Stockholder demands to inspect corporate books and records have significantly increased over the past few years. Taking a look at “the books” is a lot easier these days thanks to the impact of Delaware Section 220, and boards are taking notice.
Section 220 of the Delaware General Corporation Law allows stockholders access to corporate books and records for a “proper purpose”—most commonly to “investigate wrongdoing” such as a possible breach of fiduciary duty by the board or management. Recent rulings, however, have made the threshold for these demands less rigorous. This means pushback from corporations and organizations will most likely fail.
Demands may originate from a plaintiffs’ firm (only one stockholder is needed), or a disgruntled founder. Take, for instance, the case of Schnatter v. Papa John’s International, Inc. Schnatter was ousted as CEO and board chairman following controversial comments about the NFL player protests during the national anthem. He demanded various documents including certain emails and text messages from directors’ personal accounts and devices. The company argued that “Schnatter is just curious about what his fellow fiduciaries were saying about him.” In the end, the directors, CEO and general counsel had to produce emails and text messages from their personal accounts and devices.
Basically, all private equity and VC-backed companies are potential targets. Books and records demands have evolved to permit requests seeking not only formal board materials, such as minutes and board decks, but also electronic documents such as emails from personal accounts and text messages stored on personal devices.
What happens when the other party is a “bad actor?” Stockholder demands can be used as a back-door discovery tool to aid in challenging mergers or other corporate transactions, as well as the historical use for purposes of derivative actions and the investigation of corporate wrongdoing or mismanagement. This can result in a painful discovery process, often intended to lead to a cash settlement.
5 Legal Benefits of a Board Portal
Boards need to be aware that their communications may be subject to stockholder inspection rights. Boards should take steps to ensure their minutes and other means of formal recordkeeping are robust enough to ward off any future argument that such records are incomplete, thus requiring the production of emails and/or text messages. They need to be prepared to deal with the impact of Delaware Section 220. A board portal is a key layer of protection.
1. Limit Scope
A unified platform ensures that board minutes and other means of formal recordkeeping are well organized. This type of preparation could ward off any future argument that such records are incomplete, resulting in the need to produce emails and/or text messages. Most importantly, it is a secure mode of communication. In short, a board portal is extremely valuable in narrowing the searchable universe of “the books and records.”
As we saw in the case of Employees’ Retirement System of Rhode Island v. Facebook, Inc., handing over formal board records may not be enough to ward off a request for informal board materials or emails, particularly if the formal board records are lacking in substance. Facebook responded to a demand by agreeing to provide certain categories of documents, and produced over 30,000 pages. However, Facebook resisted the stockholder’s request for board-level emails and text messages concerning its settlement negotiations with the FTC. Facebook lost.
2. Deter Requests
Boards benefit from having clear delineation for lines of communications and clear separation from when a member is carrying out board-related duties versus unrelated, personal work. A corporation should not be required to produce personal email and/or text messages if other materials, such as board minutes exist and would accomplish the plaintiff’s proper purpose.
In KT4 Partners LLC v. Palantir Techs. Inc., the corporation failed to show other board materials that would be sufficient, so the company was required to produce emails.
In contrast, in Lebanon County Employee’s Retirement Fund v. Amerisource Bergan Corporation, the court limited the scope of production to “formal board Materials” because the board-level documents provided for adequate inspection and the plaintiff must make a “proper showing” to access informal board materials such as emails and other types of communication sent among the directors themselves.
A board portal is also useful in potentially limiting and managing the scope of pre-IPO diligence. Furthermore, it can help deter and/or reduce the settlement value of any nuisance claims in connection with an IPO. It would, in essence, help keep “bad actors” at bay.
4. Preserve Privilege
Confidentiality of documents produced in a Section 220 claim is not guaranteed or even presumed. That means the stakes are especially high as personal emails and texts could be publicly available, if not excluded from the Section 220 discovery process. The use of an email account provided by a separate employer destroys privilege. That’s highlighted in the case of In re WeWork litigation. Two SoftBank representatives used email accounts at a different company (where they were also employed) and thus the confidentiality and privilege of the communications were destroyed. SoftBank was required to produce dozens of otherwise privileged emails. This is a particular risk to independent directors who likely do not have a company email address. Use of a board portal for board-related communications solves this problem.
Most cybersecurity attacks start with an email. With a board portal, you have complete control of lines of communication and the distribution of sensitive material. Everything takes place over a secure platform that is only accessible by invited users. A board portal is a safe and effective communication and collaboration tool.
It’s easier to get a look at “the books” and more shareholders are doing it. Corporate law is on the shareholders’ side. Technology is the answer for Boards seeking an added layer of protection from the impact of Delaware Section 220. While not a bulletproof plan, it at least creates a line of defense if these phishing expedition suits arise.