Delaware 'Books and Records' Law Is Keeping up with Tech
With directors dispersed geographically, and with management on the move, many corporations and LLCs do a significant amount of business by email, or even via text messages. It is now commonly understood that such electronic communications can provide an avalanche of information available in discovery as part of a court action.
But, what impact does this business reality have on a books and records request made before litigation — whether the request for books and records is made under Delaware General Corporation Law Section 220 or under the Delaware LLC Act Section 18-305 (both of which function in the same manner)? Directors of Delaware entities and their counsel should be mindful of recent case law in this area, as it may be time for boards to reevaluate and potentially to consider new policies to best protect directors and the business.
Section 220 of the Delaware General Corporation Law provides that any stockholder of a Delaware corporation “shall, upon written demand under oath stating the purpose thereof, have the right to inspect for any proper purpose ... the corporation’s stock ledger, a list of its stockholders, and its other books and records.”1 If the corporation fails to comply with the stockholder’s demand for production of books and records, the stockholder may initiate a summary proceeding in Delaware’s Court of Chancery to compel the production.2
Historically, production of email in response to a books and records request was generally the exception, not the rule, as a shareholder’s asserted purpose for exercising inspection rights could typically be sufficiently responded to with formal board-level documents.3
Recently, however, in KT4 Partners LLC v. Palantir Techs. Inc.,4 the Delaware Supreme Court revisited the circumstances where a company could be required to produce email communications among board members in response to a books and records demand.
As background, KT4, a significant stockholder in Palantir, submitted a formal §220 demand, with its asserted proper purpose being “to investigate fraud, mismanagement, abuse, and breach of fiduciary duty by [Palantir’s Board of Directors].”5 The demand explicitly sought electronic documents for production: “the books and records of the corporation (including … electronic documents and information).”
When litigation ensued, the court noted, “[t]oday, emails and other electronic communications do much of the work of the paper correspondence of yore.” With that updated outlook on the proliferation of email, text and other forms of electronic communication, the Delaware Supreme Court held that email can well be necessary to a books and record request. Recognizing modern day business practices, the Supreme Court noted that if a company conducts “corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information” to which they would otherwise be entitled in a books and records request.
The Supreme Court expressly noted that “in a fast-moving society where the forms in which corporate records are kept continually evolve,” to have meaning, DGCL Section 220 (and LLC Act Section 18-305), must embrace emails, text messages and other electronic communications where “necessary” to satisfy a books and records request and to “accomplish the stockholder’s purpose” for making the demand.
Since stockholders of Delaware corporations have a qualified common law and statutory right to inspect the corporation’s books and records, a stockholder meets its burden to prove necessity for such books and records by identifying the categories of books and records needed and presenting some evidence that such books and records are indeed necessary for its proper inspection purpose. Consequently, if a company observes traditional corporate formalities, such as documenting its actions through formal board minutes, board resolutions and other official letters, the company should be able to satisfy a books and records request from such hard-copy, formal corporate documents.
But, if a company either (1) does not comply with traditional corporate formalities, i.e., holding annual stockholder meetings, documenting board action in minutes and the like; or (2) does not have sufficient corporate books and records to satisfy a books and record request, or perhaps even maintains its records only in email form, then such emails and other electronic documents, including text messages, among the board members likely will be the subject of a books and records request. And, of course, that comes with the risks inherent in the less formal style of email and text communications.
While some have suggested that the analysis in KT4 does not change the existing Delaware law, such a viewpoint misses the mark and fails to appreciate the reality of how even the most profitable and well-respected public companies are run in today’s modern age. Major corporate decisions are frequently vetted, and even approved, via modern forms of electronic communications and that is likely to only become more common place as technology continues to evolve. Technology is drastically changing how business, including in the boardroom, is conducted. For example, remote participation opportunities and email communications address the significant constraints on board business, including the costs and potential scheduling inconveniences that boards of previous eras faced when needing to conduct all meetings in-person.
With that reality in mind, and the ever-increasing commonplace usage of email communications, the legal takeaway from this Delaware law update is that Delaware law is evolving and indeed changing to keep pace with technology, and that boards should confer with their Delaware counsel on the best means to discharge their duties to the company and its equity holders, while still protecting informal electronic communications from production to the fullest extent possible under Delaware law.
"Delaware 'Books and Records' Law Is Keeping up with Tech," by Larry Wood Jr. and Adam Orlacchio was published in Law360 on April 4, 2019.
1 DEL. CODE ANN. tit. 8, §220 (West 2018).
2 8 Del. C. §220(c).
3 See, e.g., In re Plains All Am. Pipeline LP, 2017 WL 6016570, at *4–5 (Del. Ch. Aug. 8, 2017) (rejecting the petitioners’ request for the CEO’s emails “because board-level materials are sufficient for their stated purpose”).
4 KT4 Partners LLC v. Palantir Techs. Inc., No. 281, 2018 (Del. Jan. 29, 2019)
5 Id. at *1.