities, shareholder, and professional liability litigation. Mr. Pope has represented clients in class actions and shareholder derivative litigation involving the federal and state securities laws, directors’ and officers’ fiduciary duties, and other matters of corporate governance. He has also represented corporations and directors and officers in internal and government investigations and related litigation. Mr. Pope has extensive experience in litigation unrelated to shareholder matters, including professional liability. Mr. Pope has been recognized by The Legal 500 as a recommended securities litigator. He has also been named a Georgia Super Lawyer.

B. Warren Pope

[email protected]

(404) 572-4897

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Agenda

• Responding to Books and Records Demands

• Recent Delaware Case Law Relating To Books and Records Demands

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Responding to Books and Records Demands

• Is the inspection sought for a proper purpose?

• What is the appropriate scope of inspection?

• Are there any applicable limitations on the scope of production based on privilege grounds?

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Stockholder Inspection Rights • Stockholder inspection rights are creatures of state

corporate law, primarily statutory, but in some states including common law inspection rights

• In general, stockholders have a right to inspect a corporation’s books and records

• While there are some general principles that are applicable under the stockholder inspection statutes and/or common law of many states, stockholders must follow the applicable state’s procedures in order to avail themselves of their inspection rights

• For purposes of this presentation, unless otherwise noted, we have focused on the Delaware stockholder inspection statute (8 Del. C. § 220 or “Section 220”)

39

Share Ownership Requirements

• An increasing number of states are permitting corporations to include a share ownership threshold for inspection rights in their articles of incorporation or bylaws

― Examples include:

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Share Ownership Requirements (cont.) ― Georgia (O.C.G.A. § 14-2-1602(e) (limiting inspection rights

for those stockholders owning 2% or less of the shares outstanding));

― Louisiana (La. Rev. Stat. Ann. § 12:1-1602 (limiting inspection rights to those stockholders owning “at least five percent of any class of the issued shares of a corporation for at least the preceding six months”))

― Maryland (Md. Code Ann., Corps. & Ass’ns § 2-513 (limiting inspection rights to “[o]ne or more persons who together are and for at least six months have been stockholders of record or holders of voting trust certificates of at least 5 percent of the outstanding stock of any class of a corporation”))

― Virginia (Va. Code Ann. § 13.1-771 (limiting inspection rights to those stockholders who own at least 5% of the outstanding stock or have been a stockholder “for at least six months immediately preceding the … demand”))

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Share Ownership Requirements

• Notably, Delaware’s inspection statute does not permit such a limitation

• Corporations who do not have a share ownership threshold for shareholder inspection rights in their articles of incorporation or bylaws, but are permitted to do so, should consider adopting one

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What is the appropriate scope of inspection?

• Delaware’s Section 220 does not provide unlimited access to corporate books and records

• “[O]nly those records that are ‘essential and sufficient’ to the shareholder’s purpose will be included in the court-ordered inspection…” Helmsman Mgmt. Servs., Inc. v. A & S Consultants, Inc., 525 A.2d 160, 167 (Del. Ch. 1987).

• It is the plaintiff’s burden “to establish that each category of books and records requested is essential and sufficient to its stated purpose.” Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570 (Del. 1997).

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What is the appropriate scope of inspection?

• A Section 220 demand should not be confused with a discovery request

• “The two procedures are not the same and should not be confused. A Section 220 proceeding should result in an order circumscribed with rifled precision. Rule 34 production orders may often be broader in keeping with the scope of discovery under Court of Chancery Rule 26(b).” Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570 (Del. 1997).

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Scope of Inspection: Can stockholder’s date of purchase impact the scope?

• A derivative plaintiff “must allege that they were stockholders of the corporation ‘at the time of the transaction of which such stockholder complains...’” Saito v. McKesson HBOC, Inc., 806 A.2d 113, 117 (Del. 2002).

• The Delaware Supreme Court, however, has held that this standing limitation does not automatically “defin[e] the temporal scope of a stockholder’s inspection rights under [Section] 220.” Id.

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“If a stockholder wanted to investigate alleged wrongdoing that substantially predated his or her stock ownership, there could be a question as to whether the stockholder’s purpose was reasonably related to his or her interest as a stockholder, especially if the stockholder’s only purpose was to institute derivative litigation. But stockholders may use information about corporate mismanagement in other ways, as well. They may seek an audience with the board to discuss proposed reforms or, failing in that, they may prepare a stockholder resolution for the next annual meeting, or mount a proxy fight to elect new directors.” Id.

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• As a result, “[e]ven where a stockholder’s only purpose is to gather information for a derivative suit, the date of his or her stock purchase should not be used as an automatic ‘cut-off’ date in a [Section] 220 action.” Id.

― A potential derivative claim could “involve a continuing wrong that both predates and postdates the stockholder’s purchase date. In such a case, books and records from the inception of the alleged wrongdoing could be necessary and essential to the stockholder’s purpose.” Id.

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Scope of Inspection: Can stockholder’s date of purchase impact the scope? (cont.)

― In addition, “the alleged post-purchase date wrongs may have their foundation in events that transpired earlier.” Id.

• “If activities that occurred before the purchase date are ‘reasonably related’ to the stockholder’s interest as a stockholder, then the stockholder should be given access to records necessary to an understanding of those activities.” Id.

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Are there any applicable privilege defenses?

• In responding to a Section 220 demand that seeks corporate books and records for the purpose of investigating possible corporate mismanagement or wrongdoing, a corporation may be able to limit the scope of production by asserting certain privileges.

• Potential limitations on the scope of production based on privilege grounds may include:

― Attorney-Client Privilege

― Work Product Doctrine

― Self-Critical Analysis Privilege (not expressly recognized in Del.)

• Recent Delaware case law may complicate this issue.

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Attorney-Client Privilege

• Protects against the disclosure of “confidential communications made for the purpose of facilitating the rendition of professional legal services to the client.” See, e.g., Del. Unif. R. Evid. 502(b).

• A plaintiff may seek to obtain privileged information by demonstrating that “good cause” exists as to why the privilege should not attach. See, e.g., Saito v. McKesson HBOC, Inc., No. CIV. A. 18553, 2002 WL 31657622, at *13 (Del. Ch. Nov. 13, 2002) (citing Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970)).

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Attorney-Client Privilege: The Garner Factors

• In analyzing whether “good cause” exists, courts will evaluate the factors set forth in Garner v. Wolfinbarger, 430 F.2d 1093, 1104 (5th Cir. 1970): ― Number of shareholders and the percentage of stock they represent

― The bona fides of the shareholders

― The nature of the shareholders’ claim and whether it is obviously colorable

― The apparent necessity or desirability of the shareholders having the information and the availability of it from other sources

― Whether, if the shareholders’ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality

― Whether the communication is of advice concerning the litigation itself

― The extent to which the communication is identified versus the extent to which the shareholders are blindly fishing

― The risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons

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Work Product Doctrine

• Bars the discovery of materials created in anticipation of litigation

• Two Types

― Non-Opinion Work Product

― Opinion Work Product

• With respect to non-opinion work product, the plaintiff must demonstrate a “substantial need” for the information and inability to otherwise obtain the information absent “undue hardship.” Saito v. McKesson HBOC, Inc., No. CIV. A. 18553, 2002 WL 31657622, at *3 (Del. Ch. Nov. 13, 2002).

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Work Product Doctrine

• With respect to opinion work product, there is a higher burden. See Saito v. McKesson HBOC, Inc., No. CIV. A. 18553, 2002 WL 31657622, at *3 (Del. Ch. Nov. 13, 2002).

― Information must be directed toward a pivotal issue in the matter

― Need for information must be “compelling”

• There is no “good cause” exception as with the attorney-client privilege. See In re Fuqua Indus., Inc., No. CIV.A. 11974, 2002 WL 991666, at *6 (Del. Ch. May 2, 2002).

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Self-Critical Analysis Privilege

• Protects “confidential, non-factual deliberative materials, including recommendations or opinions resulting from internal investigations, reviews or audits.” Grimes v. DSC Commc'ns Corp., 724 A.2d 561, 570 (Del. Ch. 1998) (citing Wylie v. Mills, 478 A.2d 1273, 1276 (1984)).

• Delaware courts have not expressly recognized this privilege. See id.

• Other courts have and apply a 4-factor test (see id.):

― Resulted from self-critical analysis?

― Information remained, or intended to remain, confidential?

― Strong public interest in protecting free flow of such information?

― Free flow of that information would be curtailed if information were discoverable?

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Recent Delaware Case Law Related to Section 220

• Walmart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. July 23,2014)

• Okla. Firefighters Pension & Ret. Sys. v. Citigroup Inc.

― 2014 WL 5351345 (Del. Ch. Sept. 30, 2014)

― 2015 WL 1884453 (Del. Ch. Apr. 25, 2015)

• United Techs. Corp. v. Treppel, 109 A.3d 553 (Del. Dec. 23, 2014)

• In re Lululemon Athletica Inc. 220 Litig., Conslid. C.A. No. 9039-VCP (Del. Ch. Apr. 30, 2015)

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Wal-Mart: Background

• Involved an inspection demand under Section 220 seeking to inspect documents pertaining to an alleged bribery scheme involving a Mexican subsidiary of Wal-Mart between 2002 and 2005

• Inspection request followed publication of an April 2012 New York Times article reporting that Wal-Mart executives disregarded an initial investigation revealing significant problems, instead turning the investigation over to the GC of the Mexican subsidiary, who was himself implicated in the initial review

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Wal-Mart: Inspection Demand and Wal-Mart’s Response

• Stated purpose of inspection demand: to investigate possible mismanagement and breaches of fiduciary duty in connection with the alleged bribery scheme and the parent company’s response, and to determine whether pre-suit demand on the parent company board would be futile as part of derivative lawsuit

• Wal-Mart produced a substantial volume of documents, but refused to produce certain documents never seen by the board (i.e., documents it deemed not “necessary and essential” to the stated purposes) and redacted board documents that were protected by the attorney-client privilege or the work product doctrine

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Wal-Mart: Chancery Court’s Order

• After trial, the Delaware Court of Chancery ordered Wal-Mart to produce the following documents:

― Officer (and lower)-level documents regardless of whether they were ever provided to Wal-Mart’s Board

― Documents spanning a 7-year period and extending well after the timeframe at issue

― Documents from disaster recovery tapes

― Any additional responsive documents “known to exist” by the undefined “Office of the General Counsel”

― Certain documents protected by the attorney-client privilege pursuant to the Garner exception

― Certain documents protected by the work product doctrine

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Wal-Mart: Delaware Supreme Court

• On appeal, the Delaware Supreme Court affirmed the Court of Chancery’s decision, holding:

― Officer-level documents were “necessary and essential” to proper purpose

― Documents post-dating timeframe at issue related to Company’s ongoing compliance activities and were “necessary and essential” to proper purpose of evaluating director and officer knowledge of the investigation and liability

― Wal-Mart itself used the “Office of the General Counsel” terminology and the “appropriate forum for relief from an allegedly ambiguous term is in the Court of Chancery by filing a motion for clarification”

59

Wal-Mart: Delaware Supreme Court Adopts Garner

• The Delaware Supreme Court held that “the Garner doctrine should be applied in plenary stockholder/corporation proceedings” and “is applicable in a Section 220 action.”

• The Delaware Supreme Court further held that the “necessary and essential inquiry must precede any privilege inquiry because the necessary and essential inquiry is dispositive of the threshold question – the scope of document production to which the plaintiff is entitled under Section 220.”

• The Court did recognize that “the Garner doctrine fiduciary exception to the attorney-client privilege is narrow, exacting, and intended to be very difficult to satisfy.” Nonetheless, the Court affirmed the Chancery Court’s application of the doctrine in this case.

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Wal-Mart: Delaware Supreme Court Adopts Garner (cont.)

• The Delaware Supreme Court confirmed that the Garner doctrine does not apply to documents withheld based on the work product doctrine, but acknowledged the overlap between the Garner “good cause” standard and the standard under Court of Chancery Rule 26(b)(3).

• Although recognition of the Garner exception to the attorney-client privilege was perhaps not surprising – several Delaware lower court decisions had followed Garner – the decision to apply Garner in the context of a pre-litigation books and records inspection demand caught many observers of Delaware law off-guard.

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Wal-Mart: Current Status

• A Motion for Order of Civil Contempt is currently pending before Chancellor Bouchard. In it, Plaintiff argues that Wal-Mart has knowingly failed to produce responsive emails and has improperly redacted documents.

• The Motion followed a letter to the Court from Wal-Mart in which Wal-Mart indicated that it had completed its production. After Plaintiff filed its Motion, Wal-Mart re-reviewed its documents and again confirmed that its production is complete.

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Wal-Mart: What does it mean?

• The burden is still placed on Delaware stockholders seeking to obtain corporate documents – stockholders must identify a proper purpose.

• The Wal-Mart decision involved unusual circumstances and noted that the Garner exception is narrow; its multi-factor analysis of what constitutes “good cause” is not a bright-line rule – it is a specific, fact-based analysis that must be undertaken separately in each case – and the Delaware Supreme Court said the test is “narrow, exacting, and intended to be very difficult to satisfy.”

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Wal-Mart: Is Section 220 a more valuable tool for stockholders now?

• Could trigger an increase in stockholder requests to inspect corporate books and records related to potential regulatory/legal violations

• Stockholders can now obtain privileged communications pre-litigation

• Could lead to increase in derivative litigation against boards because with the potentially broader access to internal corporate documents, stockholder plaintiffs may be able to plead demand futility with greater particularity, and thus, more suits may survive motion to dismiss stage

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Wal-Mart: Is Section 220 a more valuable tool for stockholders now?

• Could lead to more battles within the context of Section 220 litigation (i.e., motions for contempt if companies do not fully comply with court orders ordering production of privileged information)

― As noted above, following remand to the lower court in Wal-Mart, Plaintiff filed a contempt motion, claiming Wal-Mart made a materially deficient production of documents following the Supreme Court’s ruling

― Plaintiff is seeking reasonable fees and expenses in connection with the motion and sanctions of $1 million plus $10,000 per day under the Company has complied with the order

65

Okla. Firefighters Pension & Ret. Sys. v. Citigroup, Inc.: Background

• Involved an inspection demand under Delaware law seeking to inspect documents pertaining to suspect loans by Banamex officials (Banamex is a subsidiary of Citigroup)

• Inspection demand followed disclosure that Banamex had fallen victim to fraud allegedly perpetrated by Mexican oil services company Oceanografia SA to secure $400 million in loans; that a Mexican financial regulator discovered that Banamex was the victim of a second, $30 million alleged fraud; that it had been subpoenaed by the U.S. attorney’s office in Massachusetts over bank secrecy and anti-money laundering compliance issues; and that Banamex USA received the same request and an additional subpoena from the FDIC

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Okla. Firefighters Pension & Ret. Sys. v. Citigroup, Inc.: Inspection Demand

• Stated purpose of inspection demand: to investigate possible mismanagement or wrongdoing by the Board or senior management at Citigroup regarding the alleged fraud at Banamex

• Plaintiff claimed that these disclosures and subsequent investigations called into question Citigroup’s controls and risk management procedures

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Okla. Firefighters Pension & Ret. Sys. v. Citigroup, Inc.: Master’s Recommendation

• On September 30, 2014, Master in Chancery Abigail LeGrow issued a final report rejecting Citigroup’s assertions that the evidence presented by the pension fund was not sufficient to establish a credible basis to infer possible mismanagement or wrongdoing by Citigroup’s board or senior management

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― “The scope of the fraud at the subsidiary, the significance of the subsidiary to the parent company’s profits, the public reports indicating that investigations uncovered deficiencies in internal controls, and the fact that one of the parent company’s senior executives oversees the subsidiary and the parent company’s board and its committees are responsible for overseeing the controls in question provides, in my view, ‘some evidence’ of a credible basis to infer possible mismanagement or misconduct by Citigroup’s Board or senior management.”

― Master LeGrow did acknowledge, however, “that the mere fact that wrongdoing occurred at a subsidiary is not a credible basis to infer mismanagement by the board or senior management of a parent company.”

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• Relying on Wal-Mart, Master LeGrow noted in her final report that Plaintiff had been required to show that the requested information addressed the “crux” of its purpose and was “unavailable from another source.”

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• Master LeGrow recommended that the Chancery Court order Citigroup Inc. to provide to Plaintiff:

― Board and committee minutes and materials provided to the board or committees

― Materials containing talking points, scripts, or other summaries of remarks or reports that were delivered at a board or committee meeting

― Policies and procedures, but only to the extent those books and records relate to the following topics: (a) the Banamex fraud, (b) the Bank Secrecy Act and anti-money laundering “BSA/AML” matters at Banamex USA, (c) Banamex’s fraud detection and prevention efforts, and (d) Citigroup’s BSA/AML compliance

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• Importantly, Master LeGrow “concluded that Plaintiff had not – at this point – shown that director and officer communications were necessary and essential to its stated purpose,” and therefore recommended that the court deny Plaintiff’s request for inspection of communications

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Okla. Firefighters Pension & Ret. Sys. v. Citigroup, Inc.: Chancery Court’s Order

• Citigroup filed exceptions to Master LeGrow’s final recommendation based on whether Plaintiff established a proper purpose for inspection under Section 220

• Vice Chancellor Noble held oral argument on January 22, 2015, and issued a decision in late April 2015

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• Vice Chancellor Noble approved and adopted Master LeGrow’s final recommendation, holding:

― While noting that “Citigroup is a sprawling multi-billion dollar corporation” and the fact “[t]hat wrongdoing occurred at one of its subsidiaries falls far short of indicating failures on behalf of its fiduciaries,” the Chancellor determined “[n]onetheless, given the nature and magnitude of the Banamex fraud, there is at least a credible basis to infer deficiencies at Citigroup, and Plaintiff is entitled to investigate.”

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― Vice Chancellor Noble noted that “[a]n inspection under Section 220 ‘is not open-ended’” and that “[t]his Court ‘has wide latitude in determining the proper scope of inspection.”

― Vice Chancellor Noble held that “the scope recommended by the Master is appropriately tailored to allow Plaintiff to investigate its potential claims while mitigating the burden on Citigroup. … Not only did the Master place time constraints on the documents to be produced, … she only recommended production of three categories of documents.” In light of these facts, “[n]arrowing the scope of inspection further than the Master has already done risks rendering Plaintiff’s investigation incomplete.”

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Okla. Firefighters Pension & Ret. Sys. v. Citigroup, Inc.: Privilege Issues?

• While the parties in Citigroup have yet to raise the issue of whether the shareholders will be entitled to inspect privileged communications, this issue may arise later in the litigation, as some of the requested materials, such as board and committee minutes and materials, likely contain privileged content

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United Techs. Corp. v. Treppel

• Involved an inspection demand under Delaware law seeking to inspect documents pertaining to the decision of the United Technologies board to reject Plaintiff’s litigation demand

• The litigation demand related to a U.S. Department of Justice investigation into violations of federal law by United Technologies

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• United Technologies agreed to allow Plaintiff to inspect most of the documents Plaintiff requested, but insisted that Plaintiff sign a “confidentiality agreement contain[ing] a provision requiring that ‘any claim, dispute, controversy or causes of action … arising out of, relating to, involving or in connection with’ the inspection be brought in a Delaware court”

• Plaintiff refused to sign a confidentiality agreement with such a provision and brought a books and records action

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• On January 13, 2014, Vice Chancellor Glasscock held that the Court of Chancery did not have statutory power to impose such a restriction.

• On December 23, 2014, the Delaware Supreme Court reversed the Court of Chancery, holding that “the Court of Chancery has wide discretion to shape the breadth and use of inspections under [Section] 220 to protect the legitimate interests of Delaware corporations. Because nothing in the text of [Section] 220 itself or Delaware case law interpreting it limits the Court of Chancery’s authority to restrict the use of material from an inspection when those interests are threatened, the Court of Chancery erred in concluding it lacked the statutory authority to impose its own preclusive limitation here.”

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• The Delaware Supreme Court rejected the Court of Chancery’s characterization of the provision as an “anti-suit injunction,” stating that the provision would not prevent Plaintiff from bringing suit anywhere; it would only prevent Plaintiff from using the books and records obtained in Delaware in jurisdictions other than Delaware.

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• The Delaware Supreme Court remanded the case, instructing the Court of Chancery to determine “whether it should exercise its discretion to grant the novel restriction that United Technologies sought.” The Supreme Court pointed to certain factors that the Court of Chancery should consider on remand, including:

― “(i) the fact that [Plaintiff] seeks to file claims arising out of the same corporate conduct that was already the subject of derivative litigation in the Court of Chancery and [the Supreme] Court;

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― (ii) United Technologies’ legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the courts of this state;

― (iii) United Technologies’ adoption of a forum selection bylaw that represents a non-case-specific determination by its board of directors that internal affairs litigation involving the company should proceed in a single forum; and

― (iv) the investment the corporation has already made (which comes at a cost to its stockholders) in defending not only the prior derivative litigation in the Court of Chancery, but also this [Section] 220 action.”

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In re Lululemon Athletica Inc. 220 Litig.

• Involved two inspection demands under Delaware law seeking to inspect documents pertaining to Plaintiffs’ investigation of potential insider trading claims against the Company’s founder and then-chairman of the board of directors as well as potential claims for mismanagement against the other directors made in May 2013 and October 2013

• Followed an inquiry by the Wall Street Journal related to certain stock trades made by the Company’s founder and then-chairman of the board of directors; individuals from both the Company and the Company’s founder’s personal investment company (including lawyers from both) corresponded regarding a coordinated response to the WSJ

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• On April 2, 2014, Vice Chancellor Parsons ordered the Company to produce, inter alia, the following categories of documents:

― The founder’s 10b5-1 Plan;

― Emails from the founder to the Company’s compliance officer regarding the 10b5-1 Plan;

― Changes to the 10b5-1 Plan;

― Documents concerning the founder’s trades during a specific period; and

― All documents concerning any inquiry by members of the board regarding the founder’s trades during a specific period

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• The Company produced some documents and also produced a privilege log referencing 16 documents it had withheld pursuant to the attorney-client privilege.

• Thereafter, the Plaintiffs filed a motion to enforce the Court’s prior order.

• In that motion, the Plaintiffs sought certain communications authored or received by the members of the board of directors regardless of whether those communications resided in Company or non-Company e-mail accounts.

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• The Company argued that there was “no precedent to support” a requirement that Company search the directors’ non-Company e-mail accounts.

• The Plaintiffs also sought certain documents that had been withheld on privilege grounds.

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• On April 30, 2015, Vice Chancellor Parsons issued an opinion granting in part and denying in part the Plaintiffs’ motion to enforce a prior order of the court that required the Company to produce books and records related to the Plaintiffs’ investigation of potential insider trading claims against the Company’s founder and then-chairman of the board of directors, as well as potential claims for mismanagement against the other directors.

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• The Motion to Enforce raised a number of key questions:

― whether the Company was required to “search its non-employee directors’ personal email accounts for” responsive documents;

― whether certain documents properly were designated as privileged; and

― if certain documents properly were designated as privileged, whether the Plaintiffs had demonstrated “‘good cause’ under the circumstances to obtain them anyway”

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• As to the non-employee directors’ emails, the Court held as follows:

― “In the context of a Section 220 action, stockholders with a proper purpose ‘should be given access to all of the documents in the corporation’s possession, custody or control, that are necessary to satisfy that proper purpose.’”

― “[I]n the circumstances of this case, an order requiring the Company to search the independent directors’ non-Company or personal email accounts is unwarranted, because any such emails are not ‘necessary and essential’….”

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― While not material to the decision, the Court noted that Section 220 “is silent as to the books and records of the corporation’s directors, and Delaware courts have not read Section 220 so broadly as to include, as a general matter, books and records in a director’s personal possession. If anything, the prevailing rule appears to cut against the inclusion of such documents.”

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• With respect to the privilege issues raised by the Plaintiffs, the Court held as follows:

― The Court first determined that the documents at issue were protected by the attorney-client privilege

― The Court next considered whether the documents were required to be produced pursuant to Garner

― Reiterated that it was the Plaintiffs’ burden to demonstrate “good cause” and “that the fiduciary exception ‘is narrow, exacting, and intended to be very difficult to satisfy’”

― Nonetheless, ordered production of the documents at issue pursuant to Garner

― “[D]eclined to apply [the Garner] factors mechanically” and instead “reviewed all of the factors and, cognizant of the principles on which the fiduciary exception is founded, considered whether or not their cumulative weight tend[ed] toward a showing of ‘good cause’ to access the withheld documents”

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• Court determined that, on balance, application of the Garner factors weighed in favor of “good cause” determination requiring production:

― The Company conceded that the Plaintiffs’ “have a large enough stake in the Company and are not ‘blindly fishing’”

― Found that the Plaintiffs’ claims were “obviously colorable” under the “credible basis” standard (i.e., “‘the lowest possible burden of proof’”)

― Found that the documents were “necessary and unavailable from other sources”

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― Found that “the claims that provided the foundation of Plaintiffs’ proper purpose … stem from an underlying allegation of criminal conduct…”

― Found that while it is possible that the participants in the privileged communications contemplated potential litigation, the documents were “more analogous to the ‘real-time’ evidence” the Wal-Mart court found to be subject to the Garner exception because the related to “legal advice given to the Company almost immediately after the suspicious trading was discovered”

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Attorneys’ Fees in 220 Inspection Actions

May 12, 2015

Jill Agro Womble Carlyle

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Attorneys’ Fees Under § 220

Section 220 does not provide for an award of attorneys’ fees to a stockholder who is successful in pursuing a books and records action; however, on at least one occasion, the Court of Chancery has awarded attorneys’ fees pursuant to the bad faith exception to the American Rule.

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Caveat

In Sutherland v. Sutherland, 2014 Del. Ch. LEXIS 144, 2014 WL 3906500 (Del. Ch. July 31, 2014), the Court of Chancery awarded a stockholder plaintiff fees for her “litigation efforts,” which included a § 220 action and which “brought about some positive benefits for the companies involved . . . ”

To be clear, the Court stated:

[T]he [§ 220 action] was unfortunately a necessary part of the process. However, any monetary award from this effort is necessarily minimal and is otherwise incorporated into the recovery authorized here.

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The Cost of § 220 Litigation

Despite the summary nature of § 220 actions, they can take a significant amount of time and money to resolve—and in the end, the plaintiff is only getting documents.