(Reuters) - Vice-Chancellor Travis Laster of Delaware Chancery Court signaled Wednesday that he really did intend to reset the course of books-and-records litigation when he ruled last month that the wholesale pharmaceutical distributor AmerisourceBergen give shareholders formal board materials related to opioid distribution.
The judge granted AmerisourceBergen’s petition for certification of an interlocutory appeal of his Jan. 13 decision to the Delaware Supreme Court. And though, as Vice-Chancellor Laster noted, the state justices may still decide not to hear the case, the Chancery judge made it quite clear that he believes the Supreme Court should step in now to reconfirm the low bar for shareholders demanding to see corporate books and records.
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Such demands have become routine in shareholder litigation in Delaware. The Supreme Court, as you know, has tightened its standards for shareholder breach-of-duty claims, arguably making it easier for corporate defendants to win dismissal of shareholder suits before plaintiffs can obtain discovery. At the same time, however, Delaware’s justices have repeatedly urged plaintiffs’ lawyers to take advantage of shareholders’ right to inspect corporate books before filing breach-of-duty derivative suits. Shareholders’ lawyers have taken that hint in droves, leading, as Kyle Compton Wagner of the Chancery Daily has observed, to a spike in the volume of books-and-records litigation in Chancery Court.
But in recent years, according to Vice-Chancellor Laster, some Chancery rulings have imposed limits and conditions on shareholders’ rights of access. AmerisourceBergen, represented by Morgan Lewis & Bockius and Potter Anderson & Corroon, cited decisions in 2016’s Beatrice Corwin Living Irrevocable Trust v. Pfizer and 2019’s Hoeller v. Tempur Sealy to argue that shareholders must establish “a credible basis to suspect actionable wrongdoing” in order to obtain corporate books and records in advance of a prospective breach-of-duty suit. They also argued that under (among other rulings) the Pfizer decision and 2015’s Southeastern Pennsylvania Transportation Authority v. AbbVie, plaintiffs are required to identify not just a proper purpose for inspecting corporate books but also to specify what they intend to do with the records after they obtain them. AmerisourceBergen contended that because the statute of limitations and other defenses would preclude shareholders from asserting breach-of-duty claims against board members, plaintiffs were not entitled to corporate books and records.
Vice-Chancellor Laster used his Jan. 13 decision to push back not just against AmerisourceBergen’s interpretations of Chancery precedent but also against the precedent itself. He harkened back to the Delaware Supreme Court’s landmark 2006 decision, Seinfeld v. Verizon, writing that 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.” And to the extent that other Chancery judges imposed a higher bar, Vice-Chancellor Laster said, those decisions “(go) beyond what Section 220 and Delaware Supreme Court precedent require.”
AmerisourceBergen argued in its petition for an interlocutory appeal that Laster’s decision split with other Chancery rulings on three key points: whether shareholders must show both a purpose for their books and records demand and the ends to which they intend to use the corporate documents; whether plaintiffs must show the likelihood of an actionable case in order to obtain corporate records; and whether investors are permitted to conduct a deposition of a corporate representative to find out what materials might be available to them, in addition to formal board documents.
Shareholders, represented by Prickett, Jones & Elliott and Bernstein Litowitz Berger & Grossmann, countered that the vice-chancellor had merely applied Supreme Court precedent so no “actual conflict” exists. “The routine application of Section 220 in this specific case has no ‘broader’ impact on Delaware corporate law. As such, (AmerisourceBergen) cannot satisfy the threshold requirement that the opinion determined a substantial issue,” shareholders said in their brief.
But in Wednesday’s order certifying the appeal, Vice-Chancellor Laster suggested that Chancery needs some guidance from the Supreme Court. He said his opinion did, in fact, conflict with other Chancery decisions on issues with “widespread implications for how stockholders frame demands and how companies respond.” The judge said his ruling clearly contradicted trial court precedent on what shareholders must show to obtain book and records and arguably conflicts with a case that suggested investors are not entitled to depose corporate reps to broaden the scope of their books-and-records demands. All of these questions, he said, are “substantial issues of material importance.”
The vice-chancellor said it would be more efficient for the Supreme Court to take the case now since the justices’ holding on the key legal questions - whether shareholders must show how they intend to make use of corporate documents and whether plaintiffs must make out a case of actionable wrongdoing in order to obtain access – could end the case. Moreover, said Vice-Chancellor Laster, a hearing now by the justices would “offer the wider benefit of having the Delaware Supreme Court bring clarity to the legal issues discussed in the opinion.”
AmerisourceBergen’s lawyers at Morgan Lewis didn’t respond to an email I sent to their spokeswoman. Shareholders’ lawyer Samuel Closic of Prickett Jones declined to comment.
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