United States: Responding To Books And Records Demands In An Increasingly Digital World - 3 Key Tips

Stockholder “books and records” requests have become increasingly prevalent in the past decade.  These requests can be a used as tools by activist investors to gather information to support demands for corporate change or a means for a potential stockholder plaintiff to gather information in preparation for a derivative lawsuit. Historically, companies generally had limited responsibilities in these cases. Courts would generally require only that companies furnish formal documents and presentations to satisfy most demands, which were required to serve a “proper purpose.”

However, as courts continue to adapt historic principles of corporate law to the digital world, companies face new risks. The historical limitation on books and records requests to formal corporate documents may be fading as courts look at how executives and directors communicate with one another when making corporate decisions. In recognizing the realities of modern communication, Delaware courts shown increasing willingness to grant shareholders access to electronic records (e-mails, messages, etc.), especially if the company is not observing formal corporate procedures. If a company does not take the proper precautionary steps, they too may be subject to costly and invasive searches that reach to communications that are beyond the scope of any proper books and records request. 

Background

Section 220 of the Delaware General Corporation Law and comparable statutes in other states provide stockholders a right to obtain copies of a corporation’s books and records for any “proper purpose.” A commonly recognized “proper purpose” (and one often invoked by activist stockholders and potential stockholder litigants) is investigating potential corporate wrongdoing.  However, in order to establish this “proper purpose,” a shareholder must provide a “credible basis” to proceed. Although the burden to establish a “credible basis” is relatively low, courts will limit a stockholder’s investigation only to those book and records that are “essential and sufficient” to the investigation.

Historically, companies had little trouble in furnishing “essential and sufficient” documents in books and records demands, with courts generally interpreting the required disclosure to be limited to formal corporate documents (board minutes, resolutions, stockholder records, etc.) and presentations. Courts have shown greater reluctance to expand the scope of books and records requests to encompass more informal means of communication such as text messages and emails. 

Recently, courts have engaged in a reexamination of this historical norm, largely driven by the recognition of the use of digital communications in business. This reexamination has led courts to show a greater willingness to open up books and records requests to include ordinary electronic communications in certain circumstances.  Two recent cases illustrate this shift. 

KT4 Partners v. Palantir Technologies. 

In KT4 Partners, the Delaware Supreme Court took up the question of providing electronic communications in satisfaction of a books and records request, ultimately requiring disclosure of emails related to the wrongdoing alleged by the requesting stockholder. The plaintiff was able to successfully argue that electronic communications were “necessary and sufficient” to prove corporate wrongdoing because the company kept few formal documents and records, instead choosing to conduct most of its business over email and other electronic media. The court therefore required disclosure of the electronic communication as it was the “only documentary evidence” of the suspected wrongdoing. 

Schnatter v. Papa John’s International, Inc.

The Delaware Chancery Court went further in Schnatter v. Papa John’s International, Inc., granting John Schnatter, director, founder and namesake of Papa John’s, access to emails and text messages from personal accounts and devices of board members even though Papa John’s had the capacity to furnish traditional corporate documents. Suspecting corporate wrongdoing in connection with his termination from the board, Schnatter sought emails and text messages between fellow directors regarding the issue. The court determined the electronic correspondence constituted books and records that were “necessary and sufficient” to carry out his investigation. While acknowledging the greater challenge for collection and review, the court determined that the benefits of disclosure outweighed the burdens. “[I]nvestigating mismanagement would be undermined if the court categorically were to rule out the need to produce communications in these formats.” The court did note, however, that this was not a bright line rule and will allow access to these types of electronic communications only on a case-by-case basis.  

While these two recent rulings suggest a growing burden for companies facing books and records demands from shareholders under Section 220 and similar statutes, companies can take proactive steps to reduce the risk of costly and invasive disclosures. 

Tip #1: Adhere to Traditional Corporate Formalities

Companies should not give courts a reason to compel disclosure of electronic communication by being lax in their adherence to corporate formalities. As evidenced in KT4, courts may look beyond traditional corporate documentation and compel electronic communications if a company does not maintain formal corporate records and instead communicates informally. If a company chooses to conduct business over email or by other electronic means rather than at formal board or stockholder meetings, then, the court is more likely to grant shareholders access to electronic communications.  As noted by the Delaware Supreme Court in that case, by not observing corporate formalities and adequately documenting them, the company “[had] no one to blame but itself for making the production of those emails necessary.” 

To avoid or reduce disclosure of electronic communications, a company should ensure that formal policies and procedures to record deliberations and communications between the board and management are adhered to in order to ensure that a company’s traditional corporate documents are sufficient to satisfy a Section 220 or similar demand and to not provide a basis for a court to compel the production of personal electronic communications. 

Tip #2: Provide a Singular Platform to Conduct Business Electronically

Another potential method to limit burdensome disclosure of electronic communications where such communication is common among board members and management is to keep the relevant data on an isolated platform. For example, a company could set up separate e-mail accounts or other electronic communications platforms specifically designated for corporate communications and deliberations by the board and management.  By keeping all conversation in a segregated location, a company can easily isolate and retrieve relevant corporate documentation when requested by stockholders. This would significantly ease the burden on companies and avoid having to produce personal correspondence of directors and officers that is irrelevant to the books and records request.  However, companies adopting this approach will want to carefully monitor and administer any separate platform, including providing training to directors and management on the purpose and use of the platform to ensure that it is used properly and only as a forum for official communications. 

Tip #3: Be Adaptive to Change

A key takeaway from recent books and records cases is that companies need to be proactive and adapt as courts adapt and apply historical legal concepts to the digital world.  As a result, companies should continue to expect to see changes in the pursuit and application of books and records claims as the ways we communicate continue to change.  Workplace chat applications, for example, have become another forum where corporate communications take place. Over the past few years, apps like Slack, Skype for Business, and Voxer have changed the way businesses communicate. Helping employees communicate better and faster, these apps have vastly increased the amount of business correspondence stored electronically. Companies utilizing these apps should be careful to train employees, management and directors on the proper use of the apps (including appropriate subject matter) to avoid the risk of being required to review or produce large volumes of unorganized communications in response to a books and records request. 

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