Delaware Court Expands Scope of "Books and Records" Requirement in Favor of Shareholders
The Delaware Chancery Court recently provided additional guidance on the ever evolving rules governing demands for “books and records” by shareholders under Delaware law. Unfortunately (or fortunately, depending upon your perspective) for boards of directors, the Chancery Court appears to have expanded shareholder rights under Section 220 of the Delaware General Corporate Law (DGCL) by clarifying that Section 220 covers all electronically stored information. Although several previous Delaware decisions have ordered the production of emails pursuant to a Section 220 request, we are unaware of any prior decisions which have held that Section 220 explicitly covers electronically stored information. There are significant implications for companies that are incorporated in Delaware and for those that intend to incorporate in Delaware in the future.
In a high profile case pitting Yahoo! Inc. (Yahoo) against its shareholders, the Delaware Chancery Court sided in favor of Yahoo’s shareholders in connection with their request for electronically stored information. In a decision which provides a detailed reasoned analysis of the various requirements of Section 220, the Chancery Court interpreted the books and records provision of Section 220 to expressly include electronically stored information despite the fact that the statute does not explicitly make reference to such a requirement. The Chancery Court articulated that a stockholder seeking to inspect corporate books for a proper purpose, such as to investigate potential wrongdoing or mismanagement on the part of an officer or director, may demand electronic documents, including notes and emails, related to a corporate actor’s conduct with respect to the corporation.
In this particular case, the plaintiff, Amalgamated Bank, demanded to inspect the books and records of Yahoo pursuant to Section 220 of the DGCL for the purpose of investigating the hiring and firing of Yahoo’s former COO, Henrique de Castro. The Chancery Court held that the inspection of current CEO Marissa Mayer’s electronic documents as well as those of certain board members was essential to the fulfillment of plaintiff’s purpose because, as the principal corporate actors in de Castro’s hiring and firing, these individuals’ notes and emails would provide insight into discussions and negotiations related to de Castro’s tenure and termination.
In its defense, Yahoo contended that Section 220 does not extend to electronically stored information and only allows for production of paper records because the text of the statute makes no explicit reference to “electronic records.” The Chancery Court rejected this argument and emphasized that business is now conducted in a predominantly electronic arena, with over ninety percent of business documents stored electronically. In fact, the Chancery Court asserted that interpreting Section 220 as being limited to physical documents would only render this section obsolete and ineffective. Additionally, the Chancery Court referenced other sections of the DGCL (e.g., Section 224), that have been updated to recognize corporate records as inclusive of electronically stored information as further evidence of the DGCL’s acknowledgement of electronic recordkeeping.
Importantly, the Yahoo decision provides additional guidance on whether personal email is subject to a Section 220 demand. The Chancery Court stated that if officers or directors utilize personal email accounts to conduct corporate business, all such personal emails must be produced in response to a plaintiff’s inspection demand. The Chancery Court articulated that corporate records retain their corporate character, regardless of the medium used to create them. Thus, any corporate business conducted over personal email is fair game with respect to stockholder inspection.
The evolution of Section 220 demands has significant implications for companies incorporated in Delaware. Whether and to what extent companies must share information with shareholders is an important consideration for all companies. Companies that are incorporated in Delaware and those considering incorporating in Delaware should consider the following important implications from the Delaware Court of Chancery’s recent Yahoo decision: (1) shareholders have a right to electronically stored information if certain requirements are met; (2) information from personal email accounts is potentially subject to shareholder demands; and (3) the trend to expand shareholder rights with respect to electronically stored information will likely continue in future decisions.
For further information, please contact Lori Smith (firstname.lastname@example.org; 212.714.3075), Ryan Udell (email@example.com; 215.864.7152) or Bridget Henwood (firstname.lastname@example.org; 212.631.4421).