Duane Morris Delaware Business Law

September 10, 2020 by Richard L. Renck

Seek (In Delaware), and Ye Shall Find Corporate Books and Records

The right of a stockholder of a Delaware corporation to inspect the books and records of the company is codified in Section 220 of the Delaware General Corporation Law. In recent years, and for a number of reasons, stockholders have been exercising this inspection right in ever increasing numbers (I have four clients addressing demands to inspect books and records as I write). A recent decision of the Court of Chancery (Juul Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL) is worth highlighting–less for the substantive law related to Section 220 inspections of books and records and more its discussion of certain “gatekeeping” matters related to litigation to enforce these stockholder inspection rights.

The noteworthy holdings and outcomes in the Juul Labs decision are the following:

Because Juul Labs is a Delaware corporation, and a demand by a stockholder to inspect the books and records of a corporation are a matter of internal affairs for that entity, the stockholder could not use a similar California statute (even though Juul’s principal place of business is in California) as a basis upon which to demand the inspection of books and records;
A stockholder of a Delaware corporation must look solely to 8 Del. C. Sec. 220 for its statutory rights to inspect the books and records of a Delaware corporation in which they own shares; and
The court left open the question whether a stockholder of a Delaware corporation can contractually waive the statutory rights to inspection of books and records granted by Section 220.

Thus, while it is clear that Delaware corporations and their legal advisors can take greater comfort that disputes over stockholder access to corporate books and records can and will be heard in Delaware, the broader question of whether Delaware corporations can affirmatively contract with their stockholders to limit or obviate such inspection rights remains to be answered.

May 27, 2020 by Richard L. Renck

Yet Another Minute About Minutes

The minutes of corporate board meetings are, candidly, too often treated as an afterthought. This can lead to the official records being deemed not much of a record at all when later reviewed. Indeed, a reviewing court might even draw certain inferences based on what it finds, or does not find, in the minutes. I have discussed in this blog several times (here and here) certain nuances that go into the craft that is drafting a set of board minutes that properly memorialize the directors’ fealty to their roles as fiduciaries.

A recent opinion from the Court of Chancery demonstrates why, even at the time of setting the agenda for a board meeting, the corporate secretary should be cognizant of how that meeting will be memorialized in the corporate books and records. In an April 27, 2020, Memorandum Opinion in Hughes v. Hu, et al., C.A. No. 2019-0112-JTL, the Vice Chancellor drew certain plaintiff-friendly, pleadings-stage inferences in ruling on a motion to dismiss based on what was–and more importantly, what was not–included in the corporate board minutes regarding the topics in dispute (this Blog addressed the substantive matters in dispute here).

Critical to the court’s analysis was that prior to filing his complaint, the stockholder plaintiff had exercised his rights under Section 220 of the Delaware General Corporation Law to examine the books and records of the company. While the company had produced for inspection some books and records, the company stipulated that “any remaining materials requested by Plaintiff either do not exist or had been withheld on privilege grounds.” Thus, the court held that “if the Company failed to produce a document that it would reasonably be expected to possess if a particular event had occurred, then the plaintiff is entitled to a reasonable inference that the event did not occur.”

The court used that holding as the basis for drawing a number of inferences in the plaintiff’s favor based on what was not included in or with the corporate minutes. For instance, in multiple instances where the corporate minutes referred to a document or presentation that the directors purportedly reviewed, but where no copy of such document was produced for inspection with the minutes in the Section 220 proceedings, the court inferred that such materials did not exist, and therefore were not reviewed by the directors in carrying out their duties.

Moreover, the court also drew substantive inferences in plaintiff’s favor of the anticipated contents of documents referenced in the minutes but not appended to or presented with the such minutes. For instance, a set of minutes stated that the Audit Committee approved a “Policy of Related-Party Transactions Relating to JV Shareholder,” but no such policy had been presented with the corporate books and records for inspection by the stockholder. Thus, the court held: “It is reasonable to infer at the pleading stage that the policy did not place meaningful restrictions on management.”

Finally, it is worth noting that the court also highlighted in multiple places throughout the opinion the overall landscape presented by the corporate books and records. Specifically, the court noted relatively long gaps between meetings of the audit committee, the types of tasks the directors were purportedly undertaking at such meetings, and the actual length of the meetings themselves. For example, the court held it was “reasonable to infer that with the Audit Committee having not met for almost a year, there was no possible way that the Audit Committee could have fulfilled all of the responsibilities it was given under the Audit Committee Charter during a fifty-minute meeting.”

This opinion sheds light on the potential issues that might arise where corporate secretaries (or their counsel) have allowed the task of recording minutes of board meetings to become a mere footnote in the process of keeping accurate and meaningful corporate books and records. Based on this opinion, corporate record-keepers might:

In setting the agenda, give thought to how the meeting is going to flow with an eye to what the written minutes will ultimately record for history. That is, consider the order in which topics are discussed, the relative nature and materiality of each discussion topic, and the time reasonably necessary for the directors to effectively educate themselves about that matter, discuss it, and take action. The minutes should then reflect and record this flow of information, debate, consideration, and action by the directors.
Consider what documents or presentations will be provided to the directors for review and discussion and whether such materials should be provided to the directors in advance of the meeting.
Give thought to what materials–if any–will be appended to minutes in the official books and records of the company.

Drafting minutes that properly record the material events in the life of a board of directors is an art more than a science, but like the classical orders of ancient art and architecture, the gloss from judicial decisions of the courts can define characteristics of minutes that bring that art to life in ways that unmistakably portrays director behavior fully complying with fiduciary norms.

April 8, 2020 by Richard L. Renck

Delaware Governor Issues Emergency Order Regarding Corporate Annual Meetings

I recently discussed on this page how the 2020 corporate annual meeting season was facing its own challenges in the midst of the global pandemic and worldwide orders against the congregation of persons, and discussed the potential use of virtual annual meetings being conducted remotely by electronic communications as a means to overcome such challenges. On the evening of April 6, 2020, the Governor of the State of Delaware issued his Tenth Modification to the Covid-19 State of Emergency, which contained provisions fostering a Delaware corporation’s ability to react where it had already called and noticed an annual meeting of stockholders to be held in-person.

The Tenth Modification of the Covid-19 State of Emergency permits Delaware corporations subject to the reporting requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, and who have already given notice of an in-person annual meeting of stockholders, to either (a) convene the meeting as scheduled but via electronic “virtual” means or (b) adjourn the meeting to another date to be held remotely via electronic means by both (i) making a public filing with the SEC giving notice of such changes to the convening of the meeting, and (ii) publishing the notice on the company’s website.

March 31, 2020 by Richard L. Renck

Annual Meetings–When Your Stockholders Cannot Actually Meet

As I write this post safely ensconced—and properly “socially-distanced”—in my home office, the annual rites of spring march on oblivious to the disruption caused by a global pandemic. The bulbs outside my window are in full-bloom, trees are budding out, and spindly-legged foals gambol about in their paddocks. Corporate annual meetings (another rite of spring), however, are not so immune. Millions of stockholders of Delaware corporations are currently under some form of “stay-at-home” restrictions, and applicable guidelines from health officials limit gatherings to no more than 5-10 people, each of which have to be at least 6 feet away from one another. These safety protocols, while necessary, make it essentially impossible to convene annual stockholders’ meetings as has been traditional–in person.

In this time of extreme disruption, Delaware corporations may continue to carry on the critical business attended to at the annual meeting of stockholders by taking advantage of the flexibility granted by the Delaware General Corporation Law (“DGCL”) to conduct such annual meetings “virtually” via electronic means. Moreover, as described below, Delaware corporations may also be given the freedom to delay their annual meetings until the biological dangers of in-person meetings have passed.

“Virtual” Annual Meetings

Section 211 of the DGCL was amended at the turn of this century to authorize corporations to hold annual meetings of stockholders “by means of remote communication” so long as it was not prohibited by the corporation’s charter or bylaws and was approved by the board of directors. Section 211 further gives the board sole discretion to adopt guidelines and procedures that would allow stockholders (or proxy-holders) to utilize “means of remote communications” such that they may:

1) participate in the stockholders’ meeting, and;

2) be deemed present in person and vote at a meeting of stockholders, provided that:

(i) the company implements reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder,

(ii) the company implements reasonable measures to provide its stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with the proceedings, and

(iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action will be maintained by the company.

Corporations considering utilizing the freedom offered by Section 211 to conduct their annual meetings virtually should consult their governing documents to determine whether such meetings would be prohibited, and if not prohibited, the board of directors should establish proper procedures to ensure compliance with Section 211. If a virtual meeting is, however prohibited by the governing documents, and that prohibition is contained in the company’s bylaws, then the board of directors may have the power to amend the bylaws to allow annual meetings to be conducted by remote means.

Delayed Annual Meetings

To the extent a Delaware corporation has already given notice of an “in-person” annual meeting, another option may be to delay the convening of such a gathering until it is both safe and permitted by local orders. To the extent a company decides to delay its annual meeting, among the issues that might need to be addressed are: (a) federal securities laws and regulations related to notices and solicitations of proxies (recent SEC guidance on this front is addressed here), and (b) Delaware state-law matters related to the timing of annual meetings. For instance, DGCL Section 211 mandates that a corporation convene an annual meeting no later than 13 months since the last annual meeting or the last time directors were elected by written consent. Thus, a delayed annual meeting could run afoul of this timing constraint.

As of this morning, however, it appears that the Delaware State Bar Association (“DSBA”) is working on emergency proposals for the Governor and the General Assembly that would, if presented and adopted, (a) make clear in DGCL Section 110(a) that a pandemic or epidemic is a type of emergency that could trigger a board’s ability to adopt emergency bylaws, and (b) give the board of directors broad powers regarding the timing of and method of convening an annual meeting of stockholders beyond those discussed above. These proposed measures are currently making their way through the DSBA committee process.

These are rapidly-evolving times, so stay tuned for future developments on this front.

March 25, 2020 by Richard L. Renck

Delaware Governor Closes Nonessential Businesses Until May 15, 2020

On March 22, 2020, Delaware Governor John Carney issued his Fourth and Fifth Modifications of the Declaration of a State of Emergency for the State of Delaware Due to a Public Health Threat, pursuant to which he has ordered the closure of nonessential business and commercial establishments in Delaware (Nonessential Business Closure Order). The order takes effect on Tuesday, March 24, 2020, at 8:00 a.m. and remains in effect “until after May 15, 2020, or the public health threat of COVID-19 has been eliminated… .” Violations of the Nonessential Business Closure Order constitute a criminal offense.

While essential businesses—as defined in the governor’s order and highlighted below—may continue to operate, such businesses must continue to comply with certain health-protecting guidelines and measures promulgated by the Centers for Disease Control and Prevention (CDC) or the Delaware Department of Health and Social Services’ Division of Public Health (DPH). Among the measures essential businesses are required to observe while they remain open for employees and customers are the following: (a) implementing flexible and nonpunitive sick-leave policies; (b) excluding employees who are actively exhibiting signs of illness or have had close contact with persons diagnosed with, or suspected of having COVID-19; and (c) the adoption and encouragement of certain personal hygiene and property sanitizing practices.

The Nonessential Business Closure Order appears to be fairly liberal in adopting Delaware’s definition of what businesses or industries are considered essential businesses. To that end, businesses that employ or utilize workers in the following general areas are considered essential businesses and may remain operational to provide functions critical to the day-to-day needs of Delaware’s citizens:

- Healthcare/Public Health: Not surprisingly, the list of workers related to the healthcare/public health industry is quite broad and not only includes those persons directly responsible for providing healthcare services, but also workers and businesses that are critical to the support of such healthcare functions.
- Law Enforcement, Public Safety, First Responders
- Food and Agriculture: Here, too, the list of essential functions broadly captures a wide swath of the food and agriculture segment to ensure that this critical industry remains functional. Thus, the directive generally declares as essential workers and businesses critical to the production of, distribution of and the sale of food and beverage products not only for human consumption, but also for pets and livestock.
- Energy: This industrial category is broken down into the following subcategories: (a) electricity industry; (b) petroleum industry (including transport, storage, refining, distribution and sales); and (c) natural gas and propane.
- Water and Wastewater
- Transportation and Logistics: This category broadly covers persons and businesses needed to move goods and services, as well as to maintain the assets used in transportation and logistics activities.
- Public Works
- Communications and Information Technology
- Other Community-Based Government Operations and Essential Functions: This category covers workers such as: (a) election personnel; (b) weather forecasters; (c) educators; and (d) hotel workers, among others.
- Manufacturing: This category broadly encompasses “Workers necessary for the manufacturing of materials, goods, products, or similar distribution.”
- Hazardous Materials
- Financial Services and Insurance
- Chemical
- Defense Industrial Base
- Construction: This category includes both the persons engaging in the construction and repair of residential and nonresidential structures and the businesses that supply materials and hardware to those trades.
- Necessary Products Retailers: This category lists a number of necessary products that include: (a) medical and hygiene supplies; (b) dry goods; (c) agricultural supplies; (d) pet and animal food supplies; (e) hardware; (f) products and equipment needed to work from home; (g) alcohol, beer and wine; and (h) “any other household consumer products or other products necessary to maintain the safety, sanitation, and essential operations of residences.”
- Necessary Retail and Service Establishments: This category lists 26 types of necessary retail and service establishments that include: (a) businesses that sell to or supply such businesses; (b) plumbers, electricians, exterminators, etc.; (c) lawn and garden retail facilities; (d) marinas; (e) child care facilities; (f) professional services such a legal and accounting; (g) hotels and taxis; and (h) pet sitters.
- Open Air Recreation Facilities

The Nonessential Business Closure Order also contains a list of types of businesses that are considered nonessential businesses, which includes places such as casinos, racetracks, sporting facilities, theaters and concert halls, among others. This list appears to cover a number of facilities in which large numbers of people might ordinarily gather together.

To determine the specific status of a specific type of business or worker, the state of Delaware has published an industry status list, in which the industries named above are broken down into their four-digit North American Industry Classification System (NAICS) code. The industry classification list states—by code number—which types of businesses may or may not operate (or operate with certain listed restrictions) during the time the order is in force. Moreover, in a set of FAQs published by the state, it is noted that if a business has more than one NAICS code, “[y]ou may follow the instructions for the least restrictive NAICS code your business is classified under.”

Delaware’s Nonessential Business Closure Order appears to broadly define essential businesses in a manner that will allow many aspects of Delaware’s manufacturing, commercial and business landscape to continue to operate, giving Delaware citizens the most normal day-to-day life possible, without unnecessary restrictions, in these challenging circumstances.

About Duane Morris: If you have questions regarding how the Nonessential Business Closure Order might affect your business, please contact Sharon L. Caffrey, Richard L. Renck, any of the attorneys in our Wilmington office, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are in regular contact.

Duane Morris has created a COVID-19 Strategy Team to help companies plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

August 7, 2019 by Richard L. Renck

Delaware Supreme Court Addresses Confidentiality of Corporate Books and Records in Statutory Inspections

On August 7, 2019, the Supreme Court of Delaware issued an opinion making clear that no presumption exists under Delaware law that the corporate books and records a stockholder inspects pursuant to 8 Del. C. 220 will be entitled to confidentiality restrictions. That said, the Supreme Court also made clear that the Court of Chancery remains fully empowered to condition statutory inspections of corporate books and records on the entry of a reasonable confidentiality order, and expressed its expectation that “the targets of Section 220 demands will often be able to demonstrate that some degree of confidentiality is warranted where they are asked to produce nonpublic information” for inspection.

In Tiger v. Boast Apparel, Inc. (a/k/a BAI Capital Holdings, Inc.), No. 23, 2019 (Aug. 7, 2019), the Supreme Court affirmed the Court of Chancery’s entry of a confidentiality order governing an inspection of books and records pursuant to Section 220 of the DGCL as being within the “range of reasonableness” for such restrictions. It disagreed, however, with the trial court’s “formulation of the principles governing confidentiality in the Section 220 inspection context . . . .”

First, as noted above, the Supreme Court rejected the notion that the books and records of a corporation subject to a statutory inspection demand were entitled to a presumption of confidentiality. This clarification by the Supreme Court countered what it found to be a recent trend in Court of Chancery decisions applying such a presumption that appeared based–either directly or indirectly–on an insecure foundation of earlier case law and/or reference to a widely-regarded treatise on Delaware corporate law. The Supreme Court reiterated that the Court of Chancery retained the discretion to determine whether confidentiality restrictions are appropriate in a given case, and in exercising that discretion, “must assess and compare the benefits and harms when determining the initial degree and duration of confidentiality.”

Second, the Supreme Court held that when addressing the duration of confidentiality restrictions, “an indefinite period of confidentiality protection should be the exception and not the rule,” and that a stockholder need not demonstrate “exigent circumstances” in order for the court to grant such restrictions for a time period shorter than indefinite confidentiality.

As the Supreme Court notes in a footnote, this opinion is not unlike another recent ruling of the Court in which it “rejected the notion that jurisdictional use restrictions were a ‘norm’ in Section 220 production agreements.” The takeaway from this recent Section 220 jurisprudence is that stockholders and corporations retain wide latitude in negotiating the terms of a statutory inspection, and should the Court of Chancery become involved, it retains broad discretion in imposing reasonable restrictions and conditions on such a statutory inspection.

May 14, 2019 by Richard L. Renck

Delaware Court of Chancery Weighs In on Federal Computer Fraud and Abuse Act

When employees leave their employment and take with them their former employer’s confidential information, the ensuing litigation often contains a claim against the former employee for violations of the Computer Fraud and Abuse Act (the “CFAA”). This was so in the recent decision by the Court of Chancery in the case AlixPartners, LLP, et al. v. Benichou, C.A. No. 2018-0600-KSJM (May 10, 2019). In a matter of first impression for the state courts of Delaware, the Court of Chancery was asked to interpret and apply the CFAA’s provision creating liability for any person who “intentionally accesses a computer without authorization, or exceeds authorized access, and thereby obtains . . . information form any protected computer.”

In this case, the complaint alleges that the former employee downloaded company confidential information to a personal hard drive on two occasions–once before his resignation and a second time after he was given a notice of his dismissal and was no longer performing work for the employer. At issue were the terms “without authorization” and “exceeds authorized access” of the CFAA, and how they might apply to this factual scenario.

In ruling, the Court of Chancery discussed in detail the split in authority on the application of those terms into a “broad” approach and a “narrow” approach. Under the more broad interpretation, courts have found that conduct might violate the CFAA where a person has accessed “a computer or information in violation of one’s use obligations,” which will often involve an examination of the person’s intent or use of such information. The Court, however, applied principles of statutory construction and adopted the more narrow approach to the application of this provision of the CFAA. Under that interpretation, the Court held that the terms “without authorization” and “exceeds authorized access” apply “only when an individual accesses a computer or information on that computer without permission. The statute does not impose liability for misusing information to which the individual had authorized access.”

Given this ruling, the Court dismissed the CFAA claims against the former employee related to first instance of downloading of files (when he was authorized to access the files), but allowed the claims related to the second instance–after he was allegedly no longer authorized to access the company’s computer system–to proceed.

Ultimately, while the Court ruled that claims under the CFAA may not be available to address situations where persons who are technically authorized to access computers or information have nonetheless misused that information, that misuse of data may still very well violate certain contractual duties of use and non-disclosure or other state law causes of action (for instance, under an applicable Uniform Trade Secrets Act).

April 22, 2019 by Richard L. Renck

A Minute about Minutes–Part II

A few years ago we highlighted on this blog an opinion where the Court of Chancery’s analysis turned, in part, on its impression of the quality of the corporate minutes at issue. As we also noted in that post, the drafting of corporate minutes is an art rather than a science.

While counsel to Delaware corporations may debate the level of detail that should be included in minutes of meetings of the board of directors or committees of the board, the Court of Chancery has recently noted that for the minutes to be deemed an accurate portrayal of the conduct of such meetings, there must be evidence that they were created, reviewed and approved roughly contemporaneously with the meeting. In FrontFour Capital Group LLC, et al. v. Taube, et al., C.A. No. 2019-0100-KSJM, at p. 25, n. 98 (March 11, 2019), the Vice Chancellor did not view the minutes of the meetings of a Special Committee reviewing a transaction “as contemporaneous evidence or give them presumptive weight” where there was evidence that the minutes were not finalized until months after the meetings occurred and after litigation was filed.

As this opinion makes clear, when judicial officers are asked to review minutes as a contemporaneous memorialization of the actions taken at meetings of boards of directors, they will look to see whether the minutes were, indeed, created contemporaneously with the actions–when memories are fresh and likely unclouded by later events. Therefore, it remains a worthwhile practice for boards (or their committees) to ensure that their minutes are drafted, reviewed and approved by the next meeting of the body.

February 14, 2019February 14, 2019 by Richard L. Renck

Delaware Supreme Court Issues Additional Guidance on Scope of Section 220 Inspections

In the case KT4 Partners LLC v. Palantir Technologies, Inc., No. 281, 2018 (Jan. 29, 2019), the Supreme Court of Delaware provided additional guidance as to two issues that can arise in disputes over statutory inspections of books and records demanded by stockholders. First, the court clarified when the scope of an inspection being demanded might include email communications of officers and directors of the corporation. Second, the court addressed the fact-specific inquiry involved in determining whether a forum-use restriction would be placed on the stockholder’s future use of the fruits of an inspection in litigation.

On the issue of whether email communications are properly within the scope of a statutory inspection under Section 220 of the DGCL, the Supreme Court reiterated that the analysis depends on the facts and circumstances present, but that the bar remains fairly high for a stockholder to show that such documents are necessary for the purpose they have articulated in their demand for inspection. Here, the Supreme Court also took the opportunity to put a finer point on the legal standard stockholders, corporations, and the trial court should apply to determine the proper scope of an inspection of books and records. While at various times the decisions of the courts have used the terms “necessary” or “essential” or “sufficient,” in this opinion the Supreme Court holds that the scope of documents subject to inspection are those “that are essential and sufficient to the stockholder’s stated purpose,” that is, “the court must give the petitioner everything that is essential, but stop at what is sufficient” (internal quotations omitted). The Supreme Court went on to find that in this case, the Court of Chancery should have permitted the inspection of electronic communications because the company did not have other, more formal board-level documents to memorialize the actions that were the target of the inspection. As the court concluded: “Ultimately, if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions and official letters, it will likely be able to satisfy a Sec. 220 petitioner’s needs solely by producing those books and records. But if a company instead decides to conduct formal 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 Sec. 220 entitles them.”

The Supreme Court also addressed when it is appropriate for a stockholder’s use of the information from a statutory inspection be limited to the potential for bringing litigation in a specific jurisdiction–often Delaware as the state of incorporation. The court reiterated that (a) “the Court of Chancery must be cautious about limiting the jurisdiction in which a petitioner can use in litigation the books and records it receives from a Sec. 220 action,” and (b) the circumstances when such restrictions are appropriate “must be justified by case-specific factors” (internal quotations omitted). The most important of those case-specific factors continues to be whether the subject corporation’s bylaws or charter contains a forum-selection clause limiting litigation by stockholders addressing the internal affairs of the corporation to the courts of Delaware.

February 4, 2019 by Richard L. Renck

Director Access to Corporate Books and Records

The Court of Chancery recently affirmed the long-standing principle that directors of Delaware corporations are vested with “virtually unfettered rights to inspect books and records” of the company they serve. Schnatter v. Papa John’s Int’l., Inc. C.A. No. 2018-0542-AGB (Jan. 15, 2019). The Chancellor went on to reiterate that a director of a Delaware corporation that makes a demand to inspect the books and records of the corporation pursuant to Sec. 220 of the Delaware General Corporation Law should generally have “access at least equal to that of the remainder of the board.”

Directors of a company make a prima facie case for a statutory inspection of books and records where they show that: (a) they are a director, (b) they have demanded an inspection, and (c) the demanded inspection has been refused. Upon that showing, the company will then bear the burden of proving that the director making the demand for inspection was for an improper purpose–that is, the director’s “motives are improper, or that they are in derogation of the interest of the corporation. . . .”