On The Case

Delaware Chancery judge pushes back against limits on books-and-records demands

(Reuters) - There is a reasonable possibility, according to Vice-Chancellor Travis Laster, that shareholders of the wholesale pharmaceutical distributor AmerisourceBergen Corporation will turn out to have an actionable claim that the company’s directors breached their fiduciary duties by failing to avert what the judge called the “significant corporate trauma” of the opioid crisis. As Laster recounted in a Jan. 13 opinion ordering AmerisourceBergen to give shareholders access to years of formal board materials related to opioid distribution, the company is facing billions of dollars in exposure from private litigation and regulatory investigations stemming from its distribution of opioids. Shareholders have “a credible basis,” Vice-Chancellor Laster said, to use AmerisouceBergen’s internal books and records to explore whether board members and senior executives condoned or consciously ignored violations of reporting systems that might have alerted them about suspicious drug orders.

That’s obviously an important ruling for AmerisourceBergen and for the shareholders who sued to obtain corporate books and records when the company balked at turning them over. But in the broader context of Delaware shareholder litigation, Vice-Chancellor Laster’s AmerisourceBergen opinion is notable for its strong defense of investors’ right to access corporate books, at a time when plaintiffs’ lawyers are making more frequent demands to see such books and records. The judge pushed back, hard, against a line of Delaware cases suggesting that in order to obtain books and records, shareholders must show evidence “from which a court could infer the existence of an actionable claim.”

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Citing the Delaware Supreme Court’s 2006 ruling in Seinfeld v. Verizon, Vice-Chancellor Laster said the books-and-records statute “only requires that a stockholder establish, by a preponderance of the evidence, that there is a credible basis to infer possible corporate wrongdoing or mismanagement.” That’s a much lower hurdle, he said, than the “actionable wrongdoing” theory espoused in AmerisourceBergen’s brief.

“AmerisourceBergen’s actionable-wrongdoing requirement imposes an onerous burden on stockholders that goes beyond the standard established in Seinfeld,” Laster wrote.

The Delaware Supreme Court, he pointed out, has repeatedly urged shareholders to use the books-and-records statute to investigate potential corporate wrongdoing before they file derivative suits accusing board members of breaching their fiduciary duties. That admonition, the judge said, would make no sense if investors had to show that they already had evidence of an actionable claim in order to obtain corporate documents. In fact, Vice-Chancellor Laster said, Delaware judges have in several instances granted defendants’ motions to dismiss breach-of-duty derivative suits - but have simultaneously allowed shareholders to use the books-and-records statute to conduct additional investigation.

“The Delaware Supreme Court,” he said, “has never equated the credible-basis standard with an actionable-claim requirement.”

AmerisourceBergen counsel Michael Blanchard of Morgan Lewis & Bockius and Stephen Norman of Potter Anderson & Corroon did not respond to an email request for comment. Nor did shareholders’ lawyers Gregory Varallo and Mark Lebovitch of Bernstein Litowitz Berger & Grossmann. Plaintiffs were also represented by Prickett Jones & Elliott; Kessler Topaz Meltzer & Check; and Hach Rose Schirripa & Cheverie.

AmerisourceBergen’s primary argument had two prongs. First, the company contended that shareholders’ only intention, based on their demand for the company’s records and their retention agreements with plaintiffs’ lawyers, was to use the corporate records they obtained to bring a breach-of-duty derivative suit. And, according to the company, under case law from 2016’s Beatrice Corwin Living Irrevocable Trust v. Pfizer and 2019’s Hoeller v. Tempur Sealy, when shareholders file a books-and-records case in order to obtain discovery for an eventual derivative suit, they must establish that they have “a credible basis to suspect actionable wrongdoing.” In this case, the pharma distributor said, plaintiffs could not make such a showing because, among other things, directors’ good-faith actions were shielded by an exculpatory provision and all of shareholders’ prospective claims were time-barred.

Vice-Chancellor Laster said AmerisourceBergen was wrong on both prongs of its argument. First, he said, the company erroneously asserted that shareholders must state how they intend to use corporate records in their demand to see internal materials. Two Delaware decisions have adopted such a “purpose-plus-an-end” test, the judge said, but both of those rulings involved shareholders that were quite obviously attempting to use the books-and-records statute to get discovery to use in litigation against the company. Courts, he said, are free to examine plaintiffs’ motives and conclude, like the judges in those cases, that shareholders are not entitled to see the records they want. But according to Vice-Chancellor Laster, nothing in the statute or Delaware Supreme Court precedent requires shareholders to reveal their intentions.

The law “only requires that a stockholder state a proper purpose,” the judge wrote. “The Delaware Supreme Court has not gone further by requiring that a stockholder also say what it will do with the documents it receives.”

And because the demand from AmerisourceBergen shareholders mentioned potential uses other than litigation for the requested internal records, Vice-Chancellor Laster said, the second prong of the company’s argument fails as well. AmerisourceBergen’s contention, based on the 2016 Pfizer decision, was that shareholders who intend to use corporate records in derivative suits must make a credible showing of an actionable claim – but, according to Laster, AmerisourceBergen could not satisfy the threshold test of establishing that shareholders were seeking its books and records in order to sue.

Even if the company had made such a showing, the judge wrote, its argument was fatally flawed: Regardless of precedent suggesting otherwise, Vice-Chancellor Laster said, Delaware law does not demand that shareholders seeking corporate books and records satisfy a test that is more stringent than the standard for tossing a derivative suit on a dismissal motion. That simply cannot be, the judge said.

“Generally speaking, when a corporation has suffered a trauma, and when there is a credible basis to suspect that the corporation has violated positive law or government regulations, then some level of investigation is warranted,” he wrote.

As you know, books-and-records demands have become a routine tool for plaintiffs’ lawyers in Delaware after the state’s justices tightened pleading standards for derivative breach-of-duty suits. Clearly, Vice-Chancellor Laster is concerned that some of his Chancery Court colleagues are getting too miserly about allowing shareholders access to corporate records. He’s made a stand with his AmerisourceBergen opinion. It’s going to be interesting to see if the company asks the Delaware Supreme Court to prove Laster wrong.