Earlier this month, the Delaware Court of Chancery added to a string of significant recent decisions under Section 220, Delaware's books and records statute, this time addressing when a company may be required to provide board-level email communications to a stockholder. In this decision, the court ordered Facebook, Inc. to produce board emails on a limited topic because, the court found, the minutes and other board materials previously produced by Facebook did not provide sufficient insight into the potential wrongdoing the demanding stockholder sought to investigate. But the court refused to order the production of attorney-client privileged materials under the so-called Garner exception.
A stockholder of Facebook made a books and records demand for the purpose of investigating potential director oversight claims in connection with the unauthorized release of Facebook user data to a data analytics firm, Cambridge Analytica. The stockholder alleged that the data breach likely violated a 2012 consent decree Facebook had entered into with the Federal Trade Commission (FTC) to settle prior data privacy breaches. Following a revived investigation by the FTC, Facebook agreed to a $5 billion settlement in 2019 to resolve the potential claims against Facebook and its Chief Executive Officer Mark Zuckerberg.
The stockholder's purposes for its demand included to investigate wrongdoing in connection with the 2019 settlement and communicate with other stockholders regarding "changes in management policies." Facebook ultimately produced 2,931 documents (consisting of 30,266 pages) to the stockholder but refused to produce: 1) any board-level email communications regarding the FTC negotiations; or 2) any privileged board-level documents (whether emails or unredacted board and special committee minutes) regarding the FTC negotiations. Facebook had already produced to the stockholder: 1) the materials that had been provided to a stockholder in a prior books and records action regarding the initial FTC consent decree (including board-level hard copy documents, company policies, procedures, and audit reports, director and officer independence questionnaires, and emails from four company custodians); 2) board and special committee minutes regarding the 2019 settlement (redacted for privilege); 3) the special committee's report and recommendations regarding the 2019 settlement; and 4) a privilege log containing 300 entries for communications regarding the negotiations with the FTC.
Facebook contended that those books and records were sufficient for the stockholder's purposes. Facebook also argued that the stockholder's "trumpeting" that it could survive a motion to dismiss a plenary action with the facts it already had from the books and records provided demonstrated the stockholder had more than "sufficient" information for its purposes.
At the outset of its post-trial decision, the court commended the parties for agreeing to focus trial on the limited scope of the documents for inspection rather than litigating whether the stockholder had proper purposes. The court noted that the parties' "conduct stands in marked contrast to the tactics that have prompted expressions of concern by this court regarding 'overly aggressive' Section 220 litigation."1
On the merits, the court determined that board-level electronic communications regarding the FTC negotiations were necessary and essential to the stockholder's stated purposes because the stockholder needed those communications to be able to assess the board's process in reaching the 2019 settlement. Specifically, the court explained that those communications were necessary, in light of the limited other information on the subject, to determine whether the board deliberately caused Facebook to overpay in the settlement in order to protect Mr. Zuckerberg from personal liability. The court explained that the standard for determining whether the production of emails is necessary in response to a books and records demand is whether the stockholder has identified additional categories of books and records, beyond board-level documents, that exist and presented "some evidence" that other board-level documents alone are insufficient. The court noted that a showing of "compelling evidence" is "unrealistic" and not required. The court also explained that, just because the stockholder believed it had sufficient facts to allege a claim for breach of fiduciary duty did not mean it "should be denied the use of the ‘tools at hand' to develop those facts further so that it can well-plead its claims in a complaint, particularly a derivative complaint."2
The court found the stockholder had met its burden of showing entitlement to a production of emails.3 Among other things, the court reasoned that the "heavily redacted" board and special committee minutes only "provid[ed] a basic outline of the Board's process and the resulting negotiations with the FTC," but were "bereft of any information concerning the substance of Facebook's non-privileged discussions with the FTC."4 The court viewed the 300-entry privilege log as evidence that information existed to address the stockholder's questions but noted the log itself provided no "substantive insight into the Board's decision-making."5 Notably, a white paper submitted to the FTC by Facebook's outside counsel outlined the view that the company's maximum exposure was "well below the $5 billion Facebook ultimately agreed to pay." The court viewed the white paper as supporting the stockholder's argument that it should be entitled to investigate why the company agreed to pay more than what it believed its maximum exposure to be, an issue the documents provided by the company had not explained.
At the same time, the court found that the stockholder was not entitled to privileged board-level communications and unredacted board and special committee minutes. The stockholder sought these materials under the Garner doctrine, which permits stockholders to access a corporation's attorney-client privileged documents in limited circumstances where corporate fiduciaries are alleged to have acted inimically to the stockholders' interests and the stockholders show "good cause" that the privilege should not apply.6 Reiterating the Delaware Supreme Court's guidance that the Garner doctrine is "narrow, exacting, and intended to be very difficult to satisfy,"7 the court determined there was not "good cause" to overcome the privilege and justify requiring the company to produce privileged materials for inspection. The court reasoned that, given that the stockholder's purpose for obtaining the privileged documents was the same as its purpose for obtaining the non-privileged communications the court had ordered to be produced, the stockholder could obtain the information it sought through the production of the non-privileged communications. In other words, the information the stockholder sought was available from another source and the stockholder therefore could not show a need for the privileged communications and documents.
Ultimately, the court ordered the parties to confer regarding the limited production it had ordered, including the number of appropriate and non-duplicative custodians and appropriate and targeted search terms.
This decision serves as a reminder that the Delaware courts have become more willing to require the production of emails in response to a books and records demand where the stockholder can show the traditional board-level documents do not provide the information the stockholder seeks to investigate and there is a true need for the emails. The decision also reflects that Delaware courts continue to respect the attorney-client privilege and will not require the production of privileged documents and communications in response to a books and records demand where other non-privileged documents exist that can satisfy the stockholder's purposes.
For more information on the decision regarding stockholder books and records inspection demands, please contact any member of Wilson Sonsini's corporate governance litigation or corporate governance practices.
[1] Employees Ret. Sys. of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS (Del. Ch. Feb. 10, 2021), at 3 n. 11 (citing Pettry v. Gilead Scis., Inc., 2020 WL 6870461, at *30 (Del. Ch. Nov. 24, 2020)).
[6] Id. at 22 (citing Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971)).
[7] Id. at 22-23 (citing Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1276 (Del. 2014)).
