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Espinoza v. Hewlett-Packard Company, No. 208, 2011; C.A. No. 6000 (Del. Nov. 21, 2011)

November 21, 2011

In this en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision in an action brought by Ernesto Espinoza, a stockholder of Hewlett-Packard Company (“HP”), to inspect certain books and records of HP in accordance with Section 220 of the Delaware General Corporation Law. The Court of Chancery denied Mr. Espinoza’s claim for relief and held that he had not demonstrated a need to inspect HP’s books and records that was sufficient to override the attorney-client privilege and work product immunity protections. The Supreme Court affirmed the decision, but it did so on the alternate grounds that Mr. Espinoza failed to meet his burden to prove, by a preponderance of the evidence, that the documents he sought to inspect were essential to his stated purpose of investigating possible corporate wrongdoing.

With this holding, the Supreme Court provided guidance with respect to determining the scope of inspection relief to which a plaintiff is entitled under Section 220. Because determining whether documents are essential to a stockholder’s stated purpose for demanding inspection is dispositive of deciding the scope of relief under Section 220, this “essentiality analysis” should precede an inquiry into whether such documents are protected by attorney-client privilege or work product immunity.

Mr. Espinoza had demanded to inspect books and records relating to the resignation of Mark V. Hurd, HP’s former Chief Executive Officer. Mr. Hurd had resigned, and had received a large severance package, after allegations of sexual harassment led to an independent investigation conducted by HP’s outside counsel, Covington & Burling, which revealed Mr. Hurd had breached HP’s Standards of Business Conduct. Mr. Espinoza’s stated purpose for demanding such inspection was to investigate improper conduct by certain officers and directors of HP to determine if Mr. Hurd’s severance package constituted a breach of fiduciary duty and waste of HP’s assets. Although HP made available to Mr. Espinoza extensive documentation relating to Mr. Hurd’s resignation, HP refused to disclose an interim report prepared by Covington & Burling (the “Covington Report”), claiming it was protected under attorney-client privilege and work product immunity doctrine.

Mr. Espinoza claimed that the Covington Report was the only available evidence containing information the Board of Directors of HP (the “Board”) relied upon when the directors decided to grant Mr. Hurd a severance package instead of terminating his employment for cause. Neither the Court of Chancery nor the Supreme Court inspected the Covington Report in camera, but the Supreme Court accepted the Court of Chancery’s factual finding that the report did not discuss whether the Board had grounds to terminate Mr. Hurd’s employment for cause because this finding was based on representations made by HP to the Court of Chancery and because Mr. Espinosa did not contest the finding.

The Supreme Court agreed with the Court of Chancery’s decision to deny Mr. Espinoza relief under Section 220, but the Supreme Court did not reach the question of whether the Covington Report was protected by attorney-client privilege or work product immunity principles. The Supreme Court stated that, after meeting the burden to prove that the stated purpose for seeking inspection is proper, a court must determine the scope of relief to which a stockholder is entitled. A stockholder who demands inspection must prove that the desired documents are “essential to [the] accomplishment of [his] articulated purpose for the inspection.” Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996). A document will be considered essential for purposes of Section 220 if it addresses the crux of the stockholder’s stated purpose and if its essential information is not otherwise available. Acknowledging that Mr. Espinoza was entitled to inspection under Section 220 because no one contested his stated purpose of investigating wrongdoing, the Supreme Court found that he failed to meet his burden of showing that the Covington Report was essential to his investigation of wrongdoing.

The Supreme Court held that Mr. Espinoza did not meet his burden to prove the “essentiality” of the Covington Report because (i) the report did not discuss whether Mr. Hurd’s employment should have been terminated for cause as an alternative to providing him with a severance package; (ii) Mr. Espinoza failed to show, by a preponderance of the evidence, that the Covington Report was central to the Board’s decision to enter into a separation agreement with Mr. Hurd rather than terminate his employment for cause; and (iii) HP had previously disclosed the essential aspects of the information contained in the Covington Report.

Because Mr. Espinoza did not show the Covington Report was essential to accomplishing his inspection purpose, the Supreme Court found that the Court of Chancery acted within its discretion in denying relief under Section 220. Therefore, the Supreme Court did not reach the separate question of whether the Covington Report was protected under attorney-client privilege or the work product immunity doctrine.

The full opinion is available here