Court of Chancery Denies Stockholder Books and Records Request

chancerysealIn a Memorandum Opinion issued August 31, 2016, Judge LeGrow, sitting as a Vice Chancellor by designation pursuant to Del. Const. art. IV, § 13(2), denied a shareholder demand for the inspection of books and records related to $69 million in overseas revenue that Pfizer did not report as part of its Repatriation Tax.

Pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”), a stockholder may inspect a corporation’s books and records if the demand meets form and manner requirements and inspection is made for a “proper purpose.”  Presently, the issue turned on whether Plaintiff identified a proper purpose for the demand. A proper purpose is “reasonably related to such person’s interest as a stockholder.”

Plaintiff’s two stated purposes are investigating mismanagement and valuing shares, undoubtedly proper purposes for inspection under DGCL.  Plaintiff’s intent behind the demand was to investigate whether Pfizer’s Board (the “BOD”) failed to assure compliance with generally accepted accounting principles (“GAAP”) by failing to report Pfizer’s deferred Repatriation Tax liability, a task it said was “not practicable.”  The not practicable standard excuses a corporation from reporting its deferred Repatriation Tax liability, notwithstanding its failure to indefinitely reinvest the money overseas.

The BOD’s Alleged Mismanagement

Under Plaintiff’s claim, generally referred to as a Caremark claim, Plaintiff must establish “a sustained and systematic failure of the board to exercise oversight…” such as a failure to implement a reporting system or the failure to respond to red flags. A credible basis to infer that management was engaged in wrongdoing it not enough – some evidence that the BOD failed to implement a reporting system or ignored red flags is necessary.

Here, Plaintiff’s claim failed.  The Court found that Plaintiff did not address the reporting system, any red flags, or that the BOD was aware or should have been aware of any problems.  Instead, Plaintiff erroneously focused on whether or not the accounting was practicable.  Additionally Plaintiff did not address the BOD’s reliance on the system or KPMG, Pfizer’s outside accounting firm, whom stated its belief that Pfizer’s financial statements were consistent with GAAP.  Therefore, Plaintiff did not articulate any credible basis to support a finding of the BOD’s sustained and systematic failure to exercise oversight.

Valuation Concerns

In order to make a books and records demand for the purposes of valuing shares, the proponent of the demand must show a present need for valuation and why documents available to the public are insufficient to satisfy the demand’s stated purpose.

The Court noted that Plaintiff failed to show how deferred Repatriation Tax liability would affect the price of Pfizer’s shares, the only non-public information Plaintiff sought.  Thus the information was not necessary to value Pfizer’s shares.

Judge LeGrow found that “Section 220 strikes the appropriate balance between the right of a stockholder to obtain information and the rights of directors to manage the business of the corporation without undue interference from stockholders” and denied Plaintiff’s demand.

Read the full opinion here.

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