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E-MailWilliam Savitt and Sarah K. Eddy are partners and Cynthia Fernandez Lumermann is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum, and is part of the Delaware law series; links to other posts in the series are available here.
Two recent decisions of the Delaware courts confirm that Section 220 of the Delaware General Corporation Law will be consistently interpreted to grant pre-complaint discovery to stockholders seeking to prepare fiduciary-breach litigation.
In Pettry v. Gilead Sciences, Inc., a group of Gilead stockholders sought to inspect corporate documents for the purpose of investigating wrongdoing in the development and marketing of HIV drugs. C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020). Gilead opposed the demand, principally on the ground that the stockholders’ basis to suspect such wrongdoing—unproven allegations in other lawsuits—was inadequate to justify inspection. The court disagreed, finding that allegations forming the basis of other lawsuits may well constitute a credible basis for inspection. The court went on to criticize the defendant for an “overly aggressive defense strategy” which the court found “epitomizes a trend” to “obstruct [demanding stockholders] from employing [Section 220] as a quick and easy pre-filing discovery tool.” To disincentivize such conduct, the court granted the plaintiffs leave to file a motion to recover their litigation fees and costs.
Last week, reviewing Gilead along with other recent 220 caselaw to resolve a separate appeal, the Delaware Supreme Court held that stockholders seeking inspection need not identify what they intend to do with documents they obtain. AmerisourceBergen Corp.v. Lebanon Cty. Employees’ Ret. Fund, No. 60, 2020 (Del. Dec. 10, 2020). Nor, ruled the court, must a demanding stockholder establish that the wrongdoing it is investigating would be actionable in a future derivative action—unless the sole purpose identified is to pursue a derivative suit, and that suit is “dead on arrival” because blocked by an “insurmountable procedural obstacle” that can be determined “without adjudicating merits-based defenses.” The court also upheld the Court of Chancery’s order of a 30(b)(6) deposition post-trial to allow the plaintiff stockholders to explore the types of records that exist.
The recent cases reflect the continued approval of Section 220 as a route to pre-complaint discovery in support of potential fiduciary litigation. While a demanding stockholder must establish a “credible basis” before earning the right to inspect, that standard, as both decisions reaffirmed, “is the lowest possible burden of proof” in Delaware law. Especially in light of Gilead’s fee-shifting warning, corporations confronted with Section 220 requests should consider carefully whether constructive engagement with demanding stockholders constitutes a more prudent approach than aggressive defensive litigation.
