In High River Limited Partnership v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS, 2019 WL 6040285 (Del. Ch. Nov. 14, 2019) (Slights, V.C.), the Delaware Court of Chancery held that a stockholder’s mere disagreement with a business decision of a board of directors and intent to pursue a bone fide proxy contest is not a “proper purpose” to support a demand to inspect the corporation’s books and records under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220. By declining the stockholder’s invitation to adopt a “new rule entitling stockholders to inspection documents under Section 220 if they can show a credible basis that the information sought would be material in the prosecution of a proxy contest,” this decision clarifies what had been a “murky” legal landscape under Section 220.

In 2019, Occidental Petroleum Corporation (“Occidental”), a Delaware corporation with large petroleum and chemicals operations, entered into a merger agreement with Anadarko Petroleum Corporation, wherein Occidental would eventually acquire Anadarko in a transaction valued at $55 billion. Because of the way the transaction was structured, a vote of the Occidental stockholders was not required to approve the transaction.

Entities affiliated with activist investor Carl Icahn had invested upwards of $1.5 billion in Occidental stock. Icahn had been intensely critical of the Anadarko deal, one that he publicly called “one of the worst I’ve ever seen.” He then threatened a proxy contest intended to replace members of Occidental’s board of directors with a new slate of directors.

The Icahn entities sent a demand letter to Occidental seeking to inspect books and records pursuant to Section 220 related to (1) the Occidental-Anadarko merger; (2) Occidental’s decision to be a buyer, not a seller, when market conditions for a sale of Occidental appeared to be favorable and (3) provisions of Occidental’s governance documents detailing the threshold for calling a special meeting of the stockholders. Occidental largely rejected the demand. The Icahn entities quickly brought an action to enforce the Section 220 demand.

As we have previously discussed (see blog article here), Section 220 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 order to inspect books and records under Section 220, a plaintiff-stockholder must have a “proper purpose.” While “[t]here is no shortage of proper purposes under Delaware law, . . . perhaps the most common . . . is the desire to investigate potential corporate mismanagement, wrongdoing, or waste.” Melzer v. CNET Networks, Inc., 934 A.2d 912, 917 (Del. Ch. 2007). In the typical case where a stockholder seeks to inspect books and records to investigate suspected wrongdoing, the stockholder must demonstrate a “credible basis” to suspect that mismanagement or wrongdoing has occurred before the corporation will be compelled to allow inspection. Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 118 (Del. 2006).

The Court in High River noted that a mismanagement and/or wrongdoing purpose was not supported by the trial record. Plaintiffs thus argued in the alternative that pursuing a proxy contest over a disagreement about the business judgment of the board (not wrongdoing or mismanagement by the Board) was a “proper purpose” for inspection of books and records under Section 220. As the Court explained, plaintiffs were urging “the Court to recognize a new, or at least expanded, rule that would allow a stockholder to inspect books and records relating to targeted, board level business decisions that are questionable, but not actionable, when the stockholder states and then demonstrates that his purpose is to communicate with other stockholders in furtherance of a potential, bona fide proxy contest.”

The Court rejected plaintiffs’ argument. It observed that “Plaintiffs have not alleged, much less proven, that the Occidental Board was conflicted, disloyal or in some way interested in the transactions at issue. They also do not allege, nor have they proven, that the Occidental Board acted in bad faith.” Instead, as the Court put it, plaintiffs’ allegations appeared to be nothing more than disagreements with how Occidental’s directors exercised their business judgment and that the plaintiffs strongly felt that the Anadarko transaction was a “bad deal.” The Court held that “pleading an imminent proxy contest is not enough to earn access to broad sets of books and records relating to the details of questionable transactions, particularly when the board’s decision-making is subject to the business judgment rule, and the facts of record reveal that Plaintiffs already have what they need to fulfill their stated purpose.”

This decision reaffirms that Section 220 does not provide “unfettered access” to books and records and that Section 220 is an “important part of the corporate governance landscape in Delaware,” but “it would invite mischief to open corporate management to indiscriminate fishing expeditions.” Security First Corp. v. U.S. Die Casting and Dev. Co., 687 A.2d 563, 571 (Del. 1997). It provides clarity on an important question of Delaware law and additional guidance for stockholders on what constitutes a “proper purpose” under Section 220.