Stockholder Barred from Inspecting Books and Records Related to Board’s ESG-Related Decision

• Proof that an inspection demand is improperly “lawyer-driven” will overcome a stockholder’s pretextual claim for investigating wrongdoing.

• A stockholder does not have a proper purpose for investigating an “ordinary business decision” when he admits he had “no reason to believe” any director acted out of self-interest.

• Production of all relevant Board minutes was sufficient to satisfy stockholder’s investigative needs in this case.

• Three years of emails were not necessary for investigating corporate actions taken in a single month in 2022.

On June 27, 2023, the Delaware Court of Chancery issued a post-trial memorandum opinion in Simeone v. The Walt Disney Company rebuffing a stockholder attempt to inspect books and records of The Walt Disney Company (“the Company”) related to the Company’s March 2022 response to Florida’s “Parental Rights in Education” bill, sometimes referred to as the “Don’t Say Gay” law (the “Legislation”). [1] Based in large part on the stockholder’s own testimony, the Court held that the stockholder’s “stated purposes” for the inspection demand were pretextual and improperly “lawyer-driven.” [2] The Court added that the stockholder failed to prove a credible basis to investigate wrongdoing related to the Company’s “ordinary business decision” to comment on a matter of employee and public concern. [3] Alternatively, even if the stockholder had demonstrated a proper purpose, the Court held that three years of emails among and between the Company’s Board of Directors and its CEO were not necessary for the stockholder’s purpose because the Company had already produced policies and Board minutes and materials related to the Company’s actions taken in March 2022.

Background

On March 7, 2022, eleven days after the Florida House of Representatives passed the Legislation, the Company’s CEO circulated an internal memorandum to employees “expressing the company’s ‘unwavering commitment to the LGBTQ+ community[,]’” and explaining that although it had not publicly opposed the Legislation, the Company’s “‘lack of statement’ should not be mistaken ‘for a lack of support.’” [4] The next day, March 8, the Florida Senate passed the Legislation and sent it the governor for his signature. Also on March 8, the Board held a special meeting about the Company’s “Political Engagement and Communications” and response to the Legislation. On March 9, at its annual stockholder meeting, the Company’s CEO “acknowledged that ‘many are upset that we did not speak out against the bill,’” and explained that the Company was “‘opposed to the Legislation from the outset, but we chose not to take a public position on it because we thought we could be more effective working from behind the scenes, engaging directly with lawmakers on both sides of the aisle.’” [5]

Florida’s governor signed the Legislation into law on March 28. Also on March 28, the Company issued a public statement opposing the law. [6] Florida’s governor responded that the Company had “crossed the line.” [7]  The Company’s public opposition to the Legislation prompted the Florida legislature to revoke the Company’s “ability to self-govern its lands within the Reedy Creek Improvement District (RCID),” a unique legal structure which functionally gave the Company the ability to “levy taxes, write building codes, and develop and maintain its own infrastructure” within the district. [8]

Although the Company’s stock price fell from US$145.70 per share on March 1, 2022, to US$91.84 on July 14, 2022, the Court noted that the stockholder’s only evidence related to the decline attributed it to factors other than the Company’s opposition to the Legislation.

The stockholder’s demand to inspect the Company’s books and records followed. Pursuant to Section 220 of the Delaware General Corporation Law, a stockholder has a qualified right to inspect corporate books and records. To exercise that right, a stockholder must demonstrate a proper purpose as a stockholder for inspecting the corporate records, and that the records sought are essential for accomplishing the stockholder’s stated purpose. Often such an inspection will be satisfied through the production of Board-level materials, with the burden on the stockholder to prove why additional, non-Board-level materials are necessary for resolving the demand.

According to his demand, the stockholder wanted to investigate potential misconduct because he was concerned the Company’s officers and directors breached their fiduciary duties by “failing to appreciate the known risk that [the Company’s] political stance would have on its financial position” and by “‘placing their own political views ahead of their duties to act in the best interests of [the Company] and its stockholders.’” [9]  While objecting that the stockholder failed to state a proper purpose for his inspection, in October 2022 the Company produced all formal Board documents concerning the Legislation as well as certain other documents. [10]

On December 5, 2022, the stockholder filed his verified complaint to compel further inspection of the Company’s books and records. After holding a trial on a paper record, the Court rejected the stockholder’s inspection demand.

The Court’s Decision

The Stockholder’s Stated Purposes Were Pretextual Because the Inspection Demand Was Impermissibly Lawyer-Driven

Because a stockholder must have a proper purpose as a stockholder for inspecting books and records, in “rare circumstances” the Court of Chancery has denied inspection demands when the demand was driven by the lawyers and not the demanding stockholder. [11]  This case was one of those “rare circumstances.” The Court determined that the Company showed the stockholder lacked a proper purpose for the inspection because the demand was impermissibly lawyer-driven, being intended to further the stockholder’s lawyers’ political agenda rather than any interest the plaintiff had as a stockholder of the Company.

The Court noted that the stockholder testified he had not considered pursuing litigation or making an inspection demand after learning about the Legislation. Rather, he was contacted by a lawyer who knew he was a stockholder of the Company and solicited him to make the demand. Another lawyer affiliated with the Thomas More Society, “a ‘public interest law firm championing Life, Family, and Freedom,’” then met with the stockholder and the Society agreed to advance the stockholder’s litigation costs. [12]

The stockholder further testified that “his only purpose for making the inspection” was to learn the identities of those responsible for the decision to publicly oppose the Legislation in the hopes those identities would become public. But the stockholder’s written demand did not state these purposes—and even if they had been stated, the identities the stockholder sought to disclose were made public in this Section 220 litigation. Finally, the stockholder had “limited and non-substantive involvement in the demand and litigation,” which the Court concluded “further reveal[ed] the lawyer-driven nature of this action.” [13]

Accordingly, the Court held the stockholder lacked a proper purpose for the demand. The Court further noted that, although his counsel and the Thomas More Society (the driving force behind the demand) were entitled to their beliefs, and could prosecute litigation supporting those beliefs, a Section 220 suit to address plaintiff’s interests as a stockholder is not the vehicle to advance those beliefs.

The Stockholder Failed to Show a Credible Basis to Investigate Wrongdoing

Even if his stated purpose to investigate wrongdoing was not pretextual, the Court held the stockholder failed to prove a credible basis to investigate wrongdoing.

Here, the Court concluded that the materials produced by the Company demonstrated the Board discussed the Company’s response to the Legislation, including employee backlash about the Company’s lack of comment on the Legislation and the Company’s decision to speak publicly about the Legislation. Considering these facts, a decision to speak on public matters is within the power of the board “to direct the corporation’s affairs.” [14]   Accordingly, the stockholder failed to present “any legitimate basis” to challenge the Board’s impartiality—including because he testified that he had “no reason to believe any Board member” had “acted out of self-interest.” [15]

The Court likewise rejected the stockholder’s claim that the Board “‘ignored a known risk’ of negative consequences from opposing the [L]egislation.” [16] The Court held that the stockholder failed to allege or present evidence that the Company “was warned of financial repercussions of the RCID before [the CEO’s] March 9 announcement.” [17]  Instead, it was not until after the Company spoke on the Legislation that “the specter of dissolving the RCID was explicitly raised.” [18]

As a result, the Court concluded the stockholder lacked a credible basis to investigate wrongdoing, and instead wanted to investigate a business decision with which he disagreed. But “disagreement with a business judgment” is not “‘evidence of wrongdoing’ warranting a Section 220 inspection” because it “would intrude upon the ‘rights of directors to manage the business of the corporation without undue interference.’” [19]

The Stockholder Did Not Lack Essential Information

Finally, the Court concluded that even if the stockholder had demonstrated a proper purpose, “no further inspection would be warranted.” [20]

The Company had produced “all Board-level materials related to the legislation, [the Company’s] response to the legislation, the potential loss or modification of the RCID, and [the Company’s] policies on charitable and political giving.” [21]  Despite that information, the stockholder demanded three years of email and other correspondence between and among the Board members and the Company’s CEO on the same topics. Considering the Company’s production, the Court concluded the stockholder’s demand was “vastly overbroad”—and had no relation to investigating “one piece of legislation that was introduced and passed in 2022.” [22]

Takeaways

The Simeone decision is a useful reminder that although rare, the right set of facts could defeat a Section 220 inspection demand as being lawyer—rather than stockholder—driven, particularly where the attorneys have a political or moral opposition related to the business issue. The facts in Simeone were particularly damning, and companies defending books and records litigation arising from ESG-related decisions should ensure they effectively probe a plaintiff’s (often political or social) purposes in bringing the litigation.

Although we expect that many boards and their counsel will argue this decision supports the view that ESG-related Board decisions are a business judgment limiting what records a plaintiff can review or challenge, we believe this area of law will rapidly continue to develop. ESG-related decisions by boards of directors continue to draw investor scrutiny, and important questions remain regarding the proper role of ESG in corporate governance. Accordingly, one can expect that attorneys experienced in books and records demands will develop a record likely to avoid the many defects reflected in the Simeone stockholder’s litigation strategy. For these reasons, companies should continue to consider producing core board materials in response to Section 220 demands, even where they appear to be impermissibly lawyer-driven and notwithstanding the apparent absence of a stockholder’s proper purpose, as an effective means to defend against any litigation that a stockholder may file seeking emails and other materials beyond formal board materials.

Endnotes

1No. 2022-1120-LWW, at 3 (Del. Ch. June 27, 2023).(go back)

2Id. at 19–21.(go back)

3Id. at 25.(go back)

4Id.(go back)

5Id. at 6.(go back)

6Id.(go back)

7Id.(go back)

8Id. at 9.(go back)

9Id. at 11–12(go back)

10Id. (go back)

11Id. at 19 (citation omitted).(go back)

12Id. at 20.(go back)

13Id. at 21. Indeed, the Court held that “the only evidence indicating that the purposes listed in the demand might belong to [the stockholder] is the testimony his counsel elicited through leading redirect questions”— testimony that the Court gave no weight. Id. 21 & n.108.(go back)

14Id. at 25(go back)

15Id. at 28–29 & n.143.(go back)

16Id. at 29(go back)

17Id. at 30 (emphasis added).(go back)

18Id.(go back)

19Id. (citation omitted).(go back)

20Id. at 31.(go back)

21Id. at 32.(go back)

22Id. at 33(go back)