In a post-trial decision, the Court of Chancery ordered respondent Yahoo! Inc. to produce additional documents in response to plaintiff Amalgamated Bank’s demand to inspect Yahoo’s books and records pursuant to 8 Del. C. § 220. Amalgamated Bank v. Yahoo! Inc., 2016 WL 402540 (Del. Ch. Feb. 2, 2016). In doing so, the Court interpreted Section 220 to provide for the production of electronically stored information in addition to physical documents.
The facts centered on Yahoo’s hiring of Henrique de Castro as its chief operating officer in October 2012 and de Castro’s subsequent termination just 14 months later. The Court of Chancery examined the details surrounding: (i) the involvement of Yahoo’s board of directors and Compensation Committee in the hiring process, (ii) the value of de Castro’s compensation package, (iii) the termination of de Castro, (iv) the payout de Castro received upon termination, and (v) the alleged unilateral involvement of Yahoo’s CEO, Marissa Mayer, in the hiring and firing of de Castro and the construction of his compensation package.
Amalgamated filed its first demand for inspection of Yahoo’s books and records on February 24, 2014, for the purpose of investigating “potential mismanagement, including mismanagement in connection with the payment of compensation to a corporation’s officers and directors.” Throughout 2014, Amalgamated and Yahoo engaged in negotiations surrounding the demand, and Yahoo eventually produced 677 pages of documents. When Yahoo denied Amalgamated’s demand for additional categories of documents, Amalgamated filed suit on March 10, 2015.
The Vice Chancellor’s opinion offers clarification on what is sufficient to meet the statutory “form and manner” requirements necessary for bringing a books and records demand under 8 Del. C. § 220. Yahoo argued that Amalgamated failed to prove that it owned Yahoo stock at the time the demand was filed because the proof submitted by Amalgamated was dated three days before the date demand was made—as opposed to being dated the same day as the demand—but the Court rejected that argument. The Vice Chancellor ruled that Section 220 only requires “documentation sufficient in time to the date of demand as to be consistent with and corroborate the averment of stock ownership made in the demand itself.” Additionally, the Court found that Amalgamated was not required to provide Yahoo with an ongoing stream of ownership records to confirm continuous ownership of stock.
The Court also analyzed the sufficiency of Amalgamated’s stated purpose of demanding inspection of Yahoo’s books and records to investigate potential corporate wrongdoing in connection with de Castro’s hiring and firing. Distinguishing Se. Pa. Transp. Auth. v. Abbvie, Inc., 2015 WL 1753033 (Del. Ch. Apr. 15, 2015), aff’d, 2016 WL 235217 (Del. Jan. 20, 2016), the Court held that Amalgamated had not limited its stated purposes to investigating potential causes of action that would be subject to exculpation, but rather had met the “credible basis” standard with respect to its potential claims for breach of the duty of good faith and waste.
The Court then turned to the scope of inspection. Amalgamated sought production of emails and other files of Yahoo’s CEO, Marissa Mayer. The Court found that “[t]he evidence establishes that the Mayer Documents are necessary for a meaningful investigation of de Castro’s hiring,” due to the direct and personal involvement Mayer had with the negotiations and hiring of de Castro. The Court reached a similar conclusion with regard to Mayer’s documents relating to de Castro’s termination. The Court ruled that the “scope of the production of the Mayer Documents will include email and other electronic documents, which count as corporate books and records.” The Vice Chancellor rejected Yahoo’s argument that such documents are not subject to 8 Del. C. § 220 because the language of the statute does not explicitly mention electronic information. The Court reasoned that “[a]s with other categories of documents subject to production under Section 220, what matters is whether the record is essential and sufficient to satisfy the stockholder’s proper purpose, not its source.” The Court further clarified that the production of Mayer’s emails should include emails from any personal account she may have used to conduct Yahoo business.
The Vice Chancellor also ordered Yahoo to produce emails and other electronically stored documents in the possession of the members of Yahoo’s Compensation and Leadership Development Committee, to the extent those documents related to de Castro’s hiring or termination. The Court also ordered additional production of documents relating to Yahoo’s director recruitment process.
The Court rejected Amalgamated’s request for production of documents reflecting consultations with counsel. Recognizing that those documents could be subject to production, notwithstanding the attorney-client privilege and work-product doctrine, under Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), the Court determined that it would require Yahoo to log communications with counsel relating to the subjects of the inspection, to the extent those communications were identified in searching for documents produced pre-litigation or in response to the Court’s order. The Court left open the possibility that Amalgamated might later show that these privileged documents might be essential to the proper purpose of inspection.
Finally, on an issue of first impression, the Vice Chancellor found that any further document production by Yahoo “is conditioned on Amalgamated agreeing that the entirety of Yahoo’s production in response to the Demand is incorporated by reference in any derivative action complaint it files relating to the subject matter of the demand.” The Court explained the basis for this condition as a means to protect Yahoo and the Court from the filing of a complaint based on “cherry-picked documents,” and to prevent Amalgamated from forging a complaint based on a few documents taken out of context.