Section 220 books and records demands remain popular, especially from minority shareholders in healthcare PE post-closing disputes. While recent decisions from the Delaware Court of Chancery may help portfolio companies limit the scope of informal communications like email data, management materials, or investor communications sought pursuant to these demands, other recent opinions provide a cautionary tale for companies that fail to respond to 220 demands in good faith or engage in unnecessary dilatory tactics.
The Delaware Chancery Court has issued recent opinions that, among other things, do the following:
- Make it tougher for a demanding shareholder to obtain such
communications if formal board materials are available,
comprehensive and consistent with shareholder communications.
- Limit the shareholder's request for additional materials
if they are not essential to the admittedly proper investigative
purpose under Section 220.
- Praise companies for responding to – rather than
rejecting outright – the shareholder's demand and
providing relevant, formal board materials in its response.
- Awarded sanctions and/or attorneys' fees in two separate 220 cases this year where companies refused to produce any documents or engaged in dilatory or “egregious” litigation conduct.
Moving forward in the healthcare PE context, these cases underscore the importance of:
- Maintaining corporate formalities – including clear
distinctions between the PE firm's work and the management
and board work of the target healthcare entity.
- Taking the time to formally document board agendas, meetings
and other board-level materials and communications so that the
healthcare company is well-situated and prepared to respond to an
inspection demand, no matter the context.
- Responding to any shareholder demand that arguably states a proper purpose by providing well-documented, formal board materials to fulfill the company's information-sharing duties under Section 220.
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.
