Lewis Lazarus, Morris James

A stockholder seeking the books and records of a Delaware corporation to investigate alleged management misconduct must establish a "credible suspicion." Even where a stockholder meets that burden, it will only be entitled to documents necessary and essential to accomplish its purpose. Although the Delaware Court of Chancery may order the production of certain electronically stored information, the scope of a books-and-records request is more limited than discovery that may be obtained in a plenary action. The recent case of  Bucks County v. CBS, C.A. No. 2019-0820-JRS (Del. Ch. Nov. 25, 2019), demonstrates that even when the Court of Chancery determines that a stockholder has alleged a credible suspicion of wrongdoing, the court will not require the company to produce documents in response to overly broad requests that seek information that is not essential to the stockholder's claimed investigatory purpose.

CBS arose out of the Aug. 13 announced merger of CBS Corp. and Viacom, entities both controlled by Shari Redstone. The plaintiff sought books and records on Sept. 27 and asserted that the merger was the product of Redstone's "unrelenting desire" as the controlling stockholder on both sides of the proposed transaction to merge the two companies. The plaintiff asserted that the process and price of the proposed transaction were unfair.

Court Finds Plaintiff's Allegations Met Low Bar of 'Credible Suspicion'

The court determined that plaintiff had met the "low bar" of "credible suspicion" to obtain records based on the following critical points: the CBS board had declined to submit the proposed merger transaction to the CBS unaffiliated stockholders for approval; the 2019 merger transaction was substantially similar to a 2018 merger transaction, which the CBS board had rejected as unfair; the plaintiff had a sufficient basis to allege that the controlling stockholder was receiving a nonratable benefit in that Redstone appeared to view the transaction as a bailout of her controlling interest in Viacom; the process appeared unfair, in part because Redstone had attended a meeting of the nominating and governance committee after which the committee voted to form a special committee to consider a CBS-Viacom merger, even though a 2018 settlement of litigation arising out of the prior proposed transaction (2018 settlement agreement) forebade Redstone from proposing or promoting a CBS-Viacom merger unless two-thirds of the unaffiliated directors invited a proposal; the CEO changed his position on the merger after the 2018 settlement and thereafter received a substantial increase in his compensation, a large payout upon completion of the 2019 merger and a management role at CBS post-merger; and the CBS chief legal officer resigned for good reason in a manner that made it reasonable to infer he believed the 2019 proposed merger violated the 2018 settlement agreement. The court found that these proven facts amply provided a "credible basis to suspect wrongdoing."

Court Narrows Inspection of Requests for Electronically Stored Information

Having found that plaintiff had met its pleading burden, the court then addressed the scope of the documents to which the  plaintiff was entitled. Certain of the plaintiff's requests were rejected as duplicative of information already provided and thus not essential to plaintiff's stated purpose. The court rejected defendants' arguments that board minutes, materials and financial adviser presentation from the 2016, 2018 and 2019 mergers were unnecessary because the court found that plaintiff's narrative "directly implicates the 2016 and 2018 merger attempts not as past-tense, isolated events, but as part of a continuing story of misconduct." Of particular note was the court's rejection of the plaintiff's request for "electronic documents" sent by Redstone or NAI to any CBS or Viacom board member or their advisers and vice-versa.  The court found overbroad the request for all such communications, but did allow inspection of a narrow set of electronic documents reflecting communications between Redstone and members of the nominating and governance committee fourteen days before and fourteen days after the meeting at which she had broached the subject of the 2019 merger.

Key Takeaways

CBS illustrates both the "low bar" to demonstrate entitlement to books and records and the court's careful assessment of the scope of requests to ensure a stockholder plaintiff who meets that bar obtains only those records necessary and essential to the stated investigatory purpose. This may include electronically-stored records, but the court will be mindful of the burden such production may entail and, as here, may narrowly tailor any request to ensure a stockholder plaintiff obtains only those documents that are necessary to its purpose.

Lewis H. Lazarus ([email protected]) is a partner at Morris James in Wilmington and chair of the corporate and commercial litigation group. His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations.