A Lesson On Avoiding Email Production In Delaware

Just over a month ago, the Delaware Supreme Court reversed, in part, the Court of Chancery’s post-trial decision in KT4 Partners LLC v. Palantir Technologies Inc. for failing to order a company to produce emails in response to a stockholder’s books and records request under Section 220 of the Delaware General Corporation Law.¹ In so holding, the Supreme Court reaffirmed Delaware precedent holding that, if traditional board-level documents sufficient for a stockholder to investigate its stated purpose are available, Delaware courts generally will not order the production of emails in books and records proceedings.

But the court also made clear that, if traditional board-level documents are not available due to the company’s failure to adhere to corporate formalities and properly document corporate actions, the production of emails may be necessary for the stockholder to satisfy its purpose. While the Supreme Court’s opinion did not alter existing law, and seems to have landed gently among the corporate bar, it serves as a helpful and noteworthy reminder of the importance of following corporate formalities and the burdens that may be imposed upon a company if such formalities are not followed.

Palantir Technologies Inc., KT4 Partners LLC and other large company stockholders were parties to an investors’ rights agreement that, among other things, granted major investors, including the plaintiff, the right to inspect the company’s books and records and a right of first refusal with respect to future company stock offerings. In 2015, the relationship between the parties soured, following allegations that the plaintiff’s principal had misappropriated Palantir’s intellectual property. The dispute led to the plaintiff’s attempted sale of its stake in Palantir, and allegations that the company intentionally foiled the attempted sale.

After the failed sale attempt, the plaintiff sought to inspect the company’s books and records pursuant to rights set forth in the investors agreement. Although initially indicating it would respond to the plaintiff’s information request, the company instead amended the investors agreement to, among other things, retroactively eliminate the plaintiff’s contractual inspection rights and right of first refusal by increasing the number of shares required to qualify as a major investor to a threshold that excluded the plaintiff.

Purportedly stripped of its contractual informational rights, the plaintiff thereafter sought to exercise its statutory rights to information under Section 220, which grants stockholders of Delaware corporations the right to inspect “books and records” of the company that are necessary and essential to a proper purpose — i.e., a purpose that is reasonably related to one’s interest as a stockholder. Through its Section 220 demand, the plaintiff sought to inspect the company’s books and records for the purpose of investigating alleged wrongdoing related to, among other things, the amendments. The company refused to produce most of the documents sought in the plaintiff’s Section 220 demand, prompting the plaintiff to file suit in the Court of Chancery.

The Court of Chancery’s post-trial opinion found that plaintiff had stated several proper purposes for its inspection demand under Section 220, including the investigation of suspected wrongdoing in connection with the amendments, and that the plaintiff was entitled to inspect “all books and records relating to” the amendments. The parties, however, were unable to agree on a form of implementing order with respect to several issues, including whether the inspection should encompass emails and other electronically stored information.

The court resolved the dispute by ruling that “the inspection of electronic mail is not essential to fulfilling Plaintiff’s stated investigative purpose” and that the plaintiff was entitled to receive only board-level documents relating to the amendments. The plaintiff appealed, arguing that the Court of Chancery erred by holding that emails were not necessary for its investigative purpose.²

In reversing the Court of Chancery on this issue, the Supreme Court explained that emails and other electronic communications were necessary for the plaintiff to investigate purported wrongdoing related to the amendments because the plaintiff had presented “some evidence,” and the company did not dispute on appeal, that Palantir had a history of failing to adhere to corporate formalities and conducting business informally over email — and, specifically, that much of the alleged wrongdoing relating to the amendments occurred over email. In other words, because there were no traditional board-level documents relating to the amendments and the only information in the company’s possession relating to the amendments was in the form of emails, the emails necessarily were essential to the plaintiff’s investigative purpose.

Echoing prior Delaware court opinions, the Supreme Court reaffirmed that the production of emails generally will not be ordered in a Section 220 action if there are sufficient board-level documents available for a stockholder to satisfy its proper purpose. However, “[i]f a respondent in a § 220 action conducts formal corporate business without documenting its actions in minutes and board resolutions or other formal means, but maintains its records of the key communications only in emails, the respondent has no one to blame but itself for making the production of those emails necessary.”

The Palantir decision offers companies several important takeaways. First, to reduce the likelihood that a books and records demand will result in the production of directors’ and officers’ emails, companies should ensure that they are honoring corporate formalities and properly documenting corporate actions. Of course, although compliance with corporate formalities can decrease the likelihood that electronic documents will become subject to inspection, the possibility of producing emails cannot be eliminated altogether, as certain books-and-records inspections necessarily will be focused on communications that do not lend themselves to memorialization in traditional board-level documents.³

Second, the question of which types of documents are necessary for a stockholder to investigate its proper purpose (and therefore what constitutes “books and records” under Section 220) hinges largely on the mediums that a company uses to transact business on that specific subject. The Supreme Court made clear in Palantir that it views Section 220 as a statute whose reach will evolve to keep pace with companies’ ever-changing means of communicating, maintaining corporate records and transacting business, including email and other forms of electronic communications. As the court in Palantir noted, for instance, “[t]oday, emails and other electronic communications do much of the work of the paper correspondence of yore.”

Third, a stockholder is not required to produce “compelling evidence” to obtain electronic documents. Instead, a stockholder must identify the categories of books and records it needs and present “some evidence” that such documents are necessary for its proper purpose. Although Palantir indicates that companies can rebut this argument with evidence that other materials would be sufficient to accomplish the stockholder’s purpose, the degree to which Delaware courts will allow parties to develop the record on this point is not clear.

In handling this issue, courts likely will bear in mind that Section 220 proceedings are summary in nature, a Section 220 plaintiff bears the lowest possible burden of proof under Delaware law, and, unlike in plenary litigation, stockholders in Section 220 proceedings are not afforded the opportunity to take discovery from the company before attempting to meet their evidentiary burden (meaning they have limited insight into the company’s record-keeping practices). These factors may tilt close calls on the issue in the stockholders’ favor.

Fourth, the Supreme Court lamented in Palantir that the highly relevant question of what documents are necessary to fulfill the stockholder’s proper purpose is often overshadowed in Section 220 actions by needless argument over the form of the books and records to be produced. In an attempt to refocus litigants on the more relevant inquiry, the Supreme Court conveyed its expectation that, once a stockholder is adjudicated to have a proper purpose for its inspection demand, companies will “exercise good faith in agreeing to a final order that gives the petitioner the books and records she needs to accomplish the purpose that the Court of Chancery found proper” and be forthcoming regarding how its records relating to the stated purpose are maintained so that such records can be produced to the demanding stockholder.

¹  KT4 Partners LLC v. Palantir Techs. Inc., 2019 WL 347934 (Del. Jan. 29, 2019).

² The Supreme Court’s opinion is also notable because it addressed the scope of jurisdictional use restrictions, which are often imposed in connection with Section 220 inspections and require any lawsuit arising out of the inspection to be brought in a particular forum. In Palantir, Plaintiff contended that the Court of Chancery abused its discretion by rejecting two proposed exceptions to the jurisdictional use restriction, which would have allowed Plaintiff to (1) bring suit in the Delaware Superior Court (not just the Court of Chancery) and (2) file any non-derivative suit outside of Delaware if any Palantir officer, director, or agent named as a defendant refused to consent to personal jurisdiction in Delaware. In reversing the Court of Chancery, the Supreme Court held that the jurisdictional use restriction should have included both exceptions because, among other things, the Company did not have a forum selection bylaw, the Company had already sued Plaintiff in California, relevant agreements contained California choice-of-law clauses, and certain potential defendants might not be subject to personal jurisdiction in Delaware. Palantir, 2019 WL 347934, at *13–19.

³ See, e.g., Schnatter v. Papa John’s Int’l, Inc., 2019 WL 194634, at *15–16 (Del. Ch. Jan. 15, 2019) (ordering production of emails and text messages among corporate fiduciaries in response to Section 220 action brought by director investigating company’s decision to cut ties with him).

This article was originally published by Law360 on March 8, 2019.

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