Southeastern Pennsylvania Transportation Authority, v. AbbVie, Inc., CA No. 10374-VCG and Rizzolo v. AbbVie Inc., CA No. 10408-VCG (Del. Ch. Apr. 15, 2015) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery denied two stockholders’ request for the inspection of books and records of a company pursuant to 8 Del. C. § 220, finding that the stockholders failed to show a credible basis for their stated proper purpose of investigating non-exculpated wrongdoing in aid of potential litigation.
The board of directors (the “Board”) of AbbVie, Inc. (the “Company”) decided to pursue a merger with Shire plc (“Shire”), in part to take advantage of favorable tax treatment that would result under the then-current interpretation of U.S. tax law. The Treasury Department’s interpretation of applicable tax law changed in a way that eliminated the tax advantages of the merger before it was consummated. The Board concluded that the Company would be better off withdrawing from the merger and, as a result, withdrew its favorable recommendation of, and entered into an agreement with Shire to terminate, the transaction. As a result of those actions, the Company triggered an obligation to pay a reverse termination fee to Shire in the amount of $1.635 billion, which was 3% of the total value of the cash and shares that the Company was obligated to deliver to Shire’s stockholders in connection with the transaction.
Both Southeastern Pennsylvania Transportation Authority (“SEPTA”) and James Rizzolo (“Rizzolo” and together with SEPTA, the “Stockholders”) sought books and records for the purpose of investigating potential breaches of fiduciary duties, mismanagement, wrongdoing, and waste by the Company’s directors in connection with the Company’s obligation to pay the termination fee that resulted from the failed transaction. SEPTA separately sought books and records for the stated purpose of investigating demand futility, while Rizzolo separately sought books and records to investigate aiding and abetting by the Company’s financial advisors.
Although finding that the investigation of non-exculpated wrongdoing in aid of potential litigation was a proper purpose, the Court found that the Stockholders did not demonstrate a “credible basis” from which the Court could infer that mismanagement, waste or wrongdoing occurred. In so holding, the Court noted that the record did not reflect that the Board either acted in bad faith in connection with the approval or subsequent termination of the transaction or committed corporate waste by paying the termination fee.
The Court next turned to Rizzolo’s stated purpose that a plaintiff’s 220 demand to investigate the possibility of corporate mismanagement related to the circumstances of a defunct merger is a proper purpose under Delaware law. The Court found that a failed merger standing alone does not constitute a credible basis from which corporate wrongdoing can be inferred. Rather, the Court found that specific facts, such as those supporting improper entrenchment on the part of the directors, must be asserted to demonstrate a credible basis from which a court can infer wrongdoing sufficient to state a proper purpose. Finally, the Court found that Rizzolo did not state a proper purpose in connection with the demand to inspect certain books and records to investigate the Company’s financial advisors for aiding and abetting breaches of fiduciary duties. In so holding, the Court noted that Rizzolo failed to demonstrate that investigating the financial advisors for aiding and abetting was reasonably related to his interests as a stockholder of the Company. Assuming that Rizzolo had demonstrated a credible basis to find that the directors had breached their duty of care, the Court noted that any aiding and abetting claim would have to exist as an independent action because the Company’s directors were exculpated from personal liability pursuant to Section 102(b)(7). Although the financial advisors could be found liable for aiding and abetting a breach of the duty of care, the Court noted that any such potential litigation is an asset of the Company and that Rizzolo had failed to demonstrate a credible basis from which the Court may infer that the Company’s directors could not make a decision on behalf of the Company to determine whether to pursue an action against the financial advisors, given that the directors themselves would be exculpated from personal liability for the underlying breach.