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Amalgamated Bank v. Yahoo! Inc., C.A. No. 10774-VCL (Feb. 2, 2016) (Laster, V.C.)

February 2, 2016

In this post-trial opinion, the Court of Chancery permitted a stockholder inspection of certain books and records of Yahoo! Inc., including messages from a director's personal email account, relating to the hiring and firing of a high-ranking executive.  The inspection was conditioned, however, on the requirement that the entire document production be incorporated by reference into any future derivative complaint.

The plaintiff served a demand pursuant to Section 220 of the Delaware General Corporation Law on Yahoo! Inc. (the "Company"), requesting inspection of books and records concerning the Company's decision to hire a former executive of Google Inc. as the Company's Chief Operating Officer ("COO").  The demand also sought documents regarding the Company's later decision to terminate the COO without cause, which led to a severance payment of approximately $60 million. The plaintiff sought the books and records for the stated purposes of investigating possible wrongdoing relating to the employment decisions and assessing the independence of the Company’s board of directors (the “Board”). The Company rejected the demand, asserting that the plaintiff had not satisfied the form and manner requirements of Section 220, provided credible evidence of wrongdoing, or sufficiently tailored the scope of inspection.

After trial, the Court rejected the Company's argument that the plaintiff failed to satisfy Section 220’s form and manner requirements.  First, the Court disagreed with the Company's argument that the plaintiff had not demonstrated standing to pursue an inspection because the plaintiff's evidence of beneficial ownership preceded the date of the demand by three days.  The Court ruled that the plaintiff’s documentation was sufficient because it would be impractical to require evidence of same-day ownership. Second, the Court rejected any argument that a stockholder has an obligation to update documentation in order to demonstrate continuing ownership.  Third, the Court rejected the Company’s contention that the plaintiff, which was the trustee of two investment funds that held Company stock, had not provided evidence sufficient to show that it had the authority to act on behalf of the funds.  The Court ruled that the plaintiff's statements under oath adequately established authority to act on behalf of the funds.

The Court also rejected the Company's argument that the plaintiff had failed to establish credible evidence of wrongdoing and therefore lacked a proper purpose. The Court found credible evidence to suspect possible wrongdoing by the Chief Executive Officer (“CEO”) during the COO hiring process, which included allegations that the CEO failed to provide material information to the Compensation Committee, made inaccurate disclosures when seeking the Compensation Committee’s approval, and made changes to the final offer letter without proper authority.  The Court also found credible evidence to suspect possible wrongdoing by certain members of the Board, including allegations that directors failed to ask questions during the hiring process.  The Court similarly found credible evidence of wrongdoing relating to the termination of the COO without cause.  The Court noted that it appeared the Company's Board quickly approved the termination without asking questions and did not receive a report about the reasons for the termination until several weeks later. 

In determining whether the plaintiff stated a proper purpose, the Court distinguished the case from the decision in Southeastern Pennsylvania Transportation Authority v. AbbVie, Inc., in which the stockholder was found to lack a proper purpose because the credible evidence of wrongdoing was limited to exculpated duty of care claims. First, the Court found that, unlike in AbbVie, the plaintiff had not limited its potential uses of books and records to derivative litigation.  Second, the Court found that the evidence of possible wrongdoing was stronger than the "flimsy" evidence presented in AbbVie. Third, the Court found that the evidence related to potential non-exculpated claims of bad-faith conduct, including claims for waste.  Lastly, the Court held that, unlike in AbbVie, there was a credible basis to suspect wrongdoing by the CEO, who would not have Section 102(b)(7) exculpation. 

After confirming the existence of a proper purpose, the Court turned to the appropriate scope of production. The Court ruled that, in addition to the Board-level materials that the Company previously produced, the Company would be required to produce the CEO’s documents, documents of directors serving on the Compensation Committee, consultant reports, and documents relating to Board appointments and nominations.  The Court clarified that the CEO's documents would include notes as well as “email and other electronic documents, which count as corporate books and records.”  The Court further clarified that, to the extent the CEO used personal email accounts to conduct official business, the inspection would encompass those accounts as well. 

Although the plaintiff was allowed to inspect certain books and records, the Court agreed with the Company that the inspection should be conditioned on the requirement that any subsequent derivative complaint incorporate by reference the entire production of documents. In granting the Company's request, the Court cited the broad discretion provided by Section 220 that allows the Court of Chancery to limit or condition the use of books and records.  The Court explained that the incorporation condition was an extension of the well-established incorporation-by-reference doctrine, which already allows the Court to look at an entire document to ensure that its contents have not been misrepresented. The Court clarified that the incorporation condition would not change the pleading standard at the motion to dismiss stage. 

The full opinion is available here