Lebanon County Employees' Retirement Fund v. AmerisourceBergen Corporation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LEBANON COUNTY EMPLOYEES’ )
RETIREMENT FUND and )
TEAMSTERS LOCAL 443 HEALTH )
SERVICES & INSURANCE PLAN, )
)
Plaintiffs, )
)
v. ) C.A. No. 2019-0527-JTL
)
AMERISOURCEBERGEN )
CORPORATION, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: October 15, 2019
Date Decided: January 13, 2020
Samuel L. Closic, Eric J. Juray, PRICKETT, JONES & ELLIOTT, P.A., Wilmington,
Delaware; Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN
LLP, Wilmington, Delaware; Eric L. Zagar, Michael C. Wagner, Christopher M.
Windover, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Frank
R. Schirripa, Daniel B. Rehns, Hillary Nappi, HACH ROSE SCHIRRIPA & CHEVERIE
LLP, New York, New York; Andrew Blumberg, BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP, New York, New York; Attorneys for Plaintiffs.
Stephen C. Norman, Jennifer C. Wasson, Tyler J. Leavengood, POTTER ANDERSON &
CORROON LLP, Wilmington, Delaware; Michael D. Blanchard, MORGAN, LEWIS &
BOCKIUS LLP, Boston, Massachusetts; Attorneys for Defendant.
LASTER, V.C.
Defendant AmerisourceBergen Corporation is one of the world’s largest wholesale
distributors of opioid pain medication. Its role in America’s opioid epidemic has made it
the target of numerous subpoenas, government investigations, and lawsuits. Two
congressional investigations have concluded that AmerisourceBergen failed to identify and
address suspicious orders of opioids, contrary to the requirements of federal law. The
federal Drug Enforcement Administration (the “DEA”) and federal prosecutors in nine
states have subpoenaed its documents. It is a defendant in multi-district litigation brought
by cities, counties, Indian tribes, union pension funds, and the attorneys general of virtually
every state. AmerisourceBergen and the other opioid-distributor defendants have offered
to settle with the state attorneys general for $10 billion. Analysts have estimated that
resolving all of the litigation would require $100 billion. AmerisourceBergen already has
spent more than $1 billion in connection with the opioid-related lawsuits and
investigations.
The plaintiffs own stock in AmerisourceBergen. They are investigating whether the
firm engaged in wrongdoing in connection with the distribution of opioids. As part of their
investigation, the plaintiffs sought to inspect AmerisourceBergen’s books and records
pursuant to Section 220 of the Delaware General Corporation Law. AmerisourceBergen
rejected the plaintiffs’ request in its entirety, contending that the plaintiffs lacked a proper
purpose, and alternatively, the scope of the requested inspection was overly broad. The
plaintiffs filed this action to enforce their statutory inspection rights.
The plaintiffs have proven that they have proper purposes to conduct an inspection,
and they have established their right to inspect what this decision refers to as Formal Board
Materials. The record is inadequate to determine whether the plaintiffs can inspect any
other materials because AmerisourceBergen refused to provide any discovery into what
types of books and records exist, how they are maintained, and who has them. The plaintiffs
have leave to take a Rule 30(b)(6) deposition to explore these issues. If the plaintiffs believe
that they are entitled to additional books and records after reviewing the Formal Board
Materials and taking the Rule 30(b)(6) deposition, then they may make an additional
application.
I. FACTUAL BACKGROUND
The case was tried on a paper record comprising sixty-five exhibits. The following
facts were proven by a preponderance of the evidence.1
A. AmerisourceBergen’s Legal Obligations As An Opioid Distributor
AmerisourceBergen is one of the world’s largest distributors of pharmaceutical
products, including opioids.2 In the United States, AmerisourceBergen is one of the three
largest distributors of opioids.
As an opioid distributor, AmerisourceBergen must comply with the Comprehensive
Drug Abuse Prevention and Control Act of 1970 and its implementing regulations
(collectively, the “Controlled Substances Act”). To obtain and maintain a license to
1
Citations in the form “Tr.” refer to the trial transcript. Citations in the form “JX —
at —” refer to trial exhibits; page citations refer to the last three digits of the control or JX
number.
2
AmerisourceBergen distributes opioids through its wholly owned subsidiary,
AmerisourceBergen Distribution Company. See JX 40 at ’004. For simplicity, this decision
refers only to the parent company.
2
distribute opioids, a distributor must maintain “effective controls against diversion of
[opioids] into other than legitimate medical, scientific, research, or industrial channels.” 21
U.S.C. § 823(e)(1); see id. § 823(b)(1). A distributor must also “design and operate a
system to disclose to the registrant suspicious orders of [opioids].” 21 C.F.R. § 1301.74(b).
“Suspicious orders include orders of unusual size, orders deviating substantially from a
normal pattern, and orders of unusual frequency.” Id.
A distributor must report suspicious orders to the DEA. Once a distributor has
reported a suspicious order, it must either (i) decline to ship the order or (ii) ship the order
only after conducting due diligence and determining that the order is not likely to be
diverted into illegal channels. See Masters Pharm., Inc. v. Drug Enf’t Admin., 861 F.3d
206, 212–13 (D.C. Cir. 2017). The DEA can suspend or revoke the license of any
distributor that fails to maintain controls or respond appropriately to suspicious orders. See
21 U.S.C. § 824.
B. The Opioid Epidemic And Rogue Pharmacies
The United States remains mired in an opioid epidemic that has killed hundreds of
thousands of Americans and affected the lives of millions more. Starting in the late 1990s,
pharmaceutical companies reassured doctors that patients would not become addicted to
opioids. JX 43 at ’001. Doctors responded by writing more prescriptions for opioids, often
without appreciating or advising patients about the risk of addiction. See JX 24. Between
1999 and 2014, the number of opioid prescriptions quadrupled. JX 22 at ’003. As many as
29% of the patients who were prescribed opioids for chronic pain misused them, and as
many as 12% developed an opioid-use disorder. JX 43 at ’001.
3
In a vicious cycle, increasing levels of opioid abuse led to greater demand for
opioids. So-called “rogue pharmacies” met the demand by filling large numbers of
prescriptions. Stopping rogue pharmacies became a DEA priority.
C. AmerisourceBergen And Rogue Pharmacies
In 2005, DEA personnel met with the Director of Regulatory Affairs at
AmerisourceBergen to make sure that the company understood the common characteristics
of rogue pharmacies and its obligation to prevent the diversion of controlled substances.
JX 3 at ’002–03. In April 2007, the DEA suspended AmerisourceBergen’s license for its
distribution center in Orlando, Florida, because of its involvement with rogue pharmacies.
See id. at ’001. The DEA found that the Orlando center had “sold over 5.2 million dosage
units of [opioids] to pharmacies” and that AmerisourceBergen “knew, or should have
known” that the pharmacies “were diverting controlled substances into other than
legitimate medical, scientific and industrial channels.” Id. at ’003. Among other things, the
DEA found that the pharmacies in question (i) ordered opioids from AmerisourceBergen
“in amounts that far exceeded what an average pharmacy orders,” (ii) “ordered small
amounts of other drug products relative to the pharmacies’ [opioids] purchases,” (iii)
“ordered [opioids] much more frequently than [AmerisourceBergen]’s other pharmacy
customers,” and (iv) were publicly known to “fill[] prescriptions that were issued by
physicians acting outside the usual course of professional practice . . . .” Id. at ’002. The
DEA concluded that AmerisourceBergen had “failed to maintain effective controls against
diversion.” Id. at ’003.
4
In June 2007, AmerisourceBergen settled with the DEA and committed to adopt and
maintain “a compliance program designed to detect and prevent diversion of controlled
substances.” JX 5 art. II § 1(a) (the “2007 Settlement”). The program applied to all of
AmerisourceBergen’s facilities and required “more rapid identification and daily reporting
of orders that may indicate diversion of controlled substances.” JX 6 at ’001. It also
required “a more rigorous examination process” for new customers. Id.
Later in 2007, AmerisourceBergen resolved similar problems at Bellco Drug
Company (“Bellco”), a distributor that AmerisourceBergen acquired in March 2007. See
JX 2. Between signing and closing, Bellco entered into a consent decree with the DEA “for
failing to report suspicious orders of controlled substances to . . . pharmacies.” JX 8; see
JX 7. Bellco paid an $800,000 fine and surrendered its DEA license. See JX 7; JX 8.
D. AmerisourceBergen’s Monitoring And Compliance Program
After these events, AmerisourceBergen implemented a new compliance program
that was developed in consultation with the DEA in an effort to establish an industry
standard. See Dkt. 20 at 12–13; JX 6; JX 9. After AmerisourceBergen implemented the
program, its Vice President of Corporate Security and Regulatory Affairs gave a
presentation at a conference hosted by the DEA that addressed when companies should
report suspicious orders to authorities. Dkt. 20 at 13. In August 2015, AmerisourceBergen
updated its compliance program again. JX 41 at ’185.
According to AmerisourceBergen’s public filings, the company’s senior officers
and its board of directors (the “Board”) play a significant role in monitoring and enforcing
compliance. For example, AmerisourceBergen’s proxy statement for its annual meeting in
5
2011 stated, “Our Chief Compliance Officer and/or Senior Vice President, General
Counsel and Secretary report to the Audit Committee throughout the year on the status of
our compliance program . . . and any changes or developments.” JX 16 at ’021. Eight years
later, AmerisourceBergen continued to make similar disclosures; its proxy statement for
its annual meeting in 2019 stated: “Our Board oversees risk management and considers
specific risk topics on an ongoing basis, including risks associated with the Company’s
distribution of opioid medications. . . . Our Board of Directors actively oversees and
reviews the effectiveness of our compliance programs, including our diversion control
program.” JX 44 at ’014–15. The charter of the Audit Committee corroborates these
statements by requiring that the committee review “at least quarterly reports received from
the Company’s Chief Compliance Officer, counsel and other members of management
regarding the Company’s compliance with applicable legal requirements, including
requirements of the Drug Enforcement Administration.” JX 49 at ’005.
E. Government Investigations, Lawsuits, And Multidistrict Litigation
Since 2012, AmerisourceBergen has received subpoenas relating to its anti-
diversion and order-monitoring programs from the DEA and from U.S. Attorneys’ Offices
for the District of New Jersey, the District of Kansas, the Northern District of Ohio, the
Eastern District of New York, the District of Colorado, the Northern District of West
Virginia, the Western District of Michigan, the Middle District of Florida, the Southern
District of Florida, and the Eastern District of California. JX 21 at ’074–75; JX 46 at ’014.
In 2012, the Attorney General for the State of West Virginia sued
AmerisourceBergen and other opioid distributors, alleging that they had failed to
6
implement effective controls to identify suspicious orders and guard against the diversion
of opioids. JX 21 at ’075. In 2017, AmerisourceBergen paid $16 million to settle the
litigation. JX 27 at ’002. Also during 2017, a consortium of attorneys general from forty-
one states requested documents and information from AmerisourceBergen and other opioid
distributors as part of an investigation into their distribution practices. JX 29.
In 2018, the Energy and Commerce Committee of the United States House of
Representatives released a report titled “Red Flags and Warning Signs Ignored: Opioid
Distribution and Enforcement Concerns in West Virginia.” JX 41 (the “West Virginia
Report”). The report found that AmerisourceBergen and the two other largest wholesale
opioid distributors in the United States “failed to address suspicious order monitoring” in
West Virginia. Id. at ’008. It concluded that after the 2007 Settlement with the DEA,
AmerisourceBergen initially had identified and halted suspicious orders from West
Virginia. But during the years following 2013, AmerisourceBergen’s reporting of
suspicious orders declined significantly, eventually reaching nominal levels. In 2013,
AmerisourceBergen shipped 20.2 million doses of opioids to West Virginia and reported
792 suspicious orders. Id. at ’253. Two years later, in 2015, AmerisourceBergen shipped
15.85 million doses to West Virginia, yet reported only fifty-three suspicious orders. Id. In
2016, AmerisourceBergen’s reporting of suspicious orders became virtually non-existent:
it shipped 11.5 million doses to West Virginia, yet reported only three suspicious orders.
Id. And similarly in 2017, AmerisourceBergen reported only five suspicious orders. Id. at
’252–53. The West Virginia Report inferred that the trend for AmerisourceBergen’s
reporting of suspicious orders in West Virginia reflected a broader nationwide decline,
7
because “in 2017, on a per-capita basis, West Virginia had the second highest number of
suspicious orders reported to the DEA by AmerisourceBergen of all states.” Id. at ’252.
The West Virginia Report also documented changes in how AmerisourceBergen
responded to pharmacies that placed suspicious orders. In 2009, after a pharmacy submitted
thirty-six suspicious orders in a single month, AmerisourceBergen terminated its
relationship with the pharmacy. Id. at ’253. But between 2013 and 2014, when a pharmacy
submitted 109 suspicious orders over a period of five months, AmerisourceBergen
continued doing business with the pharmacy. Id. at ’254.
Also in 2018, the Office of the Ranking Member for the Homeland Security and
Governmental Affairs Committee in the United States Senate released a report titled
“Fueling an Epidemic, Report Three: A Flood of 1.6 Billion Doses of Opioids into Missouri
and the Need for Stronger DEA Enforcement.” See JX 38 (the “Missouri Report”). The
Missouri Report similarly concluded that AmerisourceBergen and the two other largest
wholesale opioid distributors had “consistently failed to meet their reporting obligations”
regarding suspicious orders. Id. at ’002. And AmerisourceBergen reported suspicious
orders far less frequently than its competitors, even when shipping roughly the same
quantities of opioids. For example, between 2012 and 2017, AmerisourceBergen and
McKesson each shipped around 650 million doses to Missouri; McKesson reported 16,714
suspicious orders while AmerisourceBergen reported only 224. Id. at ’009.
In 2019, the New York Attorney General filed an amended complaint against
AmerisourceBergen and other opioid distributors and manufacturers. JX 48 (the “NYAG
Complaint”). In allegations specifically targeting AmerisourceBergen, the NYAG
8
Complaint contended that AmerisourceBergen’s policies facilitated the diversion of
opioids and that AmerisourceBergen failed to stop it from happening. See id. ¶¶ 698–735.
The NYAG Complaint also contended that AmerisourceBergen “has consistently stood out
as compared to its major competitors [because of] its unwillingness to identify suspicious
orders, even among customers that regularly exceeded their thresholds and presented
multiple red flags of diversion.” Id. ¶ 727.
Among other things, the NYAG Complaint alleged that AmerisourceBergen lacked
“an internal rule or policy that requires investigation of a customer based on a specific
number of suspicious order reports.” Id. ¶ 723. The NYAG Complaint also alleged that
AmerisourceBergen set arbitrary limits on the number of suspicious orders it held for
review, which resulted in other suspicious orders being shipped. Id. ¶¶ 701, 705. The
NYAG Complaint similarly alleged that AmerisourceBergen only reported some of its
suspicious orders to the DEA. Id. ¶¶ 705, 722, 728. The NYAG Complaint further alleged
that AmerisourceBergen’s procedures failed to ensure that accounts for blocked or
terminated customers were deactivated, which enabled pharmacies on the “Do Not Ship
List” to continue ordering and receiving opioids. Id. ¶ 726. When the control deficiency
was discovered, AmerisourceBergen reinstated the affected customers without conducting
any additional due diligence review. Id.
The NYAG Complaint supported these allegations by analyzing publicly available
data on AmerisourceBergen’s pharmacy customers and by providing examples of rogue
pharmacies that AmerisourceBergen supplied. The examples included:
9
 A pharmacy in Orange County, New York, that consistently ranked at or above
the 99th percentile in the state for both its number of opioid orders and its total
opioids ordered by weight. Between 2014 and 2016, more than 10% of its
prescriptions were written by prescribers who were later indicted or convicted
of opioid-related charges. Over the same period, the number of suspicious orders
that AmerisourceBergen reported from the pharmacy declined. In 2018,
AmerisourceBergen was still the pharmacy’s primary opioid distributor. See id.
at ’208.
 A pharmacy in Bronx County, New York, that ranked above the 95th percentile
for five years straight (2012 to 2016) based on percentage of opioids volume
shipped. On average, 58% of its opioid prescriptions were paid in cash, putting
it in the 99th percentile for the state. From 2013 to 2015, approximately half of
its opioid prescriptions were written by prescribers who were later convicted. In
2018, this pharmacy was still a customer of AmerisourceBergen’s. See id. at
’210.
 A pharmacy in Queens County, New York, where, between 2013 and 2017, 77%
of its prescriptions were written by prescribers who were later indicted or
convicted. AmerisourceBergen did not stop shipping to that pharmacy until
2017. See id. at ’209.
AmerisourceBergen is also a defendant in multidistrict litigation pending in the
United States District Court for the Northern District of Ohio (the “Multidistrict
Litigation”). That action centralizes 1,548 different lawsuits brought by state attorneys
general, cities, counties, Native American tribes, union benefit funds, and other plaintiffs.
See JX 45.
One of the centralized lawsuits illustrates the types of cases that are proceeding
through the Multidistrict Litigation. In a detailed complaint containing some 1,165
paragraphs, the State of Ohio and the County of Cuyahoga County alleged that
AmerisourceBergen and other distributors failed to report or halt suspicious orders of
opioids. See JX 37 (the “Ohio Complaint”) ¶¶ 9, 14. The Ohio Complaint further alleged
that AmerisourceBergen and other manufacturers collaborated to increase DEA-imposed
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limits on the volume of opioids that could be manufactured and distributed. Id. ¶ 517. It
also alleged that opioid distributors collaborated to increase opioid sales by working
through organizations such as the Pain Care Forum and the Healthcare Distribution
Alliance. Id. ¶¶ 500–14.
The claims in the Multidistrict Litigation survived a motion to dismiss (except for
certain public nuisance claims). See JX 42. The claims also survived a defense motion for
summary judgment. See JX 54 at ’016. In response to the defendants’ motion for summary
judgment, the plaintiffs presented evidence indicating that despite having a compliance
program in place nominally, “AmerisourceBergen continued the practice of shipping some
orders it identified as suspicious, with little or no documentation as to whether a due
diligence investigation was conducted.” JX 52 at ’105. They also presented evidence
indicating that “other due diligence policies put in place . . . suffered from numerous and
critical deficiencies” that “rendered AmerisourceBergen’s due diligence program
ineffective and toothless.” Id. As an example, the plaintiffs described a project that
AmerisourceBergen had implemented in 2016 to ensure that it had the necessary
documentation to establish that all of its customers were authorized to purchase controlled
substances. The project identified a significant number of customer files that lacked the
necessary documentation. One year later, AmerisourceBergen had collected the necessary
documentation for only about 10% of the files. Id. at ’106.
The Multidistrict Litigation is heading toward a series of bellwether trials. JX 47. In
August 2019, AmerisourceBergen and two other opioid distributors offered to pay $10
billion to settle the claims asserted by state attorneys general. JX 55. The regulators
11
countered at $45 billion. See id. Analysts have estimated that a global settlement could cost
as much as $100 billion. Id.
Meanwhile, AmerisourceBergen continues to incur costs. Since September 2017,
AmerisourceBergen has spent more than $1 billion on litigation and opioid-related costs,
including settlements and legal fees relating to opioid lawsuits and investigations. See
AmerisourceBergen Corp., Annual Report (Form 10-K) 73 (Sept. 30, 2019).
F. The Section 220 Demand
On May 21, 2019, the plaintiffs served a demand for books and records on
AmerisourceBergen. See JX 50 (the “Demand”). The Demand stated that the plaintiffs
sought to “investigate whether the Company’s Directors and Officers have committed
mismanagement or breached their fiduciary duties” in connection with the distribution of
opioids. See id. at ’013. The Demand described the opioid crisis and AmerisourceBergen’s
anti-diversion and compliance practices. See id. at ’002–10. The Demand asked for “Board
Materials” relating to ten categories of information. Id. at ’011–12. The specific requests
appear and are addressed in the Legal Analysis. See infra Part II.B.
On June 7, 2019, AmerisourceBergen rejected the Demand in its entirety,
contending that the Demand did not “state a proper purpose or a credible basis to suspect
wrongdoing” and that the scope of the inspection was “overly broad.” See JX 51 at ’006.
To date, AmerisourceBergen has not produced any documents in response to the Demand.
On July 8, 2019, the plaintiffs filed this action. The parties negotiated a schedule
and conducted limited discovery. A trial on a paper record took place on October 15, 2019.
12
II. LEGAL ANALYSIS
Section 220(b) of the Delaware General Corporation Law grants “[a]ny
stockholder” the right “to inspect for any proper purpose . . . [t]he corporation’s stock
ledger, a list of its stockholders, and its other books and records . . . .” 8 Del. C. § 220(b).
“Section 220 is now recognized as ‘an important part of the corporate governance
landscape.’” Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 120 (Del. 2006) (quoting
Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 571 (Del. 1997)).
To obtain books and records under Section 220(b), the plaintiff must establish by a
preponderance of the evidence (i) its status as a stockholder, (ii) compliance with the
statutory requirements for making a demand, and (iii) a proper purpose for conducting the
inspection. Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 144 (Del. 2012).
After meeting these requirements, the plaintiff must demonstrate by a preponderance of the
evidence that “each category of books and records is essential to accomplishment of the
stockholder’s articulated purpose for the inspection.” Thomas & Betts Corp. v. Leviton
Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996). The only disputed issues in this case are
whether the plaintiffs have a proper purpose and the scope of the inspection.
A. The Plaintiffs’ Purposes
“The paramount factor in determining whether a stockholder is entitled to inspection
of corporate books and records is the propriety of the stockholder’s purpose in seeking such
inspection.” CM & M Gp., Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982). In the language
of the statute, “[a] proper purpose shall mean a purpose reasonably related to such person’s
interest as a stockholder.” 8 Del. C. § 220(b).
13
“There is no shortage of proper purposes under Delaware law . . . .” Melzer v. CNET
Networks, Inc., 934 A.2d 912, 917 (Del. Ch. 2007). Prior cases have recognized that a
stockholder can state a proper purpose by seeking
 to investigate allegedly improper transactions or mismanagement;
 to clarify an unexplained discrepancy in the corporation’s financial statements
regarding assets;
 to investigate the possibility of an improper transfer of assets out of the
corporation;
 to ascertain the value of his stock;
 to aid litigation he has instituted and to contact other stockholders regarding
litigation and invite their association with him in the case;
 “[t]o inform fellow shareholders of one’s view concerning the wisdom or
fairness, from the point of view of the shareholders, of a proposed
recapitalization and to encourage fellow shareholders to seek appraisal”;
 “to discuss corporate finances and management’s inadequacies, and then,
depending on the responses, determine stockholder sentiment for either a change
in management or a sale pursuant to a tender offer”;
 to inquire into the independence, good faith, and due care of a special committee
formed to consider a demand to institute derivative litigation;
 to communicate with other stockholders regarding a tender offer;
 to communicate with other stockholders in order to effectuate changes in
management policies;
 to investigate the stockholder’s possible entitlement to oversubscription
privileges in connection with a rights offering;
 to determine an individual’s suitability to serve as a director;
 to obtain names and addresses of stockholders for a contemplated proxy
solicitation; or
 to obtain particularized facts needed to adequately allege demand futility after
the corporation has admitted engaging in backdating stock options.
14
City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 289 n.30 (Del.
2010) (emphasis omitted, formatting altered to add bullets, and internal footnotes omitted)
(quoting Edward P. Welch et al., Folk on the Delaware General Corporation Law,
Fundamentals § 220.6.3, at GCL-VII-202 to -206 (2009 ed.)).
The Demand identifies the following purposes for inspection:
(i) to investigate possible breaches of fiduciary duty,
mismanagement, and other violations of law by members of the Company’s
Board of Directors and management, including the Company’s senior
officers . . . in connection with [AmerisourceBergen]’s distribution of
prescription opioid medications;
(ii) to consider any remedies to be sought in respect of the
aforementioned conduct;
(iii) to evaluate the independence and disinterestedness of the
members of the Board; and
(iv) to use information obtained through inspection of the
Company’s books and records to evaluate possible litigation or other
corrective measures with respect to some or all of these matters.
JX 50 at ’012–13.
The second and fourth purposes are best read as elaborating on the first and third
purposes. Through the second and fourth purposes, the plaintiffs signaled that they are not
solely interested in filing a derivative lawsuit to pursue a damages remedy. They are open
to considering other possible remedies, corrective measures, and methods of addressing the
wrongdoing that they believe has occurred. They seek books and records to inform
themselves and to identify and evaluate their alternatives. This decision therefore analyzes
the first and third purposes, while taking the second and fourth purposes into account when
considering the scope of the first and third purposes.
15
Investigating Wrongdoing Or Mismanagement
The parties devoted the bulk of their efforts to debating the plaintiffs’ first purpose:
“to investigate possible breaches of fiduciary duty, mismanagement, and other violations
of law by members of the Company’s Board of Directors and management, including the
Company’s senior officers . . . in connection with [AmerisourceBergen]’s distribution of
prescription opioid medications.” JX 50 at ’012. The plaintiffs have made the showing
necessary to establish this purpose.
“It is well established that a stockholder’s desire to investigate wrongdoing or
mismanagement is a ‘proper purpose.’” Seinfeld, 909 A.2d at 121.
One of the most traditional proper purposes for a § 220 demand is the
investigation of possible wrongdoing by management. When a stockholder
has made a colorable showing of potential wrongdoing, inspecting the
company’s books and records can help the stockholder to ferret out whether
that wrongdoing is real and then possibly file a lawsuit if appropriate.
KT4 P’rs v. Palantir Techs. Inc., 203 A.3d 738, 758 (Del. 2019).
To protect the corporation from “indiscriminate fishing expeditions” and from
demands grounded in nothing more than curiosity, “[a] mere statement of a purpose to
investigate possible general mismanagement, without more, will not entitle a shareholder
to broad § 220 inspection relief.” Seinfeld, 909 A.2d at 122 (internal quotation marks
omitted). To obtain books and records, a stockholder must “show, by a preponderance of
the evidence, a credible basis from which the Court of Chancery can infer there is possible
mismanagement that would warrant further investigation . . . .” Id. at 123.
“Proof by a preponderance of the evidence means proof that something is more
likely than not. It means that certain evidence, when compared to the evidence opposed to
16
it, has the more convincing force and makes you believe that something is more likely true
than not.” Agilent Techs, Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18,
2010) (internal quotation marks omitted). “Under this standard, [the plaintiff] is not
required to prove its claims by clear and convincing evidence or to exacting certainty.
Rather, [the plaintiff] must prove only that it is more likely than not that it is entitled to
relief.” Triton Const. Co. v. E. Shore Elec. Servs., 2009 WL 1387115, at *6 (Del. Ch. May
18, 2009), aff’d, 988 A.2d 938 (Del. 2010) (TABLE).
The stockholder need only establish by a preponderance of the evidence that there
is a credible basis from which the court can infer a possibility of wrongdoing. “A
stockholder is not required to prove by a preponderance of the evidence that [wrongdoing]
and mismanagement are actually occurring.”3 A stockholder is also not required to show
by a preponderance of the evidence that wrongdoing is probable.
The “credible basis” standard is “the lowest possible burden of proof.” Seinfeld, 909
A.2d at 123. A plaintiff may meet it by making “a credible showing, through documents,
logic, testimony or otherwise, that there are legitimate issues of wrongdoing.” Id.; accord
Sec. First, 687 A.2d at 568. The plaintiff may rely on circumstantial evidence. Wal-Mart
3
Seinfeld, 909 A.2d at 123 (internal quotation marks omitted); accord Axcelis, 1
A.3d at 286–87 (“Such evidence need not prove that wrongdoing, in fact, occurred.”); Sec.
First, 687 A.2d at 565 (“The stockholder need not actually prove the wrongdoing itself by
a preponderance of the evidence.”); id. at 567 (“The actual wrongdoing itself need not be
proved in a Section 220 proceeding, however.”); Thomas & Betts, 681 A.2d at 1031
(“[Stockholders] are not required to prove by a preponderance of the evidence that waste
and [mis]management are actually occurring.”).
17
Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1273 (Del. 2014).
The plaintiff also may rely on hearsay, as long as it is sufficiently reliable.4
To evaluate whether a stockholder has met the Seinfeld test, the trial court must
make a judgment grounded in the facts of a particular case. A stockholder cannot obtain
books and records simply because the stockholder disagrees with a board decision, even if
the decision turned out poorly in hindsight. A stockholder also cannot obtain books and
records to investigate a trivial concern or to satisfy “[m]ere curiosity.” Sec. First, 687 A.2d
at 568. By contrast, when there is a credible basis to suspect that a corporation has been
violating positive law or failing to comply with the applicable regulations, and when those
potential violations appear to have contributed to a corporate trauma, it is likely that some
level of investigation will be warranted. See id. at 571 (“Stockholders have a right to at
least a limited inquiry into books and records when they have established some credible
basis to believe that there has been wrongdoing.”); In re Facebook, Inc. Section 220 Litig.
(Facebook 220), 2019 WL 2320842, at *14–15 (Del. Ch. May 30, 2019, revised May 31,
2019) (explaining that Delaware permits stockholders to investigate instances of “corporate
disobedience”).
4
See Thomas & Betts, 681 A.2d at 1032–33; Marmon v. Arbinet-Thexchange, Inc.,
2004 WL 936512, at *4 (Del. Ch. Apr. 28, 2004); Skoglund v. Ormand Indus., Inc., 372
A.2d 204, 208–13 (Del. Ch. 1976).
18
The Plaintiffs’ Showing Of Possible Corporate Wrongdoing
The plaintiffs have shown by a preponderance of the evidence that there is a credible
basis to infer that AmerisourceBergen possibly violated the Controlled Substances Act.
The evidence of possible wrongdoing is circumstantial, and it does not establish that
wrongdoing occurred. What the evidence establishes is a credible basis to infer possible
wrongdoing warranting further investigation.
Ongoing investigations and lawsuits can provide the necessary evidentiary basis to
suspect wrongdoing or mismanagement warranting further investigation.5 This type of
evidence is stronger when governmental agencies or arms of law enforcement have
conducted the investigations or pursued the lawsuits.6
5
See In re UnitedHealth Gp., Inc. Section 220 Litig., 2018 WL 1110849, at *7 (Del.
Ch. Feb. 28, 2018); In re Plains All Am. Pipeline, L.P., 2017 WL 6016570, at *3–4 (Del.
Ch. Aug. 8, 2017); Elow v. Express Scripts Hldg. Co., 2017 WL 2352151, at *5–6 (Del.
Ch. May 31, 2017), abrogated on other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d
933 (Del. 2019); Cohen v. El Paso Corp., 2004 WL 2340046, at *2 (Del. Ch. Oct. 18,
2004); Freund v. Lucent Techs., Inc., 2003 WL 139766, at *3 (Del. Ch. Jan. 9, 2003); Saito
v. McKesson HBOC, Inc., 2001 WL 818173, at *4 (Del. Ch. July 10, 2001), aff’d in
pertinent part, rev’d on other grounds, 806 A.2d 113 (Del. 2002); Carapico v. Phila. Stock
Exch., Inc., 791 A.2d 787, 792 (Del. Ch. 2000); see also Facebook 220, 2019 WL 2320842,
at *15–16 (finding that regulatory investigations and lawsuits based on the same
misconduct underlying plaintiffs’ Section 220 demand supported the plaintiffs’ credible
basis to infer wrongdoing).
6
See Plains, 2017 WL 6016570, at *3–4 (finding a credible basis to suspect
wrongdoing warranting further investigation based on the indictment of the corporation in
connection with the alleged misconduct); Cohen, 2004 WL 2340046, at *2 (finding a
credible basis to suspect wrongdoing based on (i) the corporation’s announcement of a
write-down as a result of improper accounting and (ii) the SEC’s formal investigation into
the corporation’s accounting practices); Freund, 2003 WL 139766, at *3 (finding a credible
basis to suspect wrongdoing based on (i) the corporation’s revisions of its past financial
19
In this case, the flood of government investigations and lawsuits relating to
AmerisourceBergen’s opioid-distribution practices is sufficient to establish a credible basis
to suspect wrongdoing warranting further investigation. As described in the Factual
Background, numerous governmental actors have conducted investigations into or filed
lawsuits based on AmerisourceBergen’s opioid-distribution practices. These include an
action brought by the West Virginia Attorney General that AmerisourceBergen paid $16
million to settle. They also include a pending action in which the New York Attorney
General contends that AmerisourceBergen “has consistently stood out as compared to its
major competitors [because of] its unwillingness to identify suspicious orders, even among
customers that regularly exceeded their thresholds and presented multiple red flags of
diversion.” JX 48 ¶ 727. AmerisourceBergen is also a defendant in the Multidistrict
Litigation, where the plaintiffs assert that AmerisourceBergen and other opioid distributors
failed to report or halt suspicious orders and instead collaborated to undercut the DEA’s
volume-based limits on opioid distribution. JX 37 ¶¶ 795–99.
The West Virginia Report and the Missouri Report similarly identified potential
wrongdoing by AmerisourceBergen. The West Virginia Report concluded that
statements; (ii) the SEC’s formal investigation into the corporation’s accounting practices;
and (iii) a series of lawsuits brought by other stockholders, which raised allegations of
“securities fraud, mismanagement and a retaliatory firing of an employee for ‘whistle
blowing’”); Saito, 2001 WL 818173, at *4 (finding a credible basis to suspect wrongdoing
based on (i) the corporation’s restatement of financial statements, (ii) the public admission
of the irregularities, (iii) the termination of high-ranking executives, and (iv) the institution
of criminal proceedings by federal authorities).
20
AmerisourceBergen had “consistently failed to meet [its] reporting obligations” regarding
suspicious orders. JX 38 at ’002. The Missouri Report concluded that AmerisourceBergen
had “failed to address suspicious order monitoring.” JX 41 at ’008. Both reports found that
AmerisourceBergen’s failures to report suspicious orders contributed to the opioid
epidemic in those states.
AmerisourceBergen argues that these sources fail to establish a credible basis to
suspect wrongdoing because the investigations and litigation were “directed at the entire
pharmaceutical industry.” Dkt. 20 at 17; see id. at 39. That may be true, but the argument
that “everyone else is doing it” is rarely a persuasive response. See In re Massey Energy
Co., 2011 WL 2176479, at *20–21 (Del. Ch. May 31, 2011) (“Telling your parents that all
the kids are getting caught shoplifting, cheating, or imbibing illegal substances is not,
fortunately, a good excuse.”). As scholars have documented, bad practices often spread
within industries due to network effects, with stock-option backdating providing a salient
example.7 Regardless, the government reports and various complaints include detailed
7
Todd Haugh, The Power Few of Corporate Compliance, 53 Ga. L. Rev. 129, 162–
70, 180 n.75 (2018) (describing the role of network effects in normalizing criminal
behavior and corporate compliance violations); Bert I. Huang, Essay, Shallow Signals, 126
Harv. L. Rev. 2227, 2242 & nn.39–40 (2013) (describing a “contagion” aspect of the
widespread options backdating scandal of the 2000s); see also John M. Bizjak, et al.,
Option Backdating and Board Interlocks, 22 Rev. Fin. Stud. 4821 (2006) (exploring the
role that board interlocks play in explaining the spread of option backdating to a large
number of firms across industries). See generally Sarath Sanga, Network Effects in
Corporate Governance, --- J.L. & Econ. --- (forthcoming), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3086245 (concluding that network
effects dominate secular trends in corporate governance).
21
information about AmerisourceBergen’s misconduct.8 The NYAG Complaint even
explains how AmerisourceBergen’s misconduct differed from and was more serious than
other defendants’ misconduct. See JX 48 ¶ 727. The fact that AmerisourceBergen is one
among many manufacturers and distributors that have been investigated or named as
defendants, standing alone, does not mitigate the evidentiary value of the government
investigations and complaints.
The plaintiffs have not approached AmerisourceBergen as part of an indiscriminate
fishing expedition or out of mere curiosity. AmerisourceBergen is suffering a significant
corporate trauma, as evidenced by its recent offer (along with the two other largest opioid
distributors) to pay $10 billion to settle with the state attorneys general who are pursuing
claims in the Multidistrict Litigation. The state attorneys general rejected the offer and
demanded $45 billion. And any settlement with the state attorneys general would not
resolve the other claims in the Multidistrict Litigation and elsewhere. Analysts have
estimated that a global settlement could cost as much as $100 million.
The opioid crisis is a matter of national significance. There is a credible basis to
suspect that AmerisourceBergen’s situation did not result from an ordinary business
8
Compare Carapico, 791 A.2d at 792 (“[The plaintiffs’] purposes of investigating
corporate mismanagement and waste met the threshold of specificity. . . . The SEC Orders
contain detailed information reflecting possible corporate mismanagement”), with La.
Mun. Police Empls.’ Ret. Sys. v. Lennar Corp., 2012 WL 4760881, at *4 (Del. Ch. Oct. 5,
2012) (“Instead, the articles merely report that [the defendant corporation] is one of many
companies in many industries caught up in the dragnet of a federal investigation. Such
evidence does not support an inference of possible wrongdoing.”).
22
decision that, in hindsight, simply turned out poorly. AmerisourceBergen operates in a
highly regulated industry and must comply with the Controlled Substances Act. There is
strong circumstantial evidence that AmerisourceBergen may have ignored indications of
suspicious orders, failed to halt and investigate suspicious orders, and failed to report
suspicious orders to the DEA. There is strong circumstantial evidence that
AmerisourceBergen may have ignored indications that it was distributing opioids to rogue
pharmacies and that it chose to continue doing business with these pharmacies rather than
cutting them off. There is strong circumstantial evidence that through these and other
activities, AmerisourceBergen may have pushed opioids into the distribution chain under
circumstances where AmerisourceBergen knew or should have known that they would be
diverted for improper uses.
Whether a corporation has engaged in this type of wrongdoing is a legitimate matter
of concern that is reasonably related to the plaintiffs’ interests as stockholders. When a
corporation has suffered a significant trauma, and when a stockholder can establish a
credible basis to suspect a possible violation of positive law, the stockholder has stated a
proper purpose for an inspection of books and records. See Facebook 220, 2019 WL
2320842, at *15. Having made this showing, the plaintiffs are entitled to explore whether
AmerisourceBergen has violated positive law. The plaintiffs are also entitled to explore
whether the AmerisourceBergen’s fiduciaries—its directors and senior officers—were
involved in the violation, condoned it, consciously ignored indications that it was going
on, or consciously failed to establish and monitor the necessary information and reporting
23
systems that would have enabled them to identify and address the violations of positive
law.
AmerisourceBergen’s They-Only-Want-To-Sue Argument
To lay the cornerstone for its defenses, AmerisourceBergen contends that the
plaintiffs’ purposes as expressed in the Demand are “confined to investigating a Caremark
claim . . . with the sole objective of bringing litigation.” Dkt. 20 at 2. This characterization
enables AmerisourceBergen to defend the Section 220 action by launching merits-based
strikes on the lawsuit that AmerisourceBergen expects the plaintiffs to file someday.
To support its reading of the Demand, AmerisourceBergen maintains that if a
stockholder wants to investigate corporate wrongdoing and use the resulting documents to
achieve an end other than filing litigation, then the stockholder must say so in the demand.
See Dkt. 20 at 27. That position runs contrary to Delaware Supreme Court precedent. The
high court has held that a stockholder who generally sought to investigate corporate
wrongdoing could use the fruits of the investigation to file a lawsuit or for other purposes,
such as to “seek an audience with the board to discuss proposed reforms, or failing in that,
[to] prepare a stockholder resolution for the next annual meeting, or [to] mount a proxy
fight to elect new directors.” Saito, 806 A.2d at 117; see Seinfeld, 909 A.2d at 121
(identifying possible uses other than litigation for books and records resulting from an
investigation of corporate wrongdoing); White v. Panic, 783 A.2d 543, 557 n.54 (Del.
2001) (same).
AmerisourceBergen’s approach would require a stockholder to commit in advance
to what it will do with an investigation before seeing the results of the investigation. An
24
investigator who proclaimed the outcome of an investigation at the outset would be viewed
as biased. See, e.g., Biondi v. Scrushy, 820 A.2d 1148, 1165 (Del. Ch. 2003) (denying
motion to stay by special litigation committee when chairman announced that the
individual subject to investigation had been vindicated, even though the SLC’s
investigation was just getting under way), aff’d sub nom. In re HealthSouth Corp. S’holders
Litig., 847 A.2d 1121 (Del. 2004) (TABLE). We would not want a prosecutor to commit
to bringing charges before learning whether the evidence supported them. A responsible
stockholder cannot identify all of the potential uses for books and records before knowing
what the books and records reveal.9
There is a line of authority in which this court has required stockholders who wanted
to investigate mismanagement to state up-front what they planned to do with the fruits of
the inspection. In the language of the original decision, a stockholder must not only state a
proper purpose, but also “must state a reason for the purpose, i.e., what it will do with the
9
See KT4 P’rs v. Palantir Techs., Inc., 2018 WL 1023155, at *11 (Del. Ch. Feb.
22, 2018) (refusing to hold that stockholder lacked a proper purpose to investigate
wrongdoing where it had not committed to commencing litigation; observing that “[i]n one
sense, [plaintiff] could be commended for not committing to launch litigation against [the
company] before it sees the documents it has requested”), aff’d in pertinent part, rev’d on
other grounds, 203 A.3d 738 (Del. 2019); Elow, 2017 WL 2352151, at *6 n.73 (observing
that a stockholder cannot know “prior to an inspection whether he or she definitively will
pursue litigation no matter what the documents revealed”); see also Norfolk Cty. Ret. Sys.
v. Jos. A. Bank Clothiers, Inc., 2009 WL 353746, at *11 (Del. Ch. Feb. 12, 2009) (denying
motion for summary judgment; holding that a statement that the stockholder intended to
investigate corporate wrongdoing for purposes of possibly filing a derivative suit and “[t]o
take appropriate action in the event the members of the [board] did not properly discharge
their fiduciary duties” was sufficient to support “an additional purpose of determining
whether to take any other action [besides litigation] based on the suspected wrongdoing”).
25
information, or an end to which that investigation may lead.” W. Coast Mgmt. & Capital,
LLC v. Carrier Access Corp., 914 A.2d 636, 646 (Del. Ch. 2006).
The two earliest cases to apply the purpose-plus-an-end test did so in limited
circumstances where the context supported a finding that the stockholder only sought
information for purposes of pursuing litigation. The first case involved a stockholder who
had previously filed a derivative action and had its claim dismissed without prejudice for
failing to plead demand futility. The stockholder then requested books and records to plead
a better complaint. See W. Coast, 914 A.2d at 638–39. The court held that the stockholder
was estopped from taking a second bite at the demand-futility apple, held that the
stockholder had no other end in mind for using the books and records, and ruled that the
stockholder had not identified a permissible reason for conducting the inspection. Id. at
645–46. The court distinguished this situation from a case “where there is a ‘credible
showing’ of ‘legitimate issues of wrongdoing,’ and the plaintiff is investigating to
determine the nature of the wrongdoing and what further actions may be appropriate based
on that information.” Id. at 646 n.42 (quoting Sec. First, 687 A.2d at 568).
The second case to apply the purpose-plus-an-end test involved a stockholder who
had filed a federal securities action, but who could not seek discovery in that action because
of the automatic stay imposed by the Private Securities Litigation Reform Act. The court
held on the facts presented that the stockholder had no other end in mind other than to
bypass the automatic stay and ruled that the stockholder had not identified a permissible
reason for the inspection. See Beiser v. PMC-Sierra, Inc., 2009 WL 483321, at *3 (Del.
Ch. Feb. 26, 2009).
26
Both of these cases involved fact-specific contexts that supported rulings that the
stockholders were only seeking books and records to pursue litigation. In drawing these
conclusions, the decisions considered that the stockholders had not identified any other
ends in their demands. Recently, however, this court has framed the purpose-plus-an-end
test as a general requirement under Section 220.10 Some decisions have mentioned the
concept in passing,11 but others have applied it to hold that a stockholder who fails to cite
ends other than litigation when making a demand cannot use the fruits of the investigation
for any purpose other than litigation.12 These cases turn the purpose-plus-an-end concept
into a requirement that goes beyond what Section 220 and Delaware Supreme Court
precedent require.
10
See, e.g., S.E. Pa. Transp. Auth. v. Facebook, Inc. (Facebook Compensation 220),
2019 WL 5579488, at *10 n.119 (Del. Oct. 29, 2019) (citing Beiser, 2009 WL 483321, at
*3 and quoting W. Coast, 914 A.2d at 646); Senetas Corp., Ltd. v. DeepRadiology Corp.,
2019 WL 3430481, at *4 n.43 (Del. Ch. July 30, 2019) (quoting Graulich v. Dell Inc., 2011
WL 1843813, at *5 (Del. Ch. May 16, 2011), which quotes W. Coast, 914 A.2d at 646);
Hoeller v. Tempur Sealy Int’l Inc., 2019 WL 551318, at *7 & n.71 (Del. Ch. Feb. 12, 2019)
(quoting W. Coast, 914 A.2d at 646); Beatrice Corwin Living Irrevocable Tr. v. Pfizer, Inc.
(Pfizer 220), 2016 WL 4548101, at *52 & n.52 (Del. Ch. Aug. 31, 2016, corrected Sept. 1,
2016) (citing S.E. Pa. Transp. Auth. v. Abbvie, Inc., 2015 WL 1753033, at *11 (Del. Ch.
Apr. 15, 2015), aff’d, 132 A.3d 1 (Del. 2016) (TABLE), and W. Coast, 914 A.2d at 646);
Graulich, 2011 WL 1843813, *5 (quoting W. Coast, 914 A.2d at 646).
11
See Hoeller, 2019 WL 551318, at *7; Facebook Compensation 220, 2019 WL
5579488, at *10 n.119; Senetas, 2019 WL 3430481, at *4 n.43.
12
See Pfizer 220, 2016 WL 4548101, at *7; Abbvie, 2015 WL 175033, at *12;
Graulich, 2011 WL 1843813, at *8.
27
Section 220 only requires that a stockholder state a proper purpose. See 8 Del. C. §
220(b). The Delaware Supreme Court has not gone further by requiring that a stockholder
also say what it will do with the documents it receives. A stockholder may choose to say
what it will do with the fruits of the inspection, and if it does, then a court can take those
uses into account. Or, as in West Coast and Beiser, a court may be able to draw an inference
or reach a conclusion about what the stockholder intends to do. But a stockholder need not
both articulate a proper purpose for inspection and commit in advance to the ends to which
it will put the books and records.13
Of course, the fact that Section 220 does not require a stockholder to say how it will
use the fruits of the inspection does not render the stockholder’s intentions irrelevant. If a
corporation challenges whether the stockholder’s proper purpose is bona fide, then a
stockholder can point to how it plans to use the materials as evidence that its claimed
purpose is its actual purpose. If a stockholder cannot identify a credible potential end use,
13
In practice, the purpose-plus-an-end test operates as a requirement that
stockholders include magic words in their demands. Sophisticated stockholders will know
to include a broad set of possible uses in a demand. Those who only review Section 220(b),
articulate the recognized purpose of exploring corporate wrongdoing, but fail to identify a
range of possible uses for the books and records will risk having their inspection rights
denied. A Section 220 inspection should not turn on the inclusion of magic words. See Sec.
First, 687 A.2d at 567 (“The failure of plaintiff’s key witness to articulate certain ‘magic
words’ while testifying at trial is not fatal to a Section 220 action.”); see also Dobler v.
Montgomery Cellular Hldg. Co., 2001 WL 1334182, at *7 & n.28 (Del. Ch. Oct. 19, 2001)
(ordering production of a category of books and records even though expert failed to testify
that the materials were essential; “As the Court does not grant relief because the ‘magic’
words are used, the Court conversely does not deny relief for failure to use the ‘magic’
words, provided, of course, that the requisite showing is otherwise accomplished.”).
28
then the court may infer that the stockholder’s stated purpose is not its actual purpose. See
Marathon P’rs v. M & F Worldwide Corp., 2004 WL 1728604, at *8 (Del. Ch. July 30,
2004).
In this case, the Demand did not recite ends to which the plaintiffs might put the
books and records. For the reasons discussed, they were not required to do so. Instead, the
plaintiffs reserved the ability to consider all possible courses of action that their
investigation might warrant pursuing. See JX 50 at ’012.
AmerisourceBergen points out that the Demand mentions litigation. Dkt. 20 at 27.
The fourth purpose expresses the plaintiffs’ intent “to evaluate possible litigation or other
corrective measures with respect to some or all of these matters.” JX 50 at ’012–13. The
Demand thus acknowledged that one possible use was “to evaluate possible litigation,” but
it did not restrict the stockholders to that end. See Graulich, 2011 WL 1843813, at *7;
Norfolk Cty., 2009 WL 353746, at *10–12.
Through discovery, AmerisourceBergen obtained the plaintiffs’ engagement letters
with their counsel. Those letters contain references to litigation, but the references are not
dispositive. The plaintiffs would need their counsel to conduct litigation, so it is logical
that the engagement letters would refer to it. The plaintiffs would not need their counsel to
use the fruits of their investigation for other ends.
AmerisourceBergen cannot cabin the Demand by asserting that the plaintiffs only
want to sue. The plaintiffs in this case seek to explore corporate wrongdoing. They are not
limited to pursuing litigation. They may decide to file a lawsuit, or they may pursue other
means of “effectively address[ing] the problem.” Saito, 806 A.2d at 115.
29
AmerisourceBergen’s Actionable-Wrongdoing Requirement
Having interpreted the Demand as “confined to investigating a Caremark claim,”
AmerisourceBergen argues that to obtain books and records, the plaintiffs “must present
evidence demonstrating a credible basis to suspect actionable wrongdoing on the part of
the Board.” Dkt. 20 at 2; accord Dkt. 37 at 1. AmerisourceBergen maintains that the
evidence does not support actionable wrongdoing on the part its directors, so the plaintiffs
cannot obtain any books and records.
AmerisourceBergen’s argument fails for a threshold reason. The plaintiffs are not
seeking books and records for the sole purpose of investigating a potential Caremark claim.
They can use the fruits of their investigation for other purposes. See supra Part II.A.1.b.
Examined in its own right, AmerisourceBergen’s actionable-wrongdoing
requirement imposes an onerous burden on stockholders that goes beyond the standard
established in Seinfeld. AmerisourceBergen contends that a Section 220 plaintiff must
introduce evidence from which the court can infer the existence of an actionable claim
against the board of directors. AmerisourceBergen then relies on decisions that have
granted Rule 23.1 motions to argue that the plaintiffs in this case failed to introduce
evidence from which the court could infer the existence of an actionable claim. In
substance, AmerisourceBergen contends that to establish a credible basis to suspect
30
actionable wrongdoing, a plaintiff must introduce evidence sufficient to support a claim
that could survive a pleading-stage motion to dismiss pursuant to Rule 23.1.14
The Delaware Supreme Court has not required a stockholder seeking books and
records to introduce evidence from which a court could infer the existence of an actionable
claim. The Seinfeld test only requires that a stockholder establish, by a preponderance of
the evidence, that there is a credible basis to infer possible corporate wrongdoing or
mismanagement. The Delaware Supreme Court has explained that this standard strikes “an
appropriate balance between providing stockholders who can offer some evidence of
possible wrongdoing with access to corporate records and safeguarding the right of the
corporation to deny requests for inspections that are based only upon suspicion or
curiosity.” Seinfeld, 909 A.2d at 118.
The Delaware Supreme Court has repeatedly urged stockholders to use Section 220
to investigate possible wrongdoing before filing derivative actions, recognizing that
without doing so, plaintiffs typically lack the facts necessary to plead an actionable claim
against the board that can survive a Rule 23.1 motion.15 The logical implication of this
14
On at least one occasion, AmerisourceBergen frames the requirement in more
extreme form, asserting to obtain books and records, “[s]tockholders must prove bad-faith
conduct by the directors.” Dkt. 37 at 2. That standard would require proof that wrongdoing
actually occurred, contrary to Seinfeld and numerous other Delaware cases. See supra Part
II.A.1.
15
See, e.g., King v. VeriFone Hldgs., Inc., 12 A.3d 1140, 1145–46 (Del. 2011)
(“Delaware courts have strongly encouraged stockholder-plaintiffs to utilize Section 220
before filing a derivative action, in order to satisfy the heightened demand futility pleading
requirements of Court of Chancery Rule 23.1.” (footnotes omitted)); Beam ex rel. Martha
31
message is that to obtain books and records, a stockholder does not have to introduce
evidence from which a court could infer the existence of an actionable claim. The Delaware
Supreme Court has never equated the credible-basis standard with an actionable-claim
requirement.16
Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1056–57 (Del. 2004) (“Both
this Court and the Court of Chancery have continually advised plaintiffs who seek to plead
facts establishing demand futility that the plaintiffs might successfully have used a Section
220 books and records inspection to uncover such facts.”); Brehm v. Eisner, 746 A.2d 244,
at 266–67 (Del. 2000) (rejecting argument “that the system of requiring a stockholder to
plead particularized facts in a derivative suit is basically unfair because the Court will not
permit discovery under Chancery Rules 26–37 to marshal the facts necessary to establish
that pre-suit demand is excused,” reasoning that “[p]laintiffs may well have the ‘tools at
hand’ to develop the necessary facts for pleading purposes . . . [by] seek[ing] relevant books
and records of the corporation under Section 220”); Rales v. Blasband, 634 A.2d 927, 934
n.10 (Del. 1993) (rejecting argument that the requirement of particularized pleading was
unfair because stockholders could use Section 220 “to investigate the possibility of
corporate wrongdoing”). See generally La. Mun. Police Empls.’ Ret. Sys. v. Pyott (Pyott I),
46 A.3d 313, 342–47 (Del. Ch. 2012) (describing dynamics of litigation when stockholders
file suit before seeking books and records), rev’d on other grounds, 74 A.3d 612 (Del.
2013).
16
The closest case is Seinfeld, where a stockholder sought to investigate a
compensation decision that the board had made, and where the stockholder acknowledged
in his deposition that he had no factual support for his claim that mismanagement had taken
place. See Seinfeld, 909 A.2d at 119. The Delaware Supreme Court held that a
disagreement with the board’s business judgment is not evidence of wrongdoing. Id. at
120. The decision did not hold that a stockholder must always submit evidence of board-
level wrongdoing sufficient to rebut the business judgment rule, threaten the directors with
liability, or otherwise establish demand futility. Rather, the Seinfeld decision turned on the
stockholder’s concession and his attempt to investigate a board decision involving the
hiring, firing, and compensation of management, which lies at the heart of a board’s
business judgment. Throughout the decision, the Delaware Supreme Court stressed that
stockholders could obtain books and records by presenting some evidence from which a
court could infer possible mismanagement or corporate wrongdoing sufficient to warrant
further investigation. See id. at 122–25. The Delaware Supreme Court did not require that
32
The Delaware Supreme Court’s decision in Brehm demonstrates that to obtain books
and records, a stockholder’s evidence of corporate wrongdoing need not be sufficient to
establish an actionable claim. This court dismissed the plaintiff’s complaint pursuant to
Rule 23.1, and the Delaware Supreme Court affirmed. See In re Walt Disney Co. Deriv.
Litig., 731 A.2d 342, 361 (Del. 1998), aff’d in pertinent part sub nom. Brehm, 746 A.2d at
244. Despite agreeing that the claim was not actionable, the Delaware Supreme Court
reversed the with-prejudice aspect of this court’s dismissal so that the plaintiff could use
Section 220 to obtain “relevant books and records of the corporation.” Brehm, 746 A.2d at
266. If an actionable claim was needed to obtain books and records, then the plaintiff in
Brehm could not have met that test. Instead, the plaintiff obtained books and records and
used them to plead a complaint that survived a motion to dismiss. See In re Walt Disney
Co. Deriv. Litig., 825 A.2d 275, 291 (Del. Ch. 2003).
A similar sequence of events unfolded in the Saito litigation. This court dismissed
the plaintiffs’ Caremark claims pursuant to Rule 23.1, but did so without prejudice so that
the stockholders could use Section 220. Ash v. McCall, 2000 WL 1370341, at *1, *15 &
n.56 (Del. Ch. Sept. 15, 2000). When the stockholders requested books and records, the
corporation disputed whether they had a proper purpose. Despite having held that the
stockholders could not plead facts sufficient to support an actionable claim, this court held
that they had established a proper purpose:
the plaintiffs produce evidence of board-level conflicts or exposure to liability sufficient to
defeat a Rule 23.1 motion and establish an actionable claim. See id.
33
I find that the record in this case evinces credible evidence of possible
wrongdoing. McKesson HBOC was forced to restate its financial statements
to reflect accounting irregularities totaling $325 million. This led to the
public admission of the irregularities, the termination of certain high-ranking
executives, and the institution of criminal proceedings by federal authorities.
While the ultimate involvement or culpability, if any, of the defendant in this
wrongdoing is unclear on this record, the plaintiff has met his burden at this
stage to gain access to books and records to examine the defendant’s conduct.
Thus, to the extent that the plaintiff seeks access to the books and records of
the defendant to foster this purpose, in general, I find that he has set forth a
proper purpose for a demand.
Saito, 2001 WL 818173, at *4.17
Consistent with these outcomes, a phalanx of Delaware decisions have dismissed
Caremark claims for failing to plead demand futility, while commenting that the plaintiffs
could have used Section 220 to obtain books and records that might have led to a different
17
Two other cases point in the same direction. In CNET, a federal district court held
that a stockholder had failed to plead a Caremark claim, but dismissed the case without
prejudice so that the stockholder could use Section 220. See CNET, 934 A.2d at 915. No
one disputed that the stockholder could establish a proper purpose. See id. at 917–18.
In Security First, the Delaware Supreme Court permitted a stockholder to inspect
books and records based on quite meager allegations of wrongdoing. The target corporation
had entered into a merger agreement that would have resulted in its shares being converted
into cash at a premium to the market price, but the corporation later terminated the
agreement and paid the acquirer the termination fee and its expenses. See 687 A.2d at 565–
66. Citing little more than the fact of termination, a stockholder sought to investigate the
possibility of mismanagement in connection with the termination. The corporation
responded that the merger failed because of “a difference of philosophies” between the
companies, but the stockholder argued that this explanation was dubious because prudent
management would have researched the two companies’ philosophies before agreeing to
merge. Id. at 567 (internal quotation marks omitted). This court found that the stockholder
had established a credible basis to suspect possible wrongdoing, and the high court agreed.
Id. The stockholder’s inference about possible wrongdoing could not have supported an
actionable claim, yet it was sufficient to establish a proper purpose. Id. at 568–69.
34
result.18 If the plaintiffs could have obtained books and records only by introducing
evidence that could support an actionable claim, then the stockholders could not have met
the test. Yet these decisions admonished the plaintiffs for not having used the “tools at
hand” to develop their claims before filing suit.19
18
See, e.g., Wood v. Baum, 953 A.2d 136, 144 (Del. 2008) (affirming dismissal of
Caremark claim under Rule 23.1; noting that “plaintiff could have, but chose not to, make
a books and records request”); In re Dow Chem. Co. Deriv. Litig., 2010 WL 66769, at *13
(Del. Ch. Jan. 11, 2010) (dismissing Caremark claim under Rule 23.1 where plaintiff did
not use Section 220); Desimone v. Barrows, 924 A.2d 908, 951 (Del. Ch. 2007) (noting
that plaintiff filed complaint without using Section 220 and therefore had “no idea what
the [board’s] investigation actually entailed and is unable to plead any facts about what the
. . . board did, when they did it, what they discussed, what conclusions they reached, and
why the board did or did not do anything”); Rattner v. Bidzos, 2003 WL 22284323, at *14
(Del. Ch. Sept. 30, 2003) (“[A] symptomatic and ultimately fatal defect to all of Rattner’s
claims is a failure to plead facts with particularity. . . . [T]he books and records provisions
of 8 Del. C. § 220 . . . might have been helpful here . . . .”); In re Citigroup Inc. S’holders
Litig., 2003 WL 21384599, at *3 (Del. Ch. June 5, 2003) (“Despite its prolixity, the
Amended Complaint completely fails to set forth adequate reasons why demand is excused.
Perhaps the absence of particularized facts excusing demand is the product of a race to the
courthouse. It is certainly a result of the plaintiffs’ failure to use the ‘tools at hand’ . . . .”),
aff’d sub nom. Rabinovitz v. Shapiro, 839 A.2d 666 (Del. 2003) (TABLE); Guttman v.
Huang, 823 A.2d 492, 493 (Del. Ch. 2003) (“Having failed to heed the numerous
admonitions by our judiciary for derivative plaintiffs to obtain books and records before
filing a complaint, the plaintiffs have unsurprisingly submitted an amended complaint that
lacks particularized facts compromising the impartiality of the . . . board that would have
acted on a demand.”); id. at 504 (noting that a § 220 action “could have provided the basis
for the pleading of particularized facts”); White v. Panic, 793 A.2d 356, 371–72 (Del. Ch.
2000) (dismissing Caremark claim after noting that the plaintiff failed to use Section 220),
aff’d, 783 A.2d 543, 556–57 (Del. 2001) (“[T]his case demonstrates the salutary effects of
a rule encouraging plaintiffs to conduct a thorough investigation, using the ‘tools at hand’
including the use of actions under 8 Del. C. § 220 for books and records, before filing a
complaint.”).
19
More recently, stockholders have sought and obtained books and records before
filing Caremark claims, and this court still has held that their complaints failed to state
actionable claims that could survive a Rule 23.1 motion. See, e.g., Rojas ex rel. J.C. Penney
35
To support its contrary argument that a stockholder seeking to investigate corporate
wrongdoing must introduce evidence that would support an actionable Caremark claim,
AmerisourceBergen relies on a recent line of cases from this court.20 The pivotal decision
involved a stockholder who sought books and records to explore potential wrongdoing at
Pfizer, Inc. The company had represented in its 2013 annual report that it was not
practicable to calculate a deferred tax allowance for foreign earnings. At trial, the
stockholder presented testimony from a tax expert who testified that it was practicable to
calculate the deferred tax allowance, providing a credible basis from which the court could
infer that Pfizer’s disclosure was inaccurate. See Pfizer 220, 2016 WL 4548101, at *1–3.
Co. v. Ellison, 2019 WL 3408812, at *1 (Del. Ch. July 29, 2019); Tilden ex rel. Blucora,
Inc. v. Cunningham, 2018 WL 5307706, at *9 (Del. Ch. Oct. 26, 2018); Okla. Firefighters
Pension & Ret. Sys. ex rel. Citigroup, Inc. v. Corbat, 2017 WL 6452240, at *12, *14 (Del.
Ch. Dec. 18, 2017); Horman ex rel. United Parcel Serv., Inc. v. Abney, 2017 WL 242571,
at *1 (Del. Ch. Jan. 19, 2017); Reiter ex rel. Capital One Fin. Corp. v. Fairbank, 2016 WL
6081823, at *1 (Del. Ch. Oct. 18, 2016); Melbourne Mun. Firefighters’ Pension Tr. Fund
ex rel. Qualcomm, Inc. v. Jacobs, 2016 WL 4076369, at *1, *5 (Del. Ch. Aug. 1, 2016); In
re Gen. Motors Co. Deriv. Litig., 2015 WL 3958724, at *1 (Del. Ch. June 26, 2015); see
also City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 51 & n.3 (Del. 2017).
These adverse rulings on Rule 23.1 motions indicate that the plaintiffs would not have been
able to meet a standard for obtaining books and records that required them to plead an
actionable Caremark claim, yet the plaintiffs conducted inspections. Perhaps the
companies provided documents voluntarily, confident that they would show an absence of
wrongdoing. Or perhaps the companies did not believe that the plaintiffs would be required
to establish an actionable Caremark claim to obtain books and records and produced the
documents rather than disputing whether there was a credible basis to suspect that corporate
wrongdoing existed. I would bet on the latter.
20
See Facebook 220, 2019 WL 2320842; Hoeller, 2019 WL 551318; Pfizer 220,
2016 WL 4548101.
36
Pfizer disputed the expert’s opinion, but the court held that the problem with the
plaintiff’s case went deeper:
[E]ven if the plaintiffs established that the calculation was practicable, they
have not offered a credible basis from which this Court may infer that
Pfizer’s Board, which relied on KPMG’s opinion, engaged in any
mismanagement or wrongdoing in approving Pfizer’s financial disclosures
or in assuring the company’s compliance with accounting standards.
Id. at *4. Elaborating, the court held that a stockholder must provide “some evidence from
which a Caremark claim could be inferred” and that establishing a credible basis to infer
management or wrongdoing was not enough:
Of course, a stockholder seeking inspection under Section 220 need not
prove a Caremark claim, or even plead a claim that would survive a motion
to dismiss a plenary action that asserted a Caremark claim. A stockholder
must, however, provide some evidence from which a Caremark claim could
be inferred. That is, where a stockholder’s sole purpose for investigating
mismanagement is to determine whether the board breached its duty of
oversight, it is not enough to provide a credible basis from which the Court
may infer that management or lower-level employees engaged in
wrongdoing. The stockholder also must provide some evidence from which
the Court may infer that the board utterly failed to implement a reporting
system or ignored red flags.
Id. at *5.
With the test framed in this fashion, the plaintiff could not meet it. As the court
found,
The plaintiffs’ evidence at trial and arguments in their briefs did not address
Pfizer’s reporting system, or lack thereof, or whether any “red flags” might
have been raised but ignored by Pfizer’s board. Nor is there anything in the
record from which the Court might infer the absence of such a reporting
system or the presence of such red flags. The plaintiffs sought to prove at
trial that Pfizer’s statement that the Reparation Tax calculation is not
practicable may not be accurate and therefore is a “positive violation” of the
law. It is debatable whether the plaintiffs’ evidence at trial satisfied the
minimum quantum of evidence necessary to establish a credible basis that
37
Pfizer’s practicability statement is inaccurate. The gap the plaintiffs failed to
bridge is providing any evidence permitting even an inference that the board
was aware, or should have been aware, of this inaccuracy.
Id. In fairness to the plaintiff, that is the type of evidence that typically would only appear
in internal corporate documents, which is what the plaintiff sought to obtain by seeking
books and records.
The Pfizer 220 court suggested that it was applying a less demanding standard than
the pleading-stage test that would apply under Rule 23.1. See id. (“Of course, a stockholder
seeking inspection under Section 220 need not . . . plead a claim that would survive a
motion to dismiss a plenary action that asserted a Caremark claim.”). But in practice, the
Pfizer 220 standard is higher. It requires that a plaintiff “provide some evidence from which
a Caremark claim could be inferred.” Id. When pleading a claim for purposes of Rule 23.1,
a plaintiff “need not plead evidence.” Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)
(subsequent history omitted); accord Brehm, 746 A.2d at 254 (“[T]he pleader is not
required to plead evidence.”)
The Pfizer 220 standard and the Rule 23.1 standard are functionally equivalent for
purposes of drawing inferences. The Delaware Supreme Court has made clear that when
ruling on a Rule 23.1 motion, “[p]laintiffs are entitled to all reasonable factual inferences
that logically flow from the particularized facts alleged . . . .” Brehm, 746 A.2d at 255;
accord Beam, 845 A.2d at 1048; see Del. Cty. Empls.’ Ret. Fund v. Sanchez, 124 A.3d
1017, 1022 (Del. 2015). Thus, to obtain books and records under the Pfizer 220 standard,
a stockholder must introduce evidence providing a credible basis to infer the existence of
a Caremark claim, while to survive a Rule 23.1 motion, a stockholder must make
38
particularized factual allegations providing a reasonable basis to infer the existence of a
Caremark claim. The distance between a credible basis and a reasonable basis seems too
small for workable distinctions. “Credible” is defined as “offering a reasonable basis for
being believed.”21 If an inference is unreasonable, then it is not credible.
Both the Pfizer 220 standard and the Rule 23.1 standard are likely insurmountable
for a stockholder who can point to corporate wrongdoing, but who lacks internal
information about what the directors actually did or knew. Under Seinfeld, the operative
question is whether a stockholder has shown a credible basis to suspect possible
mismanagement or wrongdoing at the corporation. This standard does not require tying the
mismanagement or wrongdoing to the board.22
21
Credible, Merriam-Webster, https://www.merriam-
webster.com/dictionary/credible (last visited Jan. 9, 2020); see Webster’s Ninth New
Collegiate Dictionary 305 (1990) (“1 : offering reasonable grounds for being believed”);
Credible, Dictionary.com, https://www.dictionary.com/browse/credible (last visited Jan. 9,
2020) (listing “reasonable” as a synonym for credible).
22
A parenting analogy may be helpful. Assume that you have heard from several
sources that unidentified members of your teenager’s sports team may be selling illegal
drugs. Further assume that your teen seems flush with cash and has recently made an
expensive technology purchase. There is no evidence that would directly tie your teen to
selling drugs and warrant making accusations, and it is possible (and hopefully likely) that
your teen is not selling drugs. But there is a credible basis to suspect possible wrongdoing
and hence conduct an investigation to obtain some basic information. If there is evidence
that other authorities are involved (perhaps you received a voicemail from the school
principal asking you to call), then the need for an investigation becomes stronger and the
scope likely broader. Obviously corporations are not children, and stockholders are not
parents, but the analogy helps illustrate the distinction between actionable wrongdoing and
a credible basis to suspect possible wrongdoing worthy of investigation. The latter is all
that Seinfeld requires.
39
Evaluating whether a stockholder has shown a credible basis to suspect possible
wrongdoing requires a judgment grounded in the facts of a particular case. Generally
speaking, when a corporation has suffered a trauma, and when there is a credible basis to
suspect that the corporation has violated positive law or government regulations, then some
level of investigation is warranted. See Facebook 220, 2019 WL 2320842, at *14–15.
The plaintiffs in this case have shown a credible basis to suspect possible
mismanagement or wrongdoing that is worthy of further investigation. See supra Part
II.A.1.a. That is all that Section 220 and Seinfeld require.
The Section 102(b)(7) Defense
Again relying on its counterfactual interpretation of the Demand as “confined to
investigating a Caremark claim,” AmerisourceBergen argues that the plaintiffs cannot
obtain books and records because AmerisourceBergen has an exculpatory provision in its
certificate of incorporation and the plaintiffs have not introduced evidence sufficient to
support an inference of a non-exculpated claim. See Dkt. 20 at 28–29. As explained above,
AmerisourceBergen’s argument fails for the threshold reason that the plaintiffs are not
seeking books and records for the sole purpose of investigating a potential Caremark claim.
They can use the fruits of their investigation for other purposes. See supra Part II.A.1.b. It
also fails because the plaintiffs’ inspection rights do not depend on the existence of an
actionable claim for damages against the board of directors. The plaintiffs need only
establish a credible basis from which a court can infer possible mismanagement or
corporate wrongdoing, which they have done. See supra Part II.A.1.c.
40
AmerisourceBergen’s argument also fails in its own right. The issues that the
plaintiffs wish to investigate could well lead to non-exculpated claims. The duty of loyalty
and its subsidiary element of good faith require that directors pursue the best interests of
the corporation and its stockholders. See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27,
53 (Del. 2006); Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1051 n.2 (Del. Ch. 1996).
A failure to act in good faith may be shown if the directors act with a purpose other than
that of advancing the best interests of the corporation, such as by consciously failing to
attempt to take action in good faith to prevent a corporate trauma. See Marchand v.
Barnhill, 212 A.3d 805, 820–21 (Del. 2019); Stone ex rel. AmSouth Bancorporation v.
Ritter, 911 A.2d 362, 370 (Del. 2006).
Directors cannot take an ostrich-like approach to their fiduciary obligations, and so
they must take active steps to oversee the operations of the corporation and become
informed about the risks confronting the company. In the words of the seminal oversight
case, directors must “attempt in good faith to assure that a corporate information and
reporting system, which the board concludes is adequate, exists . . . .” In re Caremark Int’l
Inc. Deriv. Litig., 698 A.2d 959, 970 (Del. Ch. 1996). The resulting information and
reporting systems must be “reasonably designed to provide to senior management and to
the board itself timely, accurate information sufficient to allow management and the board,
each within its scope, to reach informed judgments concerning both the corporation’s
compliance with law and its business performance.” Id. “As with any other disinterested
business judgment, directors have great discretion to design context- and industry-specific
approaches tailored to their companies’ businesses and resources.” Marchand, 212 A.3d at
41
821. The “bottom-line requirement” is for the board to “make a good faith effort—i.e.,
try—to put in place a reasonable board-level system of monitoring and reporting.” Id.
Having put a system of reporting and oversight controls in place, the directors must
“then monitor it.” Id. A board of directors can be found to have breached its duty under
this dimension of the law if the directors implemented a system of controls, then
“consciously failed to monitor or oversee its operations thus disabling themselves from
being informed of risks or problems requiring their attention.” Stone, 911 A.2d at 370.
“When a plaintiff can plead an inference that a board has undertaken no efforts to make
sure it is informed of a compliance issue intrinsically critical to the company’s business
operation, then that supports an inference that the board has not made [a] good faith effort
. . . .” Marchand, 212 A.3d 823. Particularly when dealing with “mission critical”
regulatory and compliance risks, directors must make a good faith effort to put in place a
reasonable board-level system of monitoring and reporting. Id. at 824. Directors may fall
short of this obligation if they simply rely on management to report to their board at their
discretion. See id. at 823–24. Directors also may fall short if they rely on regulatory
oversight mechanisms imposed by law, which “are not typically directed at the board.” Id.
at 823.
If directors learn of information that would put them on notice of a threatened
corporate trauma—the proverbial red flag—then they must take action in good faith to
address it. A claim that directors had notice of serious misconduct and simply brushed it
off or otherwise failed to investigate states a claim for breach of duty. See, e.g., David B.
Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931, at *5 (Del. Ch. Feb. 13,
42
2006), aff’d, 911 A.2d 802 (Del. 2006) (TABLE); Guttman, 823 A.2d at 507. A board that
fails to act in the face of such information makes a conscious decision, and the decision not
to act is just as much of a decision as a decision to act. See Krieger v. Wesco Fin. Corp.,
30 A.3d 54, 58 (Del. Ch. 2011); Hubbard v. Hollywood Park Realty Enters., Inc., 1991
WL 3151, at *10 (Del. Ch. Jan. 14, 1991).
Directors must be particularly scrupulous when overseeing the corporation’s
compliance with its legal obligations. “Delaware law does not charter law breakers.
Delaware law allows corporations to pursue diverse means to make a profit, subject to a
critical statutory floor, which is the requirement that Delaware corporations only pursue
‘lawful business’ by ‘lawful acts.’” Massey, 2011 WL 2176479, at *20 (quoting 8 Del. C.
§§ 101(b), 102). “[A] fiduciary of a Delaware corporation cannot be loyal to a Delaware
corporation by knowingly causing it to seek profit by violating the law.”23 When directors
consciously fail to prevent violations of positive law, then they act in bad faith.24
In their capacities as corporate fiduciaries, officers owe the same duties to the
corporation and its stockholders as directors. Gantler v. Stephens, 965 A.2d 695, 708–09
23
Id.; accord Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854
A.2d 121, 131 (Del. Ch. 2004) (“Under Delaware law, a fiduciary may not choose to
manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity
will result in profits for the entity.”); Guttman, 823 A.2d at 506 n.34 (“[O]ne cannot act
loyally as a corporate director by causing the corporation to violate the positive laws it is
obliged to obey.”).
24
See Stone, 911 A.2d at 369; Disney, 906 A.2d at 67; Kandell ex rel. FXCM, Inc.
v. Niv, 2017 WL 4334149, at *16 (Del. Ch. Sept. 29, 2017).
43
(Del. 2009). Officers also are fiduciaries in their capacities as agents who report to the
board of directors.25 Within this relationship, officers have a duty to comply with the
board’s directives. See Restatement (Third) of Agency § 8.09 (Am. Law Inst. 2006). Stated
in the negative, an officer “may not act in a manner contrary to the express desires of the
board of directors.” In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 775 n.570 (Del. Ch.
2005), aff’d, 906 A.2d 27 (Del. 2006). If a board of directors has given an officer
instructions about how to implement a compliance program, monitor its results, and report
back to the board, then the officer can breach his duties as an agent by failing to carry out
the board’s instructions. Both as corporate fiduciaries and as agents, officers also have a
25
See 8 Del. C. § 141(a). A vibrant debate exists over the extent to which the full
agency law regime should apply to officers. One of the principal disputes appears to be
whether officers should be liable for simple negligence, like agents generally, or whether
some form of more deferential standard of review, such as the business judgment rule,
should apply to their decisions. This decision does not speculate on that issue. For examples
of the debate over the standard of review, see Lyman Johnson & Robert Ricca, Reality
Check on Officer Liability, 67 Bus. Law. 75 (2011); Paul Graf, A Realistic Approach to
Officer Liability, 66 Bus. Law. 315 (2011); Lyman P.Q. Johnson & David Millon,
Recalling Why Corporate Officers Are Fiduciaries, 46 Wm. & Mary L. Rev. 1597 (2005);
Lawrence A. Hamermesh & A. Gilchrist Sparks III, Reply, Corporate Officers and the
Business Judgment Rule: A Reply to Professor Johnson, 60 Bus. Law. 865 (2005); Lyman
P.Q. Johnson, Corporate Officers and the Business Judgment Rule: A Reply to Professor
Johnson, 60 Bus. Law. 439 (2005); A. Gilchrist Sparks, III & Lawrence A. Hamermesh,
Common Law Duties of Non-Director Corporate Officers, 48 Bus. Law. 215 (1992). For
examples of scholarly analyses addressing other aspects of the officer’s role as corporate
agent, see Megan W. Shaner, The (Un)Enforcement of Corporate Officers’ Duties, 48 U.C.
Davis L. Rev. 271 (2014); Amitai Aviram, Officers’ Fiduciary Duties and the Nature of
Corporate Organs, 2013 U. Ill. L. Rev. 763; Megan W. Shaner, Restoring the Balance of
Power in Corporate Management: Enforcing an Officer’s Duty of Obedience, 66 Bus. Law.
27 (2010); Donald C. Langevoort, Agency Law Inside the Corporation: Problems of
Candor and Knowledge, 71 U. Cin. L. Rev. 1187 (2003).
44
duty to provide the board of directors with information that the directors need to carry out
their duties and perform their statutory role.26
Given that the plaintiffs are currently seeking only to investigate possible corporate
wrongdoing, they have not yet tried to plead a plenary claim for breach of fiduciary duty
against specific individuals. As this decision has discussed, Delaware Supreme Court
precedent does not require an actionable claim as a predicate to a books-and-records
inspection, and it would upset the proper balancing of interests in Section 220 proceedings
to effectively require one. See supra Part II.A.1.a. But it is apparent, even at this early
stage, that the fruits of a books and records investigation could potentially lead to non-
exculpated claims.
26
See Hampshire Gp., Ltd. v. Kuttner, 2010 WL 2739995, at *34 (Del. Ch. July 12,
2010) (“[W]hen a corporate officer is aware of financial misreporting that involves high-
level management and that has evaded the corporation’s auditors, and nonetheless certifies
that he is not aware of any material weakness in the company’s internal controls, he is
making a false statement and failing to bring material information to the board, in breach
of his duty of loyalty.”); Ryan v. Gifford, 935 A.2d 258, 272 (Del. Ch. 2007) (holding that
complaint stated claim for breach of the duty of loyalty against CFO and vice president
who knew about backdating but “kept silent”); Hoover Indus., Inc. v. Chase, 1988 WL
73758, at *2 (Del. Ch. July 13, 1988) (“A director does breach his duty of loyalty if he
knows the company has been defrauded and does not report what he knows to the board or
to an appropriate committee of the board, at the very least when he is involved in the fraud
and keeps silent in order to escape detection.”); see also Lewis v. Vogelstein, 699 A.2d 327,
334 (Del. Ch. 1997) (“[S]ince the relationship between a principal and agent is fiduciary
in character, the agent . . . must act not only with candor, but with loyalty.”). See generally
Restatement (Third) of Agency § 8.11 (Am. Law Inst. 2006) (describing agent’s duty to
provide principal with facts that the agent knows); Langevoort, supra, at 1191–1208
(discussing duty of candor for officers under agency principles and corporate law).
45
One possibility is that AmerisourceBergen’s directors and officers may have
breached their fiduciary duty of loyalty by consciously permitting the company to violate
positive law. Taken as a whole, the evidence surrounding the volume of
AmerisourceBergen’s distribution of opioids through rogue pharmacies, the minimal levels
of reporting of suspicious orders, and the changes over time in reporting levels is sufficient
to support an inference that AmerisourceBergen’s directors and officers may have pursued
the maximization of profit at the expense of legal compliance. As discussed in the Factual
Background, the West Virginia Report indicates that after its problems with the DEA in
2007, AmerisourceBergen initially adopted and adhered to a meaningful program of
monitoring and oversight that involved identifying suspicious orders, reporting them to the
DEA, and taking action against offending pharmacies. After 2013, however,
AmerisourceBergen began reporting dramatically lower numbers of suspicious orders. By
2016, despite shipping 11.5 million doses of opioids to West Virginia in that year,
AmerisourceBergen reported only three suspicious orders. JX 41 at ’253. In 2017,
AmerisourceBergen reported only five. Id. at ’252–53. AmerisourceBergen also stopped
taking action to terminate offending pharmacies. See id. at ʼ254. The Missouri Report
documented similar issues in Missouri. See JX 38. The NYAG Complaint likewise states,
“The one area in which AmerisourceBergen has consistently stood out as compared to its
major competitors is its unwillingness to identify suspicious orders, even among customers
that regularly exceeded their thresholds and presented multiple red flags of diversion.” JX
48 ¶ 727.
46
It is also possible that AmerisourceBergen’s directors and officers breached their
fiduciary duties by consciously failing to monitor a mission-critical source of regulatory
risk. The same pattern of evidence that supports an inference that AmerisourceBergen’s
senior officers and directors may have consciously permitted AmerisourceBergen to
violate the law also supports the lesser inference of consciously failing to monitor a
mission-critical source of regulatory risk.
There is also a credible basis from which to infer that AmerisourceBergen’s
directors and officers possibly breached their fiduciary duties by knowingly failing to
respond to red flags. Because it is possible to infer that fiduciaries at AmerisourceBergen
who were actively monitoring a compliance system would have detected the company’s
regulatory issues and taken action, one reasonable follow-on inference is that the
fiduciaries were not engaging in monitoring. Another reasonable follow-on inference is
that the fiduciaries engaged in monitoring, identified the issues, and ignored them, such as
by failing to implement additional compliance measures in response to gaps in the
compliance program or by consciously failing to take remedial steps in response to
problems that the compliance system revealed.
A books and records investigation into the potential wrongdoing at
AmerisourceBergen thus may support non-exculpated claims for breach of the duty of
47
loyalty. It also could support potential claims against AmerisourceBergen’s senior officers,
and Section 102(b)(7) does not authorize exculpation for officers.27
It would be premature to allow AmerisourceBergen to rely on its exculpatory
provision to foreclose an inspection into possible corporate wrongdoing. The inspection
could lead to non-exculpated claims.
The Time-Bar Defense
In yet another merits defense, AmerisourceBergen contends that the plaintiffs lack
a proper purpose because any claims they might hope to bring based on the information
that they seek would be time-barred. According to AmerisourceBergen, all of the issues
that the plaintiffs seek to explore “relate to events that occurred three or more years ago.”
Dkt. 20 at 40. AmerisourceBergen concludes that any claim that the plaintiffs might file
would be barred by laches because of the analogous three-year statute of limitations. Id.
As with the Section 102(b)(7) defense, the time-bar defense fails for two threshold
reasons. First, as previously discussed, the Demand is not limited to pursuing derivative
litigation. See supra Part II.A.1.b. The plaintiffs are entitled to use the information that they
obtain to identify, evaluate, and pursue alternative remedies and corrective measures.
Second, the plaintiffs’ inspection rights do not turn on the existence of an actionable claim
27
8 Del. C. § 102(b)(7) (authorizing “[a] provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director . . .”); Gantler, 965 A.2d 695 at 709 n.37
(“Although legislatively possible, there currently is no statutory provision authorizing
comparable exculpation of corporate officers.”).
48
against the directors. The plaintiffs need only establish a credible basis to infer possible
corporate management or wrongdoing, which they have done. See supra Part II.A.1.c.
Regardless, it is not clear at this stage that the plaintiffs’ derivative claims would be
time-barred. Although a stockholder lacks a proper purpose for an inspection that relates
solely to time-barred derivative claims, it must be clear that any claims would be barred.
See Graulich, 2011 WL 1843813, at *6. Rarely will a court be able to reach that conclusion
because the scope of merits-related discovery in a summary Section 220 proceeding is
limited, and this court has been hesitant in Section 220 proceedings to permit “the factual
development necessary to assess fairly . . . a time-bar affirmative defense . . . .”
Amalgamated Bank v. UICI, 2005 WL 1377432, at *2 (Del. Ch. June 2, 2005).
It is possible that doctrines like fraudulent concealment or equitable tolling could
enable the plaintiffs to pursue otherwise stale claims. See Fike v. Ruger, 754 A.2d 254,
260–61 (Del. Ch. 1999), aff’d, 752 A.2d 112 (Del. 2000). It is also possible that the
plaintiffs could show a continuing wrong. See Saito, 806 A.2d at 117 (rejecting argument
that stockholder could not obtain books and records pre-dating the stockholder’s purchase
of shares; noting that “the potential derivative claim may involve a continuing wrong that
both predates and postdates the stockholder’s purchase date”). Or the plaintiffs may be able
to use earlier information to support non-time-barred claims, such as by citing earlier
conduct as evidence of intent, knowledge, or lack of mistake. See, e.g., id.; Pyott I, 46 A.3d
at 354–55. The plaintiffs also may use the earlier information to show that the directors
engaged in “a sustained or systematic failure . . . to exercise oversight.” Caremark, 698
A.2d at 971.
49
It would be premature to determine in this summary proceeding on an abbreviated
record that any possible claim that the plaintiffs might bring would be time-barred.
AmerisourceBergen thus cannot undercut the plaintiffs’ otherwise proper purpose for
conducting an inspection by advancing a timeliness defense.
Evaluating Director Disinterestedness And Independence
The plaintiffs’ other articulated purpose is straightforward. The plaintiffs seek to
investigate issues of director disinterestedness and independence, which is a proper
purpose.28 The Delaware Supreme Court has observed that it is “within [a stockholder’s]
power to explore these matters.” Beam, 845 A.2d at 1056. The Delaware Supreme Court
has also criticized a plaintiff “who sought books and records to plead his complaint”
because he “somehow only asked for records relating to the transaction he sought to redress
and did not seek any books and records bearing on the independence of the board.” Sandys
v. Pincus, 152 A.3d 124, 128–29 (Del. 2016). This is a valid purpose.
B. The Scope Of The Inspection
Because the plaintiffs have met the test for an inspection, this court must determine
its scope. Sec. First, 687 A.2d at 569. The production of records in response to a Section
220 demand is not the equivalent of discovery in a plenary action. Id. The Section 220
28
See Rock Solid Gelt Ltd. v. SmartPill Corp., 2012 WL 4841602, at *4 (Del. Ch.
Oct. 10, 2012); La. Mun. Police Empls. Ret. Sys. v. Morgan Stanley & Co., 2011 WL
773316, at *7 (Del. Ch. Mar. 4, 2011); Haywood v. AmBase Corp., 2005 WL 2130614, at
*6 (Del. Ch. Aug. 22, 2005); UICI, 2005 WL 1377432, at *3; Grimes v. DSC Commc’ns
Corp., 724 A.2d 561, 566 (Del. Ch. 1998).
50
plaintiff must establish “that each category of the books and records requested is essential
and sufficient to [its] stated purpose.” Thomas & Betts, 681 A.2d at 1035. “[T]he court
must give the petitioner everything that is ‘essential,’ but stop at what is ‘sufficient.’”
Palantir, 203 A.3d at 752 (internal quotation marks omitted). At bottom, the plaintiff
should receive “access to all of the documents in the corporation’s possession, custody or
control, that are necessary to satisfy [the plaintiff’s] proper purpose.” Saito, 806 A.2d at
114–15.
When tailoring the production order, the court must balance the interests of the
stockholder and the corporation. See Sec. First, 687 A.2d at 569. When “a plaintiff has
shown evidence of wide-ranging mismanagement or waste, a more wide-ranging
inspection may be justified.” Freund, 2003 WL 139766, at *5; accord Skoglund, 372 A.2d
at 211. “[W]here a § 220 claim is based on alleged corporate wrongdoing, and assuming
the allegation is meritorious, the stockholder should be given enough information to
effectively address the problem, either through derivative litigation or through direct
contact with the corporation’s directors and/or stockholders.” Saito, 806 A.2d at 114–15.
“The source of the documents and the manner in which they were obtained by the
corporation have little or no bearing on a stockholder’s inspection rights. The issue is
whether the documents are necessary and essential to satisfy the stockholder’s proper
purpose.” Id. at 118.
The starting point (and often the ending point) for an adequate inspection will be
board-level documents that formally evidence the directors’ deliberations and decisions
and comprise the materials that the directors formally received and considered (the “Formal
51
Board Materials”).29 A corporation should be able to collect and provide its Formal Board
Materials promptly and with minimal burden. In many organizations, the corporate
secretary maintains a central file for each board meeting in either paper or electronic form
that contains the minutes and other Formal Board Materials for that meeting.30
29
See Cook v. Hewlett-Packard, 2014 WL 311111, at *4 (Del. Ch. Jan. 30, 2014)
(limiting inspection to “board-level” documents relating to an acquisition and subsequent
problems with the acquired company); Robotti & Co. v. Gulfport Energy Corp., 2007 WL
2019796, at *4 (Del. Ch. July 3, 2007) (permitting inspection of board minutes); Grimes
724 A.2d at 567 (“The right to obtain corporate records [to investigate demand refusal]
focuses on the committee process itself and extends at least to reports or minutes, reflecting
the corporate action,” including “copies of the Special Committee’s report, minutes of the
meetings of the Special Committee and minutes of any meeting of the board of directors
relating to the creation or functioning of the Special Committee, including any meeting of
the board of directors at which the recommendation of the Special Committee was
considered or approved” (internal quotation marks and footnote omitted)); see also Axcelis,
1 A.3d at 291 (observing that if a board declines to accept a director resignation under a
system of majority voting with a board-rejectable resignation, then a stockholder can obtain
through a Section 220 inspection “any documents and other records upon which the board
relied”).
30
See, e.g., 3 William B. Solomon & Michael A. Nemeroff, Practice Checklist,
Successful Partnering Between Inside & Outside Counsel § 46A:31 (2015) (“In connection
with the corporate secretary’s role as the company’s record keeper, the corporate secretary
often maintains the official minutes of the meetings of the board in a central location. . . .
The corporate secretary generally prepares board packages or gathers them from the
applicable members of management, reviews what is gathered to ensure it is narrowly
tailored to the board’s purposes and disseminates the materials necessary for the board
members to review in advance of each meeting of the board.”); Soc’y of Corp. Sec’ys. &
Gov’ce Prof’ls, Corporation Minutes: A Publication for the Corporate Secretary 23–24
(Feb. 2014) (“Corporate secretaries may also maintain separate meeting files for each board
and committee meeting which includes the material related to the meeting and materials
referenced in the minutes. . . . Companies have also started storing these materials
electronically. . . .”).
52
If the plaintiff makes a proper showing, an inspection may extend to informal
materials that evidence the directors’ deliberations, the information that they received, and
the decisions they reached (“Informal Board Materials”). Informal Board Materials
generally will include communications between directors and the corporation’s officers
and senior employees, such as information distributed to the directors outside of formal
channels, in between formal meetings, or in connection with other types of board
gatherings. Informal Board Materials also may include emails and other types of
communication sent among the directors themselves, even if the directors used non-
corporate accounts. See Palantir, 203 A.3d at 742, 753; Amalgamated Bank v. Yahoo! Inc.,
132 A.3d 752, 793 (Del. Ch. 2016), abrogated on other grounds by Tiger v. Boast Apparel,
Inc., 214 A.3d 933 (Del. 2019). In an appropriate case, an inspection may extend further to
encompass communications and materials that were only shared among or reviewed by
officers and employees (“Officer-Level Materials”). See Wal-Mart, 95 A.3d at 1273
(affirming order requiring production of Officer-Level Materials); see also Beam, 845 A.2d
at 1056 (explaining that Officer-Level Materials can be necessary to understand how
“directors handled [management] proposals or conduct in various contexts,” which could
reveal patterns of boardroom behavior).
The Types Of Documents Covered By The Demand
For each demanded category, the Demand seeks “Board Materials,” which it defines
as documents “that were provided at, considered at, discussed at, or prepared or
disseminated, in draft or final form, in connection with, in anticipation of, or as a result of
53
any meeting of the Company’s Board or any regular or specially created committee
thereof.” JX 50 at ’011 n.57.
Through this definition, the Demand requests Formal Board Materials, Informal
Board Materials, and Officer-Level Materials. The Demand seeks Formal Board Materials
by requesting documents “provided at, considered at, discussed at, or . . . disseminated . . .
in connection with, in anticipation of, or as a result of any meeting of the Company’s Board
or any regular or specially created committee thereof.” The Demand seeks Informal Board
Materials by requesting “documents prepared or disseminated, in draft or final form” and
because the phrases “in connection with,” “in anticipation of,” and “as a result of” are broad
enough to extend beyond documents formally reviewed during an official meeting. The
Demand requests Officer-Level Materials because officers and other employees could have
prepared documents in connection with, in anticipation of, or as a result of a board meeting.
Whether a stockholder is entitled to a particular category of documents “is fact
specific and will necessarily depend on the context in which the shareholder’s inspection
demand arises.” Wal-Mart, 95 A.3d at 1271 (internal quotation marks omitted). Because
of the fact-specific nature of the inquiry, it will often be difficult to determine in the abstract
whether a stockholder is entitled to more than Formal Board Materials. The analysis will
generally need to proceed on a category-by-category basis.
In this case, an additional obstacle is the absence of information about what types
of records AmerisourceBergen maintains and who has them. The plaintiffs sought this
information in discovery, but AmerisourceBergen refused to provide it. JX 56 at ’006. At
trial, AmerisourceBergen relied on Palantir, which it interpreted as prohibiting a plaintiff
54
in a Section 220 proceeding from obtaining discovery into what types of books and records
the company might have. See Tr. 118.
In Palantir, a corporation argued that a stockholder was not entitled to obtain emails
using Section 220 unless the stockholder introduced “compelling evidence” that emails
were necessary to fulfill a proper purpose. 203 A.3d at 754. In rejecting this standard, the
high court held that the plaintiff had satisfied its burden by pointing to “some evidence”
that production of the emails was necessary. Id. The high court explained that the plaintiff
had made “as strong of a showing . . . as can be reasonably expected of a [plaintiff] in a
summary § 220 proceeding.” Id. The high court later noted that the plaintiff was “in no
position to get discovery to determine how a company . . . conducts business and whether
the books and records that address its needs come in the form of hardcopy documents,
electronic PDFs, emails, or some other medium.” Id. at 755.
Turning this pro-production reasoning on its head, AmerisourceBergen interprets
Palantir as holding that stockholders are never entitled to obtain discovery into how a
company maintains its books and records. Palantir does not say that, and to interpret the
decision as establishing a bright-line rule would run contrary to Delaware’s case-by-case
approach to Section 220 proceedings.31
31
See Tiger, 214 A.3d at 939 (rejecting presumption of confidentiality in Section
220 productions as inconsistent with the need to balance factors in an individual case);
United Techs. Corp. v. Treppel, 109 A.3d 553, 558 (Del. 2014) (holding that because of
the discretionary nature of Section 220 proceedings, “the determination of whether to
impose a condition or limitation on an inspection [is] inherently case-by-case and fact
specific” (internal quotation marks omitted)); Espinoza v. Hewlett–Packard Co., 32 A.3d
55
 It is often helpful when ruling on a Section 220 demand to have information about
what types of books and records exist and who has them. The limitations on the scope of
discovery in a Section 220 action exist to ensure that the parties do not expand a books-
and-records action into a plenary proceeding, with the plaintiffs seeking discovery into the
merits of future claims and the defendants seeking discovery into future defenses.32 But the
parties can obtain discovery into the limited issues raised by the Section 220 proceeding.
See 2 Edward P. Welch et al., Folk on the Delaware General Corporation Law §
220.07[B], at 7-246 to -247 (6th ed. Supp. 2018-1). Just as a defendant can serve
interrogatories or depose a plaintiff about its proper purpose, so too can a plaintiff serve
interrogatories or notice a Rule 30(b)(6) deposition to understand what books and records
exist and who has them. See, e.g., Wal-Mart, 95 A.3d at 1269. The resulting record can
365, 372 (Del. 2011) (noting that on the related issue of the scope of an inspection,
“[w]hether or not a particular document is essential to a given inspection purpose is fact
specific and will necessarily depend on the context in which the shareholder's inspection
demand arises”).
32
See Palantir, 203 A.3d at 754 (“Books and records actions are not supposed to be
sprawling, oxymoronic lawsuits with extensive discovery.”); Chammas v. NavLink, Inc.,
2015 WL 5121095, at *1 (Del. Ch. Aug. 27, 2015) (“Extensive discovery can bog down a
books and records action which is supposed to be handled on a summary schedule.”); Saito,
806 A.2d at 114 (“[Section 220] does not open the door to the wide ranging discovery that
would be available in support of litigation.”). See generally Randall S. Thomas, Improving
Shareholder Monitoring and Corporate Management by Expanding Statutory Access to
Information, 38 Ariz. L. Rev. 331, 346–47 & n.88 (1996) (noting that Chancellor Seitz had
added language to the draft version of § 220 in 1965 to “mak[e] it clear that this type of
case should be given expedited treatment in the court system,” and that the final version
“created a summary procedure, with expedited discovery on limited issues and a quick trial”
(emphasis added)).
56
assist the parties in resolving their dispute, and it later assists the court in crafting a tailored
order.
In this case, AmerisourceBergen prevented the plaintiffs from obtaining any
information about what types of books and records exist and who has them. As a result, the
parties could not effectively meet and confer, and the court lacks a record on which to base
a final order.
At present, the plaintiffs have shown that they are entitled to Formal Board
Materials. After AmerisourceBergen produces Formal Board Materials, the plaintiffs may
conduct a Rule 30(b)(6) deposition to determine what other types of books and records
exist and who has them. If the parties cannot agree on a final production order at that point,
then the plaintiffs may make a follow-on application for Informal Board Materials or
Officer-Level Documents.
The Time Period Covered By The Inspection
The Demand seeks books and records dated “from May 1, 2010 to the present.” JX
50 at ’011 n.57. The plaintiffs proved that an inspection covering this time frame is
appropriately tailored to the scope of the alleged wrongdoing. See Dkt. 44 at 52. The record
at trial supports potential wrongdoing and mismanagement dating back at least to 2010.
See JX 48 at ’208, ’210 (describing AmerisourceBergen’s 2010 suspicious order reports
for a customer that “exhibited several common indicators of suspicious activity for multiple
years”).
AmerisourceBergen argues that the inspection should not pre-date the time period
covered by the statute of limitations. Dkt. 20 at 4. Just as its statute of limitations argument
57
fails to undermine the plaintiffs’ proper purpose, so too it fails to constrain the scope of the
inspection. The plaintiffs may be able to show that their claims are not time-barred, or they
may use the information to support aspects of non-time-barred claims. They may also use
earlier materials for purposes unrelated to litigation. See supra Part II.A.1.e.
Books And Records Concerning Opioid Distribution
The Demand seeks books and records concerning the following topics:
a. the 2007 Settlement;
b. the Bellco Acquisition;
c. the Company’s involvement and participation in the Pain Care Forum
and the [Health Distribution Alliance];
d. the Company’s written policies regarding anti-diversion and
compliance program, including, but not limited to, administration
records through [its Diversion Control Program and Order Monitoring
Program] and [its Corporate Security and Regulatory Affairs];
e. the creation of a committee of the Board to review the Board’s
oversight of risks associated with the Company’s role as a distributor
of prescription opioid medications;
f. the creation of the Governance and Nominating Committee;
g. the decision to task the Governance and Nominating Committee with
preparing a report with respect to the Board’s oversight of risks
associated with the Company’s role as a distributor of prescription
opioid medications;
h. any materials supplied to the Governance and Nominating Committee
for preparation of its report;
i. any investigation or analysis of the Company’s duty or obligation to
conduct due diligence with respect to compliance with anti-diversion
laws;
j. lawsuits, investigations, or congressional inquiries relating to the
Company’s distribution of prescription opioid medications;
58
k. the Company’s anti-diversion and compliance programs, including,
but not limited to:
(i) information concerning the origins of, causes of, or remedial
steps taken in response to any deficiencies in the programs; and
(ii) any investigation, review, or analysis conducted by the
company relating to any aspect of its anti-diversion and
compliance programs, and any modifications made in response
thereto.
JX 50 at ’011–12.
AmerisourceBergen does not dispute that categories (d), (e), (i), (j), and (k) are
subject to inspection, so those categories will be produced. AmerisourceBergen disputes
whether categories (a), (b), (c), (f), (g), and (h) are subject to inspection. See Dkt. 20 at 46–
51; Dkt. 37 at 25.
The 2007 Settlement And The Bellco Acquisition
Categories (a) and (b) address the 2007 settlement with the DEA and
AmerisourceBergen’s acquisition of Bellco. The plaintiffs argue that these categories relate
to AmerisourceBergen’s “existing positive obligations for compliance” and that the
documents “are necessary and essential to determine whether the Board willfully
disregarded the Company’s obligations pursuant to the 2007 Settlement and Bellco
Consent Judgment.” Dkt. 44 at 48. Any production relating to these matters will be limited
by the temporal scope of the Demand, which only seeks documents from May 1, 2010, to
the present. As a practical matter, this means that the production would involve documents
that were created no earlier than May 1, 2010, but that retrospectively summarize or
analyze AmerisourceBergen’s obligations or evaluate whether to make changes in how
AmerisourceBergen complies with its obligations. The plaintiffs need these types of
59
materials because they suspect that AmerisourceBergen initially established a responsible
standard of compliance after the 2007 incidents, but then backed away from compliance
during the years after 2013. The plaintiffs are entitled to inspect these categories of books
and records.
The Pain Care Forum And The Health Distribution Alliance
Category (c) addresses AmerisourceBergen’s participation in trade associations
including the Pain Care Forum and the Health Distribution Alliance. The plaintiffs contend
that those documents “are necessary and essential to determine the extent to which the
Board was alerted to the Company’s involvement with these organizations which . . . were
utilized for the nefarious purpose of skirting AmerisourceBergen’s responsibilities under
federal law.” Dkt. 44 at 51. The plaintiffs seek these documents because of allegations in
the Multidistrict Litigation that manufacturers and distributors collaborated through trade
associations to increase opioid sales and ensure that DEA-imposed quotas remained
artificially high. The plaintiffs are entitled to inspect this category of documents, which are
necessary to investigate this aspect of the plaintiffs’ concerns about wrongdoing.
Materials Involving The Governance Committee
Categories (f), (g), and (h) seek documents relating to the Governance and
Nominating Committee (the “Governance Committee”). Category (e) seeks similar
documents relating to an unidentified committee. The plaintiffs are only entitled to some
of these materials.
Category (f) addresses the creation of the Governance Committee. The plaintiffs
would be entitled to these materials, but AmerisourceBergen has represented that the
60
committee was formed in 2003. See Dkt. 20 at 50. The original records therefore fall
outside the temporal scope of the inspection. The plaintiffs may obtain any later records
from within the temporal scope of the inspection that discuss the formation of the
Governance Committee.
Category (g) addresses a decision to task the Governance Committee with preparing
a report on the oversight risks associated with opioid distribution. Category (h) seeks books
and records supplied to the Governance Committee in connection with that report. The
plaintiffs are entitled to these categories of books and records. One aspect of the plaintiffs’
concerns involves how the directors have handled oversight risks. Any reports that the
Governance Committee prepared and any documents that it received and reviewed
regarding the distribution of opioids will show the extent to which AmerisourceBergen’s
directors and senior management knew about and addressed mismanagement or unlawful
activity. It is possible that some of the documents may fall within other categories as well,
but some degree of overlap is acceptable. The necessary-and-sufficient inquiry is
concerned with the books and records themselves, not the framing of each individual
category of requests.
Category (e) addresses “the creation of a committee of the Board to review the
Board’s oversight of risks associated with the Company’s role as a distributor of
prescription opioid medications.” JX 50 at ’011. AmerisourceBergen has represented that
it never created such a committee. Dkt. 20 at 47 n.8. If they wish, the plaintiffs may test
this representation in the Rule 30(b)(6) deposition. If there is no committee, then that is the
end of the matter.
61
Director Independence Questionnaires
The Demand seeks “[c]opies of the director independence questionnaires completed
by each Board member during the prior four (4) years.” JX 50 at ’012. AmerisourceBergen
concedes that these materials are subject to inspection. See Dkt. 20 at 46–47; Dkt. 37 at 25.
Conditions On Production
AmerisourceBergen asks that any inspection ordered be subject to four conditions:
(i) a mutually agreeable confidentiality agreement, (ii) a forum selection provision
requiring any subsequent lawsuit to be filed in the Delaware Court of Chancery, (iii)
agreement that all books and records would be incorporated by reference into any
subsequent complaint, and (iv) the ability to redact non-responsive material. See Dkt. 37 at
53–54.
The plaintiffs do not object to conditions (i) or (ii), which are reasonable. The
production will take place pursuant to a mutually agreeable confidentiality agreement that
contains a forum selection provision requiring that any subsequent lawsuit based on the
books and records be filed in the Delaware Court of Chancery. If this court would lack
jurisdiction, then the lawsuit may be filed in a state or federal court located in the State of
Delaware, or the plaintiffs may seek leave to modify the forum selection requirement. The
incorporation-by-reference provision is also reasonable. See Yahoo!, 132 A.3d at 796.
The dispute over the right to redact is not something the court will address at this
stage. Redactions should be limited, but they can be warranted. See, e.g., Plains, 2017 WL
6016570, at *1. If there are disputes over redactions, then the court will resolve them. The
same is true for any disputes over privilege.
62
III. CONCLUSION
AmerisourceBergen shall produce Formal Board Materials falling within the
categories for which inspection is permitted. AmerisourceBergen also shall produce the
director questionnaires that the Demand requested. Once the plaintiffs have reviewed these
materials, they have leave to conduct a Rule 30(b)(6) deposition to explore what types of
books and records exist and who has them. At that point, if the parties cannot agree on a
final production order, then the plaintiffs may seek any additional Informal Board Materials
or Officer-Level Documents that they can show are necessary for their inspection.
63