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In Lebanon County Employees’ Retirement Fund, et al. v. AmerisourceBergen Corporation,1 the Delaware Court of Chancery ordered the inspection of the books and records of AmerisourceBergen Corporation, one of the leading opioid distributors in the country, for the purpose of investigating potential mismanagement or breaches of fiduciary duty in connection with the company’s distribution of opioids. In his decision, Vice Chancellor J. Travis Laster confirmed that stockholders are not required to show that the misconduct central to the investigation supports an actionable claim in order to meet their low burden to enforce inspection rights under Section 220 of the Delaware General Corporation Law. The decision also reinforced that, in appropriate circumstances, the Court will allow stockholders to inspect both board-level documents reflecting the directors’ decisions at formal board meetings and less formal communications by and among directors, officers, and senior-level managers. This decision is notable because the Court rejected the company’s efforts to impose heightened burdens on stockholders seeking to discover additional information about the types of books and records a company may or may not have, and in what formats those records exist. This decision also serves as a reminder to boards considering inspection demands that stockholders bear a low burden to show they are entitled to enforce their inspection rights under Delaware law, and if stockholders meet clear this threshold—which is seemingly easier in the context of publicly scrutinized events—Delaware courts are increasingly likely to find that stockholders are entitled to inspect minutes and other sources of information. Companies confronted with inspection demands should be strategic in what demands to oppose, and consider whether negotiation with the stockholder ultimately may produce a more favorable outcome than litigating the issue in court.
Plaintiffs are stockholders of AmerisourceBergen Corporation (“Amerisource” or the “Company”), one of the largest wholesale distributors of pharmaceuticals, including opioid pain medication. Plaintiffs filed an action pursuant to Section 220 of the Delaware General Corporation Law2 (“DGCL”) seeking to enforce their rights to inspect the books and records of Amerisource to determine whether the Company engaged in wrongdoing in connection with its distribution of opioids. Amerisource denied Plaintiffs’ request in its entirety on the grounds that Plaintiffs’ demand was overly broad and failed to state a proper purpose.
The widespread opioid epidemic in the United States is well known. In 2007, the DEA suspended Amerisource’s distribution license in Orlando, Florida, as a result of the Company’s dealings with so-called “rogue pharmacies” (pharmacies that fill large orders of prescriptions), finding that it failed to maintain effective controls at its Orlando distribution center. In response, Amerisource adopted a company-wide compliance program to correct these issues (the “2007 Settlement”), and Amerisource continued to work with the DEA to improve its operations. According to the Company’s public filings, its senior officers and board of directors “play[ed] a significant role in monitoring and enforcing compliance.”3
Since 2012, Amerisource has received subpoenas from the DEA and U.S. Attorneys’ Offices of numerous states alleging that it failed to maintain effective controls and other deficiencies concerning its compliance program. In 2017, 41 state attorneys general began investigating Amerisource, along with other opioid distributors and manufacturers. In 2018, the Energy and Commerce Committee of the United States House of Representatives issued a report condemning Amerisource and two other distributors’ monitoring and enforcement compliance in West Virginia. The United States Office of the Ranking Member for Homeland Security and Governmental Affairs Committee issued a similar report relating to oversight of opioid distributions in Missouri. In 2019, the New York Attorney General amended her complaint against the Company alleging, based on public investigations, that Amerisource’s policies failed to stop the unlawful diversion of opioids, and that Amerisource “has consistently stood out as compared to its major competitors [because of] its unwillingness to identify suspicious orders, even among customers that regularly exceeded their thresholds and presented multiple red flags of diversion.”4 Amerisource was also sued in multidistrict litigation in the Northern District of Ohio by “state attorneys general, cities, counties, Native American tribes, union benefit funds, and other plaintiffs.”5 To date, Amerisource has spent over $1 billion in connection with defending and settling opioid-related litigation.
In May 2019, Plaintiffs served their books and records demand on Amerisource, seeking to “investigate whether the Company’s Directors and Officers have committed mismanagement or breached their fiduciary duties” regarding the distribution of opioids, and requesting ten categories of information (the “Demand”).6 In June 2019, Amerisource rejected the Demand in its entirety and refused to produce any documents for inspection. After limited discovery and a one-day trial, the Court of Chancery found that Plaintiffs stated a proper purpose and were entitled to obtain responsive documents.
Much of the evidence that the Court relied upon came from government investigations, other lawsuits, and media coverage involving Amerisource and the opioid crisis. The Court of Chancery reached a similar outcome in In re Facebook, Inc. Section 220 Litigation,11 in which plaintiffs sought to enforce their inspection rights after news outlets reported that Cambridge Analytica had acquired the private data of 50 million Facebook users, which Facebook never disclosed. There, Vice Chancellor Joseph R. Slights, III found that plaintiffs established that there was “a credible basis to infer the Board and Facebook senior executives failed to oversee Facebook’s compliance with the Consent Decree [ordered by the Federal Trade Commission requiring Facebook to implement better data security protocols] and its broader efforts to protect the private data of its users.”12 The Court relied upon public reports and findings regarding the inadequacy of Facebook’s policies, the Consent Decree’s mandates, Facebook’s policies and business plan, news reports, regulatory authorities’ investigations, and “numerous lawsuits” arising from the same conduct. Based on this information, the Court concluded that plaintiffs presented sufficient evidence showing a proper purpose in investigating the board’s oversight failures. Amerisource and Facebook demonstrate that Delaware courts will rely upon publicly available information in assessing whether plaintiffs have asserted a proper purpose in connection with a Section 220 demand. However, given that Amerisource and Facebook both arose out of highly publicized scandals, the decisions may have limited applicability to Section 220 demands arising from less widely-known or publicized events.
Finally, while Plaintiffs are entitled only to documents that are “essential and sufficient” to the stated purpose of a Section 220 demand, access to so-called informal board materials, including emails and texts, is increasingly being permitted.30 In light of these recent legal developments, companies should confer with experienced counsel on the various strategic considerations implicated by a stockholder demand under Section 220.
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1 2020 WL 132752 (Del. Ch. Jan. 13, 2020).
2 See 8 Del. C. § 220(b); see also Amerisource, 2020 WL 132752, at *6 (internal citations omitted) (“To obtain books and records under Section 220(b), the plaintiff must establish by a preponderance of the evidence (i) its status as a stockholder, (ii) compliance with the statutory requirements for making a demand, and (iii) a proper purpose for conducting the inspection.”).
3 2020 WL 132752, at *3.
4 Id. at *4.
5 Id. at *5.
6 Specifically, the Demand sought to: “(i) to investigate possible breaches of fiduciary duty, mismanagement, and other violations of law by members of the Company’s Board of Directors and management, including the Company’s senior officers . . . in connection with [AmerisourceBergen]’s distribution of prescription opioid medications; (ii) to consider any remedies to be sought in respect of the aforementioned conduct; (iii) to evaluate the independence and disinterestedness of the members of the Board; and (iv) to use information obtained through inspection of the Company’s books and records to evaluate possible litigation or other corrective measures with respect to some or all of these matters.” Id. at *7. For purposes of its analysis, the Court reduced the four purposes articulated in the Demand to two: (1) investigate wrongdoing or mismanagement; and (2) evaluate director disinterestedness and independence.
7 2020 WL 132752, at *6 (citing 8 Del. C. § 220(b)). Delaware courts have recognized that there is “no shortage of proper purposes under Delaware law[,]” and the Court here listed several purposes that previously have been upheld: “to investigate allegedly improper transactions or mismanagement; to clarify an unexplained discrepancy in the corporation’s financial statements regarding assets; to investigate the possibility of an improper transfer of assets out of the corporation; to ascertain the value of his stock; to aid litigation he has instituted and to contact other stockholders regarding litigation and invite their association with him in the case; ‘[t]o inform fellow shareholders of one’s view concerning the wisdom or fairness, from the point of view of the shareholders, of a proposed recapitalization and to encourage fellow shareholders to seek appraisal’; ‘to discuss corporate finances and management’s inadequacies, and then, depending on the responses, determine stockholder sentiment for either a change in management or a sale pursuant to a tender offer’; to inquire into the independence, good faith, and due care of a special committee formed to consider a demand to institute derivative litigation; to communicate with other stockholders regarding a tender offer; to communicate with other stockholders in order to effectuate changes in management policies; to investigate the stockholder’s possible entitlement to oversubscription privileges in connection with a rights offering; to determine an individual’s suitability to serve as a director; to obtain names and addresses of stockholders for a contemplated proxy solicitation; or to obtain particularized facts needed to adequately allege demand futility after the corporation has admitted engaging in backdating stock options.” Id. at *7.
8 Id. at *8.
10 Id. at *9-10.
11 2019 WL 2320842 (Del. Ch. May 31, 2019).
13 Amerisource, 2020 WL 132752, at *11.
14 Id. at *13.
15 Id. at *6 (emphasis added).
16 In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).
17 Amerisource, 2020 WL 132752, at *15.
18 Id. at *14.
19 See In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 361 (Del. 1998); Saito v. McKesson HBOC, Inc., 2001 WL 818173, at *4 (Del. Ch. July 10, 2001).
20 Amerisource, 2020 WL 132752, at *17.
21 Id. at *19; cf. Beatrice Corwin Living Irrevocable Trust v. Pfizer, Inc., 2016 WL 4548101 (Del. Ch. Aug. 31, 2016).
22 Amerisource, 2020 WL 132752, at *22.
23 Id. at *23.
24 Id. at *26.
25 Id. at *27.
26 203 A.3d 738 (Del. 2019).
27 Amerisource, 2020 WL 132752, at *24.
28 Id. at *25.
30 See, e.g., Palantir, 203 A.3d 738 (reversing decision that denied request for production of electronic communications on basis that company and board relied on email communication in lieu of corporate formalities); Bucks Cty. Employees Retirement Fund v. CBS Corp., 2019 WL 6311106 (Del. Ch. Nov. 25, 2019) (court ordered limited production of electronic communications from specified individuals within specified time periods); Schnatter v. Papa John’s Internat’l, Inc., 2019 WL 194634 (Del Ch. Jan. 15, 2019) (court ordered limited production of e-documents from personal accounts and devices).