AmerisourceBergen v. Lebanon County Employees' Retirement Fund: Affirmation of Proper Purpose in Section 220 Inspection Demands

AmerisourceBergen v. Lebanon County Employees' Retirement Fund: Affirmation of Proper Purpose in Section 220 Inspection Demands

Introduction

In the case of AmerisourceBergen Corporation v. Lebanon County Employees' Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan (243 A.3d 417), the Supreme Court of the State of Delaware affirmed the Court of Chancery's decision related to a Section 220 books and records inspection demand. This case scrutinizes the boundaries of proper purpose under Delaware General Corporation Law (DGCL) Section 220, particularly addressing whether plaintiffs must disclose the ultimate objectives of their inspection demands and the necessity of establishing actionable wrongdoing.

Summary of the Judgment

AmerisourceBergen Corporation ("AmerisourceBergen") appealed the Court of Chancery's memorandum opinion, which had ordered the production of certain books and records and granted plaintiffs leave to conduct a Rule 30(b)(6) deposition. The lower court determined that the plaintiffs had established a proper purpose for the inspection demand under Section 220 of the DGCL, asserting that they were investigating potential breaches of fiduciary duty, mismanagement, and other wrongdoing related to the opioid crisis. AmerisourceBergen challenged the sufficiency of the plaintiffs' demand, arguing that it failed to specify the ultimate objectives and did not establish actionable wrongdoing. The Supreme Court affirmed the lower court's decision, holding that when an inspection demand states a proper investigatory purpose, it need not specify the intended use of the records and that establishing actionable wrongdoing is not always necessary.

Analysis

Precedents Cited

The judgment extensively references key Delaware cases that have shaped the interpretation of Section 220:

  • In re Caremark International Inc. Derivative Litigation (1996): Established that directors can be held liable for oversight failures under certain conditions.
  • SEINFELD v. VERIZON COMMUNICATIONS, Inc. (2006): Clarified the proper purpose requirement under Section 220, emphasizing that a proper purpose need not enumerate all potential uses of the sought-after records.
  • Northwest Industries, Inc. v. B.F. Goodrich Co. (1969): Highlighted the necessity for plaintiffs to sufficiently articulate their intended communications with other shareholders.
  • Polygon Global Opportunities Master Fund v. West Corp. (2006): Demonstrated that inspection demands solely aimed at pursuing litigation could be denied if procedural obstacles render such litigation futile.
  • Southeastern Pennsylvania Transportation Authority v. AbbVie, Inc. (2016): Addressed the limitations of using Section 220 for investigating claims potentially barred by exculpatory provisions.

These precedents collectively underscore the balance Delaware courts strive to maintain between shareholders' rights to inspect corporate records and directors' authority to manage without undue interference.

Legal Reasoning

The Court of Chancery and subsequently the Supreme Court delved into the requirements for a proper purpose under Section 220. The primary contention was whether plaintiffs needed to disclose their ultimate objectives when demanding inspection of corporate records. AmerisourceBergen argued that without specifying the end use, such demands could be overreaching and akin to fishing expeditions.

However, the courts held that as long as the demand articulates a reasonable investigatory purpose related to the shareholder's interest—such as investigating potential breaches of fiduciary duty or mismanagement—there is no obligation to enumerate all possible subsequent actions, including litigation. The mere suggestion that information might be used for litigation does not invalidate the proper purpose. Furthermore, the plaintiffs were not required to demonstrate that the alleged wrongdoing was actionable at the time of the inspection demand.

The decision emphasizes that requiring plaintiffs to outline every potential use of the records would hamper legitimate investigations into corporate governance issues. Instead, the focus remains on whether there is a credible basis for suspecting misconduct that justifies the inspection.

Impact

This judgment reinforces the accessibility of corporate records to shareholders under Section 220 for legitimate investigatory purposes. By affirming that plaintiffs do not need to disclose the ultimate objectives of their inspection demands, the decision potentially broadens the scope for shareholders to investigate corporate wrongdoing without undue constraints.

Additionally, by clarifying that establishing actionable wrongdoing is not a blanket requirement, the ruling alleviates procedural barriers that may have previously deterred shareholders from exercising their inspection rights. This could lead to increased accountability and transparency within corporations, as shareholders are empowered to uncover and address potential mismanagement more effectively.

Going forward, corporations may need to be more prepared to engage with Section 220 demands by ensuring robust compliance and record-keeping practices, knowing that shareholders have a clearer path to investigating corporate affairs without the need to disclose the full extent of their investigative intentions.

Complex Concepts Simplified

Section 220 of the Delaware General Corporation Law (DGCL)

Section 220 allows shareholders to inspect a corporation's books and records for a proper purpose related to their interest as shareholders. This right is fundamental for shareholders to monitor corporate governance and ensure that directors and officers are managing the company effectively.

Proper Purpose

A proper purpose refers to a legitimate reason for requesting corporate records, such as investigating potential breaches of fiduciary duty, mismanagement, or other wrongdoing. It ensures that the inspection demand is not arbitrary or intended for harassment.

Rule 30(b)(6) Deposition

This is a legal tool that allows plaintiffs to depose a corporation's representative to obtain information about the existence, custody, preservation, and inspection of documents. In this case, the court allowed plaintiffs to use this deposition to determine what types of records AmerisourceBergen possessed and who maintained them.

Actionable Wrongdoing

Actionable wrongdoing refers to misconduct that constitutes a violation of law or corporate governance standards, making it possible for shareholders to take legal action. The court clarified that establishing whether wrongdoing is actionable is not always necessary to justify an inspection demand under Section 220.

Conclusion

The Supreme Court of Delaware's affirmation in AmerisourceBergen v. Lebanon County Employees' Retirement Fund solidifies the standards governing Section 220 inspection demands. By determining that plaintiffs need not disclose their ultimate objectives or establish actionable wrongdoing, the ruling enhances shareholders' ability to conduct meaningful investigations into corporate affairs. This decision strikes a crucial balance, ensuring corporate accountability while safeguarding directors' management prerogatives. Consequently, it serves as a pivotal reference for future Section 220 actions, promoting transparency and responsible governance within Delaware corporations.

Case Details

Year: 2020
Court: SUPREME COURT OF THE STATE OF DELAWARE

Judge(s)

TRAYNOR, Justice

Attorney(S)

Stephen C. Norman, Esq., Jennifer C. Wasson, Esq., Tyler J. Leavengood, Esq., POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Michael D. Blanchard, Esq. (argued), Amelia G. Pennington, Esq., MORGAN, LEWIS & BOCKIUS LLP, Boston, Massachusetts, for Appellant AmerisourceBergen Corporation. Samuel L. Closic, Esq., (argued) Eric J. Juray, Esq., PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Gregory V. Varallo, Esq., BERNSTEIN LITOWITZ BERGER & GROSSMAN LLP, Wilmington, Delaware, for Appellees Lebanon County Employees' Retirement Fund and Teamsters Local 443 Health Services and Insurance Plan. Eric L. Zagar, Esq., Michael C. Wagner, Esq., Christopher M. Windover, Esq., KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania, for Appellee Lebanon County Employees' Retirement Fund. Frank R. Schirripa, Esq., Daniel B. Rehns, Esq., Hillary Nappi, Esq., HACH ROSE SCHIRRIPA & CHEVERIE LLP, New York, New York; David Wales, Esq., Andrew Blumberg, Esq., BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York, for Appellee Teamsters Local 443 Health Services and Insurance Plan.

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