United States: Emails And Texts Could Constitute Corporate Books And Records

Directors, corporate secretaries and company counsel must be mindful of good corporate housekeeping practices involving the maintenance of corporate books and records. Earlier this year, a handful of Delaware court opinions clarified the scope of books and records subject to inspection in the context of demands brought by directors or stockholders under Delaware General Corporation Law § 220. The outcome of these cases demonstrates the breadth of documents that may be considered corporate books and records and underscores the importance of maintaining clear, consistent documentation.

Section 220 enables stockholders and directors of public or private Delaware corporations to demand access to a corporation's books and records where a proper purpose can be demonstrated. Demands brought by stockholders face a higher pleading burden because stockholders must prove that their demand is reasonably related to their interests as a stockholder and that the requested documents are "necessary and essential" to the stockholders' stated purpose. A desire to investigate, alone, is not sufficient, and stockholders claiming corporate wrongdoing must come forward with a "credible basis" from which a court can infer mismanagement. They must also demonstrate proof of stock ownership. By contrast, directors with a proper purpose are "entitled to virtually unfettered access to the books and records of the corporation."1 In all cases, stockholders and directors instituting court action to demand access to books and records must specifically state the books and records sought that are related to the stockholder's or director's proper purpose. Further, while the capacity in which a person brings a Section 220 demand matters for purposes of pleading and the scope of documents to be produced, the types of documents that may constitute "books and records" subject to a Section 220 demand are the same. Books and records proceedings receive expedited treatment by the Delaware Court of Chancery.

Answering the question of what types of documents constitute books and records for Section 220 purposes, recent Delaware case law affirms that emails, text messages and other less formal communications may constitute books and records of a corporation. These holdings illustrate how Delaware courts interpret "books and records" flexibly under Section 220 to keep pace with evolving record-keeping and communication practices. In the context of a books and records demand brought by an institutional stockholder, the Delaware Supreme Court ordered production of company emails where the company conceded that "'there are no board-level documents,' though 'there may very well be emails'" relating to the stockholder's Section 220 demand. The court reasoned that

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 § 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 § 220 entitles them.2

On balance, the court went on to say that "[i]f a corporation has traditional, non-electronic documents sufficient to satisfy the petitioner's needs, the corporation should not have to produce electronic documents."3

Even where corporate communications are more personal in nature and can be more difficult to gather and produce, such as emails and text messages on personal accounts or devices, Delaware courts may order that such communications be produced in response to a Section 220 demand if the communications respond to a request that is sufficiently precise and relates to a proper purpose. For example, in the context of a Section 220 demand brought by a director who was also the company's founder and former CEO, the Delaware Court of Chancery ordered the production of emails and text messages from personal accounts and devices of other directors, officers and the company's general counsel who used such personal accounts and devices to conduct business regarding the company's relationship with the director, which was a proper purpose of the Section 220 demand. The court, however, limited the communications to be produced from personal accounts and devices to those involving the director's relationship with the company, including his behavior and performance in various roles during specified periods.5 The court held that when dealing with information contained on personal accounts and devices, the court "should apply its discretion on a case-by-case basis to balance the need for the information sought against the burdens of production and the availability of the information from other sources . . . ."6

Bearing this recent case law in mind, companies should follow prudent record-keeping practices to help mitigate intrusive books and records demands, including:

  • Consistently document board actions in formal meeting minutes and written consents;
  • Ensure formal documentation of board action is sufficiently robust to eliminate gaps that could be used as a basis for directors or stockholders to seek less formal communications (e.g., ensure formal documentation adequately captures corporate actions taken via informal communication methods);
  • Maintain an organized repository of documented board actions and materials sent to the board for review and discussion;
  • Discard or otherwise exclude informal communications and notes from formal documentation of corporate action where such informal documentation is not intended to form a part of the corporation's books and records (in accordance with any applicable document preservation requirements in place); and
  • Educate directors and officers about the risks of using informal communications and personal accounts or devices such as email or text messages to take corporate action and keep those communications to a minimum.

Footnotes

1 McGowan v. Empress Entm't, Inc., 791 A.2d 1, 5 (Del. Ch. 2000).

KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 742 (Del. 2019). 

3 Id. at 756. 

4 Schnatter v. Papa John's Int'l, Inc., No. CV 2018-0542-AGB, 2019 WL 194634, at *16 (Del. Ch. Jan. 15, 2019).

5 The Delaware Court of Chancery in Schnatter concluded that the request related to a proper purpose for a director and was sufficiently tailored and specific to satisfy the three elements of a proper books and records request that the Court had established in Chammas v. Navlink, Inc., No. CV 11265-VCN, 2016 WL 767714, at *8 (Del. Ch. Feb. 1, 2016):

  1. State a proper purpose,
  2. Encompass communications constituting books and records of the corporation, i.e., those that affect the corporation's rights, duties, and obligations, and
  3. Be sufficiently tailored to direct the Court to the specific books and records relevant to the director's proper purpose.

Schnatter, 2019 WL 194634, at *16.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions