New harsh message from the Chancellery to the accused: the “disgusting” fights of section 220 will cost you dearly
- Law firms
- Related documents
The names of companies and law firms shown above are generated automatically based on the text of the article. We are improving this functionality as we continue to test and develop in beta. We appreciate comments, which you can provide using the comments tab on the right of the page.
(Reuters) – Pressure has quietly been mounting for several years among Delaware Chancery Court judges over the defendants’ increasingly aggressive opposition to shareholder demands for the company’s books and records they are entitled to to consult under section 220 of the Delaware Corporate Code.
Chancellor Kathaleen McCormick burst on Thursday.
The Chancellor issued a brief but scathing notice letter the award of fees to several plaintiff companies who successfully argued an application for books and records from Gilead Sciences Inc, which is the subject of lawsuits and regulatory investigations for allegedly stifling generic competition for an anti-drug – Profitable HIV. Gilead’s opposition to shareholder demands, McCormick said, was not only baseless. It was “blatantly”.
The company had claimed that shareholders could not meet the very low bar of showing a credible basis for their demand for books and records, even if it was amply justified, McCormick said. Gilead twisted the record by saying any potential derivative shareholder lawsuit based on the books and records would be dismissed, the Chancellor wrote. And the company claimed that each of the five shareholders who requested 220 materials was an unqualified workhorse for the plaintiffs’ businesses, McCormick said, despite deposition testimony showing that all of them knowingly exercised their rights as shareholders.
“Perhaps one of these positions alone could be forgiven as a mere aggressive defense,” the Chancellor wrote. “Maybe not. I don’t need to take this difficult call because, collectively, these positions rise to the level of blatant litigation conduct.”
McCormick did not specify how much money would be allocated to corporate shareholders – including Bernstein Litowitz Berger & Grossmann; Cotchett, Pitre and McCarthy; Pomerantz and Bottini & Bottini – but the complainants request $ 1.76 million to compensate them for “Gilead’s bad faith litigation tactics.”
Gilead’s attorneys at Cooley and Potter Anderson & Corroon referred me to a company spokesperson, who said in an email that Gilead was “disappointed” with the decision and planned to appeal. “Gilead’s defense was based on good faith and supported by case law,” the statement said. From the company Short The opposing plaintiffs’ claim for fees argued that she had not engaged in “hostile or intimidating tactics” and that Gilead believed her arguments were “supported by the law and the nuances of a practice. evolution of books and records ”.
The problem for Gilead – and other corporate defendants – is that recent developments in Section 220 litigation do not justify the kind of aggressive opposition the company has mounted. “The pendulum has swung,” Cotchett shareholder lawyer Mark Molumphy said.
Thursday’s opinion has been months, if not years, in the works. About 10 years ago the judges of the Chancellery clearly counsel for shareholders that they should thoroughly investigate allegations of breach of duty before initiating derivative lawsuits accusing directors of companies of misconduct. This meant using shareholders’ rights under section 229 to inspect the books and records of the company.
The plaintiffs’ lawyers got the message. In fact, as law professors James Cox, Randall Thomas, and Kenneth Martin wrote in a 2020 article, The Paradox of the Delaware “Tools at Hand” Doctrine, requests for books and records over the past decade have become an essential means for shareholders to obtain a ‘backdoor discovery’, especially as the Court of Chancery has tightened dismissal standards for prosecution in the event of mergers and acquisitions for breach of obligations.
The defendants, as one would expect, retaliated. Delaware law, as I mentioned, allows shareholders to access company records, but these rights have limitations. Shareholders must have an appropriate purpose, and plaintiff lawyers cannot exploit unwitting shareholders to claim inspection rights for litigation. Citing these limitations, the defendants began to force the plaintiffs ‘lawyers to go to court – and even to trial – to enforce shareholders’ inspection rights.
According to the law professors’ study, defendants rarely won these cases upfront, but sometimes succeeded in narrowing down claims and establishing new restrictions on setting an appropriate target. They also, of course, made it costly and time-consuming for shareholder lawyers to litigate inspection requests.
The Delaware judges noticed it and started pushing the other way. In February 2020, for example, Vice Chancellor J. Travis Laster confirmed the low bar for shareholders in a decision against pharmaceutical distributor AmerisourceBergen Corp. The Delaware Supreme Court upheld Laster’s decision in December, believing that in order to obtain documents, shareholders are simply required to provide enough evidence to give the Court of Chancellery a credible reason to infer mismanagement of the company.
McCormick oversaw a trial last fall in the Gilead case. She showed that she was on the tactics of the accused in a decision in november who ordered the company to grant shareholders access to the company records they were looking for. “Gilead’s real goal in this litigation is not to protect its interests but, rather, to make the process of investigating wrongdoing as difficult as possible for its shareholders,” she wrote. This strategy, she said, had become an outright trend among defendants, claiming “too aggressive” opposition to requests for inspection only to obstruct shareholders.
The defendants, she said in the November decision, had acted “with the apparent conviction that there is no real downside” to their obstructionism. McCormick suggested the sense of impunity was misplaced, urging lawyers for the plaintiffs to file a petition for their fees and expenses.
The Chancellor’s decision on Thursday implemented her threat in the November decision. Defendants can now award a million dollar prize for unduly aggressive opposition to the demands of the books and records of shareholders.
Plaintiffs’ attorneys, Molumphy of Cotchett and Gregory Varallo of Bernstein Litowitz, told me that McCormick had sent a clear and direct message: no more shenanigans by the defense to oppose requests for inspection. Plaintiffs just want defendants to be reasonable, Varallo said, adding: “We are always happy to work constructively rather than plead.”
The judges of the Court of Chancery are probably united in this intransigent attitude. I already told you about Laster’s decision last year at AmerisourceBergen. Earlier this year, Vice Chancellor Paul Fioravanti cited both AmerisourceBergen and the November 2020 decision to Gilead when he ruled after a Section 220 lawsuit, Biogen shareholders were entitled to most of the records they sought, despite the drug company adopting “” too aggressive a defense strategy “to oppose inspection. “
Now let’s see if the accused heard what the Chancellery said.
(By Alison Frankel)
Delaware Chancellery Judge Pushes Boundaries On Books And Records Requests
Our standards: Thomson Reuters Trust Principles.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias.