Could Your Board Be Forced to Disclose Director Emails and Texts?

A Recent Delaware Supreme Court Case Clarified When Companies May Be Required to Disclose Director Emails and Texts…

While technology allows directors to conveniently communicate outside the boardroom, corporations should exercise caution in using email, texts, or mobile messaging applications for conducting substantive board business. Should litigation arise, those electronic messages can be the subject of intense scrutiny, particularly if they must be used to fill-in-the-blanks of the “official” record.

For Delaware-based companies, the state’s Supreme Court recently clarified when companies may be required to produce electronic communications under Section 220 of the Delaware General Corporation Law, which governs the “inspection of books and records” of Delaware corporations by stockholders and directors. The court’s decision in KT4 Partners LLC v. Palantir Technologies Inc. highlights that corporations that fail to observe corporate formalities are more likely to be required to turn over emails and other forms of electronic communications.

Section 220 Books and Records Requests

Section 220 of the Delaware General Corporation Law provides that any stockholder of a Delaware corporation “shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from … the corporation’s stock ledger, a list of its stockholders, and its other books and records.” In addition to satisfying Section 220’s procedural requirements, stockholders must show, by a preponderance of the evidence, that they have a proper purpose in making the demand.

Section 220 defines a “proper purpose” as “a purpose reasonably related to [the demanding stockholder’s] interest as a stockholder.” As acknowledged by Delaware courts, the most common purpose is the desire to investigate potential corporate mismanagement, wrongdoing, or waste.

In Section 220 cases, Delaware courts have held that the “books and records of the corporation” means “those [documents] that affect the corporation’s rights, duties, and obligations.”  An inspecting stockholder with a proper purpose “bears the burden of proving that each category of books and records is essential to the accomplishment of the stockholder’s articulated purpose for the inspection.” Books and records satisfy this standard “if they address the ‘crux of the shareholder’s purpose’ and if that information ‘is unavailable from another source.’” Wal–Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014) (quoting Espinoza v. Hewlett–Packard Co., 32 A.3d 365, 371–72 (Del. 2011)).

KT4 Partners LLC v. Palantir Technologies Inc.

In KT4 Partners LLC v. Palantir Technologies Inc., KT4 Partners LLC (KT4), a stockholder of Palantir Technologies Inc. (Palantir), filed suit seeking to inspect the company’s books and records under Section 220. The Court of Chancery found that KT4 had shown a proper purpose of investigating suspected wrongdoing in three areas: (1) “Palantir’s serial failures to hold annual stockholder meetings”; (2) Palantir’s amendments of its Investors’ Rights Agreement in a way that “eviscerated KT4’s (and other similarly situated stockholders’) contractual information rights after KT4 sought to exercise those rights”; and (3) Palantir’s potential violation of two stockholder agreements by failing to give stockholders notice and the opportunity to exercise their rights of first refusal, co-sale rights, and rights of first offer as to certain stock transactions. The Court of Chancery ordered Palantir to produce various records. However, the court refused to order Palantir to produce email communications related to the Investors’ Rights Agreement amendments, concluding that they were unnecessary.

The Delaware Supreme Court reversed. It held that the Court of Chancery erred in denying wholesale KT4’s request to inspect emails relating to the amendments of Palantir’s Investors’ Rights Agreement. “Section 220 entitles a stockholder to inspect all books and records that are necessary to accomplish that stockholder’s proper purpose, and on our review of the record below, KT4 made a sufficient showing that emails were necessary to investigate potential wrongdoing related to the Investors’ Rights Agreement amendments,” the court held.

According to the court, if the emails serve as the only documentary evidence of the board’s and company’s involvement in the amendments, they must be produced. “Emails and other electronic communications do much of the work of the paper correspondence of yore,” Chief Justice Leo Strine wrote. “[A] corporation cannot insist on a production order that excludes emails even if they are in fact the only responsive corporate documents that exist and are therefore by definition necessary.”

In reaching its decision, the court emphasized that a corporation is not presumptively required to produce emails and other electronic communications. “If a corporation has traditional, non-electronic documents sufficient to satisfy the petitioner’s needs, the corporation should not have to produce electronic documents,” Justice Shrine explained. “But when a petitioner like KT4 reasonably identifies the documents it needs and provides a basis for the court to infer that those documents likely exist in the form of electronic mail, the respondent corporation cannot insist on a production order that excludes emails even if they are in fact the only responsive corporate documents that exist and are therefore by definition necessary.”

The court also noted that companies who fail to observe corporate formalities have only themselves to blame when forced to conduct a more burdensome production of electronic communications. “If a respondent in a § 220 [books and records] 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,” Justice Shrine wrote.

Key Takeaway

While the Delaware Supreme Court’s decision in KT4 Partners LLC v. Palantir Technologies Inc. only applies to companies subject to Section 220 of the Delaware General Corporation Law, it provides an important reminder to all corporations —  it is imperative to keep formal corporate records of all board activities. If you fail to do so, it will be difficult to thwart stockholders seeking to obtain information via electronic sources, such as email.  We will continue to monitor the courts in other states to determine if they follow the holding of the Delaware Supreme Court.

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Scott V. Heck, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.