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(Reuters) - Pressure has been building quietly for a couple of years among the judges of Delaware Chancery Court about defendants’ increasingly aggressive opposition to shareholder demands for the corporate books and records they are entitled to see under Section 220 of the Delaware Corporate Code.
On Thursday, Chancellor Kathaleen McCormick erupted.
The chancellor issued a brief but scathing letter opinion awarding fees to several plaintiffs' firms that successfully litigated a demand for books and records from Gilead Sciences Inc, which is facing lawsuits and regulatory investigations for allegedly squelching generic competition for a profitable HIV medication. Gilead’s opposition to shareholders’ demands, McCormick said, was not just baseless. It was “glaringly egregious.”
The company had claimed that shareholders could not meet the very low bar of showing a credible basis for their books-and-records demand, even though there was ample justification for it, McCormick said. Gilead misrepresented the record in arguing that any potential shareholder derivative suit based on the books and records would be dismissed, the chancellor wrote. And the company claimed that each of the five shareholders that sought 220 materials was an unqualified stalking horse for plaintiffs' firms, McCormick said, despite deposition testimony showing that all of them were knowingly exercising their rights as shareholders.
“Perhaps one of these positions, standing alone, could be forgiven as merely an aggressive defense,” the chancellor wrote. “Perhaps not. I do not need to make that difficult call because, collectively, these positions rise to the level of glaringly egregious litigation conduct.”
McCormick did not specify how much money would be awarded to shareholder firms -- including Bernstein Litowitz Berger & Grossmann; Cotchett, Pitre & McCarthy; Pomerantz and Bottini & Bottini – but plaintiffs requested $1.76 million to compensate them for “Gilead’s bad faith litigation tactics.”
Gilead’s lawyers at Cooley and Potter Anderson & Corroon referred me to a corporate spokesperson, who said in an email statement that Gilead was “disappointed” by the ruling and plans to appeal. “Gilead's defense was rooted in good faith and supported by the case law,” the statement said. The company’s brief opposing plaintiffs’ fee request argued that it did not engage in “hostile or bullying tactics,” and that Gilead believed its arguments were “supported by law and the nuances of an evolving books and records practice.”
The problem for Gilead – and other corporate defendants – is that the recent evolution of Section 220 litigation does not justify the kind of aggressive opposition that the company mounted. “The pendulum has swung,” said shareholder lawyer Mark Molumphy of Cotchett.
Thursday’s opinion has been months, if not years, in the making. About 10 years ago, Chancery judges made clear to shareholder lawyers that they were expected to investigate breach-of-duty allegations thoroughly before filing derivative suits accusing corporate directors of misconduct. That meant using shareholders’ rights under Section 229 to inspect corporate books and records.
Plaintiffs' lawyers got the message. In fact, as law professors James Cox, Randall Thomas and Kenneth Martin wrote in a 2020 paper, The Paradox of Delaware’s “Tools at Hand” Doctrine, books-and-records demands over the last decade became a critical way for shareholders to obtain “backdoor discovery,” especially as the Chancery Court tightened dismissal standards for breach-of-duty M&A suits.
Defendants, predictably, fought back. Delaware law, as I mentioned, entitles shareholders to access corporate records, but those rights have limits. Shareholders must have a proper purpose, and plaintiffs' lawyers can’t exploit unwitting shareholders to claim inspection rights for litigation purposes. Citing these limitations, defendants began forcing plaintiffs' lawyers to go to court -- and even to trial -- to enforce shareholders’ inspection rights.
Defendants rarely won these cases outright, according to the law profs’ study, but sometimes managed to curtail demands and establish new restrictions on the definition of a proper purpose. They also, of course, made it expensive and time-consuming for shareholder lawyers to litigate inspection demands.
Delaware judges noticed, and began pushing the other way. In February 2020, for instance, Vice Chancellor J. Travis Laster confirmed the low bar for shareholders in a ruling against the pharma distributor AmerisourceBergen Corp. The Delaware Supreme Court affirmed Laster’s ruling in December, holding that to obtain documents, shareholders are merely required to offer enough evidence to give the Chancery Court a credible reason to infer corporate mismanagement.
McCormick oversaw a trial last fall in the Gilead case. She showed she was onto defendants’ tactics in a ruling in November that ordered the company to grant shareholders access to the corporate records they sought. “Gilead's real goal in this litigation is not to protect its interests but, rather, to make the process of investigating wrongdoing as difficult as possible for its stockholders,” she wrote. That strategy, she said, had become an outright trend among defendants, asserting “overly aggressive” opposition to inspection demands solely to obstruct shareholders.
Defendants, she said in that November decision, had been operating “with the apparent belief that there is no real downside” to their obstructionism. McCormick suggested that sense of impunity was misplaced, urging plaintiffs' lawyers to file a motion for their fees and costs.
The chancellor’s ruling on Thursday made good on her threat in the November decision. Defendants can now pin a million-dollar price tag on unduly aggressive opposition to shareholders’ books and records demands.
Plaintiffs' lawyers Molumphy of Cotchett and Gregory Varallo of Bernstein Litowitz told me McCormick sent a clear and direct message: No more defense shenanigans in opposing inspection demands. Plaintiffs just want defendants to be reasonable, Varallo said, adding, “We are always happy to work constructively rather than litigate.”
Chancery Court judges are likely united in this get-tough attitude. I’ve already told you about Laster’s ruling last year in AmerisourceBergen. Earlier this year, Vice Chancellor Paul Fioravanti cited both AmerisourceBergen and the November 2020 decision in Gilead when he ruled after a Section 220 trial that Biogen shareholders were entitled to most of the records they sought, despite the pharma company's embrace of an "‘overly aggressive defense strategy’ in opposing inspection.”
Now we’ll see if defendants have heard what Chancery is saying.
(By Alison Frankel)
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