Scope of Section 220 Discovery After 'Wal-Mart'

The Delaware Supreme Court’s decision last year in Wal-Mart Stores Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW¹ drew headlines for adopting the so-called Garner doctrine, an exception to the attorney-client privilege that permits shareholders asserting fiduciary duty claims to obtain privileged documents upon a showing of good cause.² However, Wal-Mart also is noteworthy for another, perhaps more subtle, reason. Pursuant to §220 of the Delaware General Corporations Law, the Supreme Court affirmed the Court of Chancery’s ruling requiring Wal-Mart to produce a vast array of documents that spanned seven years regarding the Wal-Mart board of directors’ investigation into an alleged bribery scheme at its Mexican subsidiary.³ Most notably, Wal-Mart was ordered to produce the emails of officers and lower-level employees regardless of whether the emails were provided to Wal-Mart’s board of directors.⁴ The vast scope of this discovery raised a legitimate question whether Wal-Mart signaled an expansion of §220 to permit the sort of burdensome and expensive electronic discovery typically associated with plenary shareholder litigation. Nearly a year after Wal-Mart, several decisions make it possible to begin to answer this question. The early signs are that Wal-Mart may not have signaled a sea change in the scope of §220 discovery.

Section 220

Originally enacted in 1967, §220 permits any stockholder, upon written demand, to inspect “[t]he corporation’s stock ledger, a list of its stockholders, and its other books and records.”⁵ The principal limitation imposed by §220 is that a shareholder must state a “proper purpose” for inspection.⁶ While “[t]here is no shortage of proper purposes under Delaware law … perhaps the most common ‘proper purpose’ is the desire to investigate potential corporate mismanagement, wrongdoing, or waste.”⁷ When seeking to investigate mismanagement, wrongdoing or waste, shareholders must surmount the additional hurdle of showing that there is “some credible basis from which the court can infer that waste or mismanagement may have occurred.”⁸ While courts have acknowledged that the credible basis standard is a “low hurdle”⁹ for stockholders to clear, this standard is not illusory. Indeed, courts have recognized that “[t]o permit stockholders to demand corporate books and records based on the ‘mere suspicion’ of wrongdoing would ‘invite mischief’ and expose companies to ‘indiscriminate fishing expeditions.’”¹⁰