Emails and Texts Could Constitute Corporate Books and Records

Emails and Texts Could Constitute Corporate Books and Records

Blog Focus on Audit Committees, Accounting and the Law

Directors, corporate secretaries and company counsel must be mindful of good corporate housekeeping practices involving the maintenance of corporate books and records. Earlier this year, a handful of Delaware court opinions clarified the scope of books and records subject to inspection in the context of demands brought by directors or stockholders under Delaware General Corporation Law § 220. The outcome of these cases demonstrates the breadth of documents that may be considered corporate books and records and underscores the importance of maintaining clear, consistent documentation.

Section 220 enables stockholders and directors of public or private Delaware corporations to demand access to a corporation’s books and records where a proper purpose can be demonstrated. Demands brought by stockholders face a higher pleading burden because stockholders must prove that their demand is reasonably related to their interests as a stockholder and that the requested documents are “necessary and essential” to the stockholders’ stated purpose. A desire to investigate, alone, is not sufficient, and stockholders claiming corporate wrongdoing must come forward with a “credible basis” from which a court can infer mismanagement. They must also demonstrate proof of stock ownership. By contrast, directors with a proper purpose are “entitled to virtually unfettered access to the books and records of the corporation.”1 In all cases, stockholders and directors instituting court action to demand access to books and records must specifically state the books and records sought that are related to the stockholder’s or director’s proper purpose. Further, while the capacity in which a person brings a Section 220 demand matters for purposes of pleading and the scope of documents to be produced, the types of documents that may constitute “books and records” subject to a Section 220 demand are the same. Books and records proceedings receive expedited treatment by the Delaware Court of Chancery.

Answering the question of what types of documents constitute books and records for Section 220 purposes, recent Delaware case law affirms that emails, text messages and other less formal communications may constitute books and records of a corporation. These holdings illustrate how Delaware courts interpret “books and records” flexibly under Section 220 to keep pace with evolving record-keeping and communication practices. In the context of a books and records demand brought by an institutional stockholder, the Delaware Supreme Court ordered production of company emails where the company conceded that “‘there are no board-level documents,’ though ‘there may very well be emails’” relating to the stockholder’s Section 220 demand. The court reasoned that

if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions, and official letters, it will likely be able to satisfy a § 220 petitioner’s needs solely by producing those books and records. But if a company instead decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which § 220 entitles them.2

On balance, the court went on to say that “[i]f a corporation has traditional, non-electronic documents sufficient to satisfy the petitioner’s needs, the corporation should not have to produce electronic documents.”3

Even where corporate communications are more personal in nature and can be more difficult to gather and produce, such as emails and text messages on personal accounts or devices, Delaware courts may order that such communications be produced in response to a Section 220 demand if the communications respond to a request that is sufficiently precise and relates to a proper purpose. For example, in the context of a Section 220 demand brought by a director who was also the company’s founder and former CEO, the Delaware Court of Chancery ordered the production of emails and text messages from personal accounts and devices of other directors, officers and the company’s general counsel who used such personal accounts and devices to conduct business regarding the company’s relationship with the director, which was a proper purpose of the Section 220 demand.The court, however, limited the communications to be produced from personal accounts and devices to those involving the director’s relationship with the company, including his behavior and performance in various roles during specified periods.5 The court held that when dealing with information contained on personal accounts and devices, the court “should apply its discretion on a case-by-case basis to balance the need for the information sought against the burdens of production and the availability of the information from other sources . . . .”6

Bearing this recent case law in mind, companies should follow prudent record-keeping practices to help mitigate intrusive books and records demands, including:

  • Consistently document board actions in formal meeting minutes and written consents;
  • Ensure formal documentation of board action is sufficiently robust to eliminate gaps that could be used as a basis for directors or stockholders to seek less formal communications (e.g., ensure formal documentation adequately captures corporate actions taken via informal communication methods);
  • Maintain an organized repository of documented board actions and materials sent to the board for review and discussion;
  • Discard or otherwise exclude informal communications and notes from formal documentation of corporate action where such informal documentation is not intended to form a part of the corporation’s books and records (in accordance with any applicable document preservation requirements in place); and
  • Educate directors and officers about the risks of using informal communications and personal accounts or devices such as email or text messages to take corporate action and keep those communications to a minimum.

1 McGowan v. Empress Entm’t, Inc., 791 A.2d 1, 5 (Del. Ch. 2000).

KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 742 (Del. 2019). 

3 Id. at 756. 

4 Schnatter v. Papa John’s Int’l, Inc., No. CV 2018-0542-AGB, 2019 WL 194634, at *16 (Del. Ch. Jan. 15, 2019).

5 The Delaware Court of Chancery in Schnatter concluded that the request related to a proper purpose for a director and was sufficiently tailored and specific to satisfy the three elements of a proper books and records request that the Court had established in Chammas v. Navlink, Inc., No. CV 11265-VCN, 2016 WL 767714, at *8 (Del. Ch. Feb. 1, 2016):

  1. State a proper purpose,
  2. Encompass communications constituting books and records of the corporation, i.e., those that affect the corporation’s rights, duties, and obligations, and
  3. Be sufficiently tailored to direct the Court to the specific books and records relevant to the director’s proper purpose.

Schnatter, 2019 WL 194634, at *16.

 

More from this series