Delaware Supreme Court Clarifies Stockholder’s Right to Inspect Books and Records of a Delaware Corp
A. Delaware Supreme Court Clarifies Stockholder’s Right to Inspect Books and Records of a Delaware Corporation
In KT4 Partners LLC v. Palantir Technologies Inc., No. 281, 2018, 2019 WL 347934 (Del. Jan. 29, 2019), the Delaware Supreme Court provided guidance on Section 220 of the Delaware General Corporation Law (“DGCL”) by holding that stockholders have a right to inspect formal board documents, including electronic documents. As long as a company “observes traditional formalities” including, but not limited to, recording board minutes and resolutions, the company can likely satisfy a petitioner/stockholder’s needs by simply producing such books and records. Id at *2.
DGCL Section 220 allows stockholders the ability to access company books and records as long as the stockholders can show a “proper purpose.” Id. Delaware courts have held that investigating wrongful conduct by directors and officers is a proper purpose. Id. at *12. However, the petitioner must show a “credible basis” for such wrongdoing. Id. Furthermore, the petitioner can only review documents that are “essential and sufficient” to the petitioner’s stated purpose. Id. at *9.
Initially, the Court of Chancery in KT4 Partners limited the plaintiff’s inspection to formal board documents. Id. at *6. Although the Court of Chancery held that the plaintiff had a proper purpose to inspect such books and records, the court granted access to board-level documents, but refused to order the production of emails. Id. On appeal, plaintiff argued that the documents produced were inadequate as Palantir conducted its business mostly via email, and lacked formal board minutes and materials. Id. at *8. The Delaware Supreme Court reversed the Court of Chancery, and expanded the plaintiff’s access to electronic documents. Id. at *10. The Court held that if the only evidence of the board’s involvement comes in the form of emails, then those emails must be produced. Id.
The significance of this decision cannot be understated. A company that keeps traditional, accurate and sufficient records of board minutes, resolutions, and formal presentations has a lower risk of needing to produce internal email communications than one who does not keep adequate formal records. Additionally, because Delaware courts view electronic communications to or from outside directors as corporate books and records, directors should consider using a company email address for all company business in order to avoid inspection of their personal devices and accounts by stockholders.
B. FTC’s Revised Hart-Scott-Rodino Filing Thresholds for M&A Transactions
The Federal Trade Commission (“FTC”) announced revised thresholds used for pre-acquisition filings under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR”). These take effect on April 3, 2019. Under the new thresholds, the parties to a merger, consolidation or acquisition of voting securities or substantial assets will in most cases need to file pre-acquisition notifications with the FTC and the Department of Justice and observe the HSR waiting periods before closing if the transaction meets one or more tests which look at both the size of the transaction and the sizes of the persons in the transaction.
Size of Transaction: This test is both a floor below which no filing is required, and a threshold for automatic filing regardless of the size of the persons discussed below. No filings are required for transactions under $90 million this year notwithstanding the size of the persons. If the value of the securities or assets exceeds $359.9 million, then the persons must report the transaction notwithstanding the size of the persons.
Size of Person: If the value of the securities and assets held as a result of the transaction is between $90 million and $359.9 million, the transaction must be reported in most cases if either the acquired or acquiring party has annual net sales or total assets of at least $18 million and the other party to the transaction has at least $180 million in annual net sales or total assets. For the purposes of applying the above thresholds, “person” means the ultimate parent entity of the party engaged in the transaction.
Filing Fees: The amounts of the filing fees have not changed, but the thresholds are increased as follows:
Note that certain exemptions may apply depending on the nature of the transaction and the nature and location of the assets and entities involved. Consequently, additional analysis is often required before making a final determination regarding the need for a HSR filing. Counsel is recommended, as noncompliance with HSR leads to significant penalties. We can assist with this analysis.
- Transactions valued at more than $90 million but less than $180 million pay $45,000.
- Transactions valued at $180 million or more but less than $899.8 million pay $125,000.
- Transactions valued at $899.8 million or more pay $280,000.