The Delaware Court of Chancery recently decided a search by a shareholder for information to support a proxy contest—or an effort to oust a board of directors—is not a “proper purpose” to inspect the corporation’s books and records. However, the court did acknowledge the legal landscape surrounding a stockholder’s statutory right to demand such an inspection following complaints was “murky.”
The court left open the possibility that a proxy contest could serve as a proper purpose if the information sought is “essential and sufficient” for the contest, and if the shareholder could present credible evidence of a “questionable” transaction—that is, board behavior that falls short of violating the board’s fiduciary obligations yet may be improper.
By declining the stockholder’s invitation to adopt a “new rule entitling stockholders to inspection documents under Section 220 if they can show a credible basis that the information sought would be material in the prosecution of a proxy contest,” the Occidental decision clarifies what had been murky under Title 8, Section 220 of the Delaware Code (Section 220).
Shareholders Disagree on Asset Sale, Other Business Decisions
The case, High River LP v. Occidental Petroleum Corp., arises from Occidental Petroleum’s bidding war and high-profile acquisition of Anadarko Petroleum. Plaintiffs bought 26 million shares of Occidental stock worth $1.16 billion after the acquisition was announced. Plaintiffs disagreed with Occidental’s sale of some assets to be acquired in the deal and the price it paid to secure financing through preferred stock to avoid a shareholder vote, among other business decisions.
Shortly after sending a demand, plaintiffs filed suit to enforce it and launched a proxy fight to obtain consent to elect directors, change bylaws, and modify the consent solicitation process. Occidental strongly contested their efforts.
Section 220 does not define “proper purpose,” but case law interpreting the statute has set forth several bases for a shareholder to establish a “proper purpose.” A long-settled proper purpose exists when a stockholder demonstrates a credible basis to suspect that the board of directors has engaged in wrongdoing, such as by breaching its fiduciary duty, which is defined by extensive case law.
The “murky legal landscape” lies in the boundaries of other circumstances that constitute a proper purpose.
Two Earlier Decisions
Based on two earlier decisions—including one successfully brought by plaintiffs in 2012—plaintiffs argued that communicating with other shareholders “in furtherance” of a proxy contest is a proper purpose. Plaintiffs contended that Section 220 permits stockholders to obtain business documents by showing “a credible basis that the information sought would be material in the prosecution of a proxy contest.”
That is, plaintiffs argued that stockholders ought to have the right to inspect records regarding directors’ questionable but not actionable business judgment in furtherance of a proxy contest.
The court distinguished both of plaintiffs’ cited authorities, Tactron Inc. v. KDI Corp. and High River LP v. Forest Labs Inc. In Tactron, the court granted a demand for records to aid in a proxy contest but limited plaintiffs to reviewing only logistical, rather than decision-making, information.
The court in Forest Labs granted plaintiffs’ demand to inspect records related to business decisions when the purpose was to wage a proxy contest; however, it limited the grant to documents that were “essential and sufficient” for that purpose and focused on the need to inspect the records to police compliance with a previous agreement between the company and the shareholders.
A Fishing Expedition
In Occidental, by contrast, because the transaction was highly publicized, significant information about the underlying acquisition was freely available. Although plaintiffs asserted that an information gulf impaired their proxy contest efforts, the court found that they already had all of the essential information they needed without Occidental’s internal documents.
The court characterized plaintiffs’ demand as a fishing expedition. The court also underscored that plaintiffs complained about the board’s substantive decision-making, which was subject to the business judgment rule and about which ample information was available publicly. Therefore, unlike in Forest Labs, the plaintiffs had the information they needed to make their case—that is, the requested information was not “essential.”
Plaintiffs also argued halfheartedly that their purpose was to investigate corporate mismanagement, but the court dismissed this argument summarily because plaintiffs did not allege any breach of fiduciary duty in their pre-trial briefs. The court clarified that some allegation of fiduciary breach is required to support the purpose of investigating corporate mismanagement.
Contrastingly, the same Delaware court determined that a plaintiff’s purpose of investigating corporate mismanagement was proper in Bucks Cty. Emps. Ret. Fund v. CBS Corp., which was decided 11 days after Occidental. A CBS stockholder sought enforcement of a Section 220 demand after the announcement of the CBS-Viacom merger but before the merger closed.
The plaintiff demonstrated a credible basis to suspect wrongdoing, such as possible breaches by the board of the duty of loyalty and failing to act in the best interests of the corporation, including a control shareholder on each side of the deal. The decision underscores the nexus between board misconduct and unavailability—the essentiality—of a shareholder’s requested information. Had the merger already closed, perhaps the court would have weighed the records request differently.
The Occidental court left open the possibility that a proxy contest may be a proper purpose under different facts. With the right facts, the court “might endorse a rule that would allow a stockholder to receive books and records relating to questionable, but not actionable, board-level decisions … in aid of a potential proxy contest.” Information sought through a Section 220 demand would need to be “essential and sufficient” to pursuing a proxy contest to allow stockholders access to the records.
It is worth asking: What facts might present the right case for endorsing such a rule? A stockholder’s complaint must present a credible basis of “questionable” rather than “actionable” board decisions. A plaintiff must demonstrate that the records sought are essential and sufficient for the proxy contest, suggesting that the requested information is not available otherwise and that it is appropriate for the shareholder’s purpose in the proxy fight, aside from challenging the board’s substantive decision-making.
CBS underscores that it is easier to make the case for records review if the transaction is subject to a heightened standard of review, such as “entire fairness.”
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Tod Northman, a partner in the Cleveland office of Tucker Ellis LLP, has practiced transactional law for 25 years. In addition to mergers and acquisitions, his practice focuses on aviation and emerging technology, including autonomous vehicles.
Lauren Lipsyc, an associate in the Cleveland office of Tucker Ellis LLP, graduated from the University of Virginia School of Law in May 2019. She maintains a broad practice across several practice areas.