Investor Scrutiny Lawsuits Snarl Business Court’s Breakneck Norm

A spike in lawsuits from investors demanding internal corporate documents has Delaware’s Chancery Court in triage mode.

The disputes have left the leading US forum for corporate cases deluged and distracted from more urgent matters, like litigation over deals set to close or imminent company meetings.

Records suits, which require only preliminary suspicions, are designed to resolve narrow disagreements over how to enforce a core shareholder right. But Delaware’s judges are spending significant chunks of time policing the process, as in recent fights over Amazon.com Inc’s antitrust woes, Boeing Co.'s safety scandals, and the $8 billion Paramount Global-Skydance Media merger.

“Nobody’s happy with the state of affairs,” said Widener University law professor Lawrence Hamermesh. “It’s a mess.”

Everyone involved would rather be doing something more substantive, but they’re responding rationally to structural incentives, Chancellor Kathaleen St. J. McCormick, the court’s chief judge, said at George Washington University. Although getting inside information offers clear advantages, “complaints just get longer and longer,” she said Oct. 25. “I’m not sure I need all that at the pleading stage, but it’s not hard to see why they’re doing it, and I can’t advise against it.”

Shareholder attorneys blame the logjam on board stonewalling, while companies say the ballooning cost is affecting settlement leverage. “Shareholders aren’t in the engine room every day, so there was wisdom in making sure they get this information,” said GWU law professor Omari Scott Simmons. “But there were unintended consequences.”

‘Tools at Hand’

The workload crunch took time to reach a crisis point after records litigation began to climb a few years ago. Annual cases nearly doubled to 168 between 2018 and 2021, representing a surge to 15% of the court’s total workload from 9%, court documents show.

Cases are now assigned to magistrates, oral rulings are replacing opinions, and judges are being conscripted from other courts to handle the overflow. Records disputes look like potential low-hanging fruit.

The lawsuits, often reflecting an attempt to drum up fiduciary breach claims, invoke Section 220 of the Delaware General Corporation Law, which gives investors broad access if they have credible but tentative concerns—a deliberately low burden of proof.

Several dynamics are colliding to drive the increase. For one thing, Delaware’s courts directly pressed shareholder attorneys—notably in cases involving Walt Disney Co. and Martha Stewart—to do more diligence using “the tools at hand.” The plaintiffs’ bar took the hint.

Judges, meanwhile, began cracking down on frivolous litigation. One result was rulings that tightened the standards for merger challenges, making injunctions far rarer and channeling dealmakers toward transactions engineered to sail through court.

The decisions also fortified a rule requiring shareholders to demand internal investigations before bringing many non-merger cases. To skip that step, an investor must show the board faces significant legal exposure or other conflicts. That used to be a “formulaic” enterprise, but a records case “can really help you make that argument,” said Oderah Nwaeze, a partner at Faegre Drinker Biddle & Reath LLP.

He pointed to other recent rulings expanding the universe of records subject to disclosure. If a company “follows typical corporate governance,” a judge will likely stick to formal materials, but if it “plays fast and loose,” that puts emails and text messages on the table, according to Nwaeze. Those private communications have raised the stakes, making the court fights fiercer.

Smoking Guns

At around the same time, liability shields for simple mismanagement claims began to proliferate. For decades those “exculpation clauses” covered only boards, but after lawmakers extended them to executive officers in 2022, the only remaining target for shareholders was the duty of corporate loyalty, a category of serious breaches involving “bad faith"—legal violations, lack of oversight, self-dealing, or fraud.

Showing bad faith requires evidence of conscious wrongdoing. “Just saying simply ‘This happened on their watch’ is going to be insufficient,” especially in the context of the oversight-based Caremark claims that have become an innovative way around liability shields, according to Simmons.

Despite that “heightened pleading burden for the types of cases that matter to stockholders,” more attorneys are now seeking information about corporate “red flags” after decisions across 2023 created “the perception that Caremark is more muscular,” McCormick said at GWU.

As the path to liability grows slimmer, the emphasis on records is a logical counterweight, according to Columbia University law professor Dorothy Lund. “We’ve moved toward screening stuff that looks frivolous while giving plaintiffs additional tools to find actual smoking guns,” she said.

The court also rethought how it confers the lucrative lead counsel designation when multiple shareholders go after a single deal. Appointing lawyers who won the race to the courthouse led to “a lot of noisy litigation that was untethered from actual misconduct,” Lund said. Judges now favor the most detailed complaint, a policy that points toward more cases seeking earlier access to records.

Elusive Fix

Even when a case is bound for trial, lawyers gunning for the lead role often feel compelled to sue for records that will likely come out later.

The Paramount-Skydance merger is illustrative. A brewing lead counsel battle centers on whether records are necessary, given the public information about the transaction. The first-filing investor says they would drag out the process, while two groups of pension funds say his lawyers are taking a shortcut.

McCormick said at GWU that she’s now routinely assigning records disputes to magistrates, and the court is adding more. Beyond that increase in capacity, a fix appears elusive, according to Hamermesh. “How do you pick lead counsel if not on the merits?” he said.

But a solution may develop in the ordinary course as new rulings lay out clearer standards that streamline litigation by getting everyone “reading from the same script,” according to Nwaeze.

Lund made a similar point. “You see these cycles in litigation, with bad incentives being created and weird things happening,” she said. “And then Delaware responds.”