LASTER, Vice Chancellor.
Plaintiff Amalgamated Bank ("Amalgamated") demanded to inspect the books and records of respondent Yahoo! Inc. pursuant to Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220. Amalgamated's stated purpose was to investigate the hiring and subsequent firing of Yahoo's Chief Operating Officer, Henrique de Castro. This post-trial decision orders a tailored production of some of the documents identified in the demand. The production is subject to a condition: The resulting documents will be deemed incorporated by reference in any derivative complaint that Amalgamated may file relating to the subject matter of the demand.
A trial on a paper record took place on September 29, 2015. The following facts were proven by a preponderance of the evidence.
2012 was a big year for Yahoo. Ten of the eleven members of the board of directors (the "Board") joined that year. The Board also reconstituted its Compensation and Leadership Development Committee (the "Committee"), comprising directors Maynard Webb, Sue James, Peter Ligouri, and Harry Wilson. Webb served as chair.
Change was afoot at the executive level as well. In July 2012, the Board hired Marissa Mayer as Yahoo's new CEO. Mayer previously worked at Google, Inc. as Vice President of Local, Maps, and Location Services.
Soon after taking over as CEO, Mayer received an email from Henrique de Castro. He was serving at Google as President of Media, Mobile, and Platforms. de Castro invited Mayer to dinner.
During dinner, de Castro expressed interest in serving as Mayer's number two executive at Yahoo. Mayer liked the idea, and she and de Castro began discussing his compensation package.
On September 12, 2012, the Committee held a special meeting. According to the minutes, Mayer raised the fact that she "was in discussions with a person to take the number two role." JX 5 at 1. The purpose of the meeting was to give Mayer "guidance on potential compensation parameters" to determine whether "it was feasible to have further discussions with the candidate." Id. She did not identify de Castro by name or state his current job or title, citing confidentiality concerns. She did tell the Committee that the candidate "would require a significant compensation package" given his talents and the money he would forfeit by leaving his existing employer. Id. Mayer described the candidate's expected compensation package as "$15 million per year (with $40 million as part of that up front in a four-year grant) and a $16 million or more make-whole payment." Id.
George B. Paulin of Frederic W. Cook & Co. was the Committee's compensation
On September 23, 2012, the Committee met again. Mayer provided the Committee members with a term sheet summarizing the candidate's compensation package. The Committee still did not know the name of the candidate. Mayer emphasized the candidate's expertise in the display-ad market, which Mayer identified as an important area for Yahoo. The Committee authorized Mayer to continue negotiations. The Committee did not receive any materials that illustrated how the different compensation components in the term sheet interacted or how much compensation they would yield under different scenarios.
On September 24, 2012, the Committee met for a total of thirty minutes. During this meeting, the members finally learned that the candidate was de Castro. Mayer presented the Committee members with a letter offering de Castro the positions of Chief Operating Officer and Executive Vice President. JX 9 (the "Original Offer Letter"). The terms of the Original Offer Letter tracked the term sheet that the Committee had reviewed the previous day. The Committee again did not receive any materials that illustrated the complex interrelationships among the various compensation components or the amount of compensation they generate in particular scenarios.
The Committee approved the Original Offer Letter and gave Mayer authority to continue negotiating with de Castro. The Committee authorized Webb to approve any non-material changes to the Original Offer Letter. The Committee retained control over any "material changes," specifying that they would be "subject to approval by the full Committee." Id. at 3.
The Original Offer Letter contemplated that de Castro would receive the following forms of cash compensation:
• Base salary of $600,000.
• Annual bonus with a target value equal to 90% of base salary.
• Signing bonus of $1 million.
Id. at 1-2. In addition, the Original Offer Letter contemplated that de Castro would receive three different types of equity compensation (collectively, the "Equity Awards"). Each type of award had a target value and its own vesting schedule:
• The Incentive Restricted Stock Units (the "Incentive RSUs") had a target value of $20 million. The first 25% of the Incentive RSUs would vest on November 23, 2013. The remaining 75% would vest monthly in 36 equal installments over a three-year period, with 1/36 vesting one month after November 23, 2013, and each month thereafter.
• The Performance Stock Options (the "Options") had a target value of $20 million They were divided into four equal tranches with vesting dates of July 26, 2013, January 26, 2014, January 26, 2015, and January 26, 2016. This meant the first two tranches would vest in a little over a year, one approximately six months after de Castro would start at Yahoo and another six months after that. The next tranche would not vest for another year, after two years of service. The final tranche would vest a year after that, after three years of service.
Id. at 3-6. The total target value of the Equity Awards was $56 million.
The Original Offer Letter contemplated two possible types of terminations: with cause and without cause. It detailed what de Castro would receive in each scenario.
If the termination was with cause, then de Castro would forfeit all of his unvested Equity Awards. The Original Offer Letter defined "Cause" as follows:
Id. at 19 (formatting into separate paragraphs added).
If the termination was without cause, then de Castro would keep all of the Equity Awards that had vested through his termination date, plus a portion of his unvested Equity Awards that would vest on an accelerated basis. The provisions of the Original Offer Letter that governed the accelerated vesting were complex and differed for each type of Equity Award, so they take some time to describe.
For purposes of the Incentive RSUs and the Options, the total potential number of awards that could vest on an accelerated basis was limited to the number "which would have vested in the six months following termination of employment" if the employee remained employed and met all required criteria (the "Six-Month Tail"). JX 9 at 8. Because the Incentive RSUs and the Options had different vesting schedules, the Six-Month Tail operated differently for those types of awards.
For the Incentive RSUs, an initial slug of twenty-five percent of the awards vested on November 23, 2013, one year and eleven days after the start of de Castro's employment. The Six-Month Tail meant that the accelerated vesting of the Incentive RSUs could result in either another 25% vesting or nothing, depending on de Castro's termination date. If he was terminated more than six months before November 23, 2013, then the Six-Month Tail would not pick up his initial 25% tranche. If he was terminated less than six months before November 23, 2013, then it would. The Six-Month Tail only had this binary effect for the initial 25% tranche. After the first slug, additional Incentive RSUs vested monthly in equal installments. If de Castro was terminated without cause after the first year, then the Six-Month Tail would sweep in another 12.5% of the total Incentive RSUs.
For the Options, the vesting schedule contemplated four equal tranches. The first tranche vested a little more than six months after de Castro started working at Yahoo, and the next would vest approximately six months after that. Then the remaining two tranches would vest annually. Depending on when the termination took place, the Six-Month Tail (i) would sweep in another tranche, if another vesting date would have occurred in the next six months, or (ii) produce nothing, if another vesting date was more than six months away. This meant the Six-Month Tail had a binary effect for the first, third, and fourth tranches.
The Six-Month Tail established the number of Incentive RSUs and Options that were eligible for accelerated vesting (the "Eligible Pool"). To determine the number of awards that actually vested, the Original Offer Letter called for multiplying the Incentive RSUs and Options in the
The Make-Whole RSUs worked differently. First, they were not subject to the Six-Month Tail. All of the Make-Whole RSUs were part of the Eligible Pool. Second, the cutback percentage for the Make-Whole RSUs increased at a rate more favorable to de Castro than for the Incentive RSUs and Options: (i) 50% for a termination before November 23, 2013, (ii) 75% for a termination after November 23, 2013, and before November 23, 2014, (iii) 100% for a termination after that.
The compensation implications of the varying vesting schedules, the Six-Month Tail, and the Specified Percentage were not self-evident. When Mayer furnished the Original Offer Letter to the Committee, no one provided the directors with any materials that illustrated their consequences for different departure scenarios. Table 1 attempts to illustrate the implications by identifying the specified percentage of each type of Equity Award that the Original Offer Letter stated would accelerate and vest. It then calculates an effective percentage of the total Equity Awards that de Castro would receive if terminated without cause on the specified date. The table illustrates the direction and order of magnitude of the accelerated vesting and the differences among the Equity Awards.
For an example of how Table 1 works, consider the Make-Whole RSUs. If Yahoo terminated de Castro on November 24, 2012, twenty-nine days before his first monthly grant, then none of his Make-Whole RSUs would have vested due to service, leaving 100% outstanding. The Original Offer Letter provided that 50% of the remaining amount would accelerate, so de Castro would receive the equivalent of 50% of the total grant. If de Castro was terminated on November 24, 2013, then he would have received 25% his Make-Whole RSUs through service, leaving 75% out-standing. The Original Offer Letter provided that 75% of the outstanding Make-Whole RSUs would accelerate, giving him an additional 56.25%. In total, de Castro would receive 81.25% of the grant. If de Castro was terminated on November 24, 2014, then he would have received 50% his Make-Whole RSUs through service, leaving 50% outstanding. The Original Offer Letter provided that 100% of those out-standing Make-Whole RSUs would accelerate, giving him an additional 50% of the all-in award. In total, de Castro would receive 100% of the grant. Footnotes to Table 1 explain the calculations for other cells.
Table 1 Make-Whole RSUs Incentive RSUs and Options Termination % Of Effective % Specified % Of Effective % Of Effective % Of Date Remaining Of Total Remaining Total Incentive Total Options Awards To Received Awards To RSUs Received Received Accelerate Accelerate November 24, 2012 50% 50% 25% 0%3 0%4 November 24, 2013 75% 81.25% 50% 31.25%5 37.5%6 November 24, 2014 100% 100% 75% 59.375%7 68.75%8 November 24, 2015 100% 100% 100% 87.5%9 100%10 [Editor's Note: The preceding image contains the references for footnotes3 ,4 ,5 ,6 ,7 ,8 ,9 ,10 ]
The Committee did not have anything like Table 1, much less a helpful graph that would show the individual and aggregate effects of the Equity Awards over time. The Committee members only received a copy of the Original Offer Letter, and they spent a total of thirty minutes considering it.
After the Committee meeting, the full Board met "to review and discuss the appointment of Henrique de Castro as the Company's Chief Operating Officer." JX 10 at 1. Like the Committee, the Board received a copy of the Original Offer Letter. The Board did not receive any other materials. According to the minutes,
Id. at 1-2.
Mayer then turned to Michael S. Sirkin of Proskauer Rose LLP, counsel to the Committee, and Webb, the Chair of the Committee.
Id. at 2. The description the Board received did not capture the implications of accelerated vesting for various termination scenarios.
At this point, Yahoo's general counsel "reviewed the resolutions previously distributed to the Board in advance of the meeting." Id. The resolutions approved the concept of hiring de Castro "on substantially the terms presented to the Board." Id. at 3. They also authorized Yahoo's officers "to execute and deliver the [Original] Offer Letter substantially in the form attached hereto ... with such administrative or non-material changes to the [Original] Offer Letter as such officers, in conjunction with Maynard Webb, chair of the Compensation Committee, may deem necessary or appropriate." Id. The Board approved the resolutions.
de Castro was not happy with the Original Offer Letter. He wanted accelerated vesting for a larger number of Incentive RSUs and Options if he was terminated without cause. The Original Offer Letter used the Six-Month Tail to determine the Eligible Pool. de Castro wanted the tail period extended to twelve months (the "Twelve-Month Tail"), and he did not want the number of additional awards that vested during the tail period to be cut back by the Specified Percentage.
On October 13, 2012, the Committee met to receive a report on the status of the negotiations with de Castro. Counsel noted that the Committee "had previously approved proposed terms of employment... and had delegated to Mr. Webb authority to approve changes [to] such terms, with the understanding that any material changes would be presented to the Committee for approval." JX 12 at 1-2. At this point, Mayer described what the Committee ostensibly had approved previously, but she incorrectly described "[t]he terms previously approved by the Committee" as having "provided for 12-months acceleration of a `Specified Percentage.'" Id. at 2. In other words, she represented to the Committee that the Original Offer Letter already contained a Twelve-Month Tail.
Mayer framed the issue for the Committee to decide as whether the concept of the Specified Percentage should be removed. Mayer represented to the Committee that "the Candidate had understood that he would receive 12 months acceleration of all equity, regardless of when the termination event occurred." Id. at 2.
The Committee discussed the issue as Mayer had framed it, viz., eliminating the Specified Percentage based on the incorrect assumption that the Committee already
Id. at 2-3.
The Committee did not receive any materials that attempted to quantify the effect of the changes or illustrate how they altered the compensation payouts under different scenarios. There is no evidence that anyone addressed the magnitude of the change, whether based on the incorrect assumption that the baseline was a Twelve-Month Tail or the actuality that the baseline was the Six-Month Tail.
Mayer expressed her view that "while she believed that the payout was already significant and was concerned about the increase, her concerns was [sic] less in the termination without cause scenario since that will be under her and the Board's control." Id. at 3. There is no evidence that anyone examined the definition of cause in the context of Mayer's comment.
After further discussion, Mayer asked that the Committee "approve removing the concept of `Specified Percentage' in the event of termination without cause." Id. "The Committee approved the requested changes." Id. At no point during the meeting did anyone discuss changing the vesting schedule for the Make-Whole RSUs.
After the Committee meeting, Mayer prepared a final version of the offer letter, which she provided to de Castro. JX 13 (the "Final Offer Letter"). She made at least three changes that materially increased de Castro's compensation package.
The first change increased the tail period from six months to twelve months, which doubled the effective percentages of the Incentive RSUs and Options that de Castro would receive if terminated without cause. The Twelve-Month Tail was not something the Committee ever approved. Mayer incorrectly represented to the Committee that the Original Offer Letter already had a Twelve-Month Tail, so the Committee never evaluated it.
Second, Mayer eliminated the Specified Percentage for the Incentive RSUs and Options. That was consistent with what the Committee had approved, albeit based on a misunderstanding about the existing tail period.
Third, Mayer eliminated the time-weighted schedule for accelerated vesting for the Make-Whole RSUs. She provided instead that 100% of the grant would accelerate if Yahoo terminated de Castro without cause. This last change was never discussed with the Committee, much less approved.
Table 2 compares the effective percentages of Equity Awards that de Castro would receive using the accelerated vesting as structured in the Original Offer Letter (as shown in Table 1) with the effective percentages using the accelerated vesting as structured in the Final Offer
Table 2 Make-Whole RSUs Incentive RSUs Options Termination Original Final Original Final 11 Original Final Date November 24,2012 50% 100% 0% 25% 0% 25%12 November 24, 2013 81.25% 100% 31.25% 50% 37.5% 50%13 November 24, 2014 100% 100% 59.375% 75% 68.75% 75%14 November 24, 2015 100% 100% 87.5% 100% 100% 100%15 [Editor's Note: The preceding image contains the references for footnotes11 ,12 ,13 14 ,15
As the table shows, Mayer's changes substantially increased the percentage of the Equity Awards that de Castro would receive for an early termination.
Finally, Mayer reallocated the amount of target value conveyed through the different types of Equity Awards. She increased the target value of the Make-Whole RSUs from $16 million to $20 million. She simultaneously decreased the value of the Incentive RSUs and Options from $20 million each ($40 million total) to $18 million each ($36 million total). These changes were never discussed with the Committee, much less approved.
Mayer's changes did not affect the target value of the aggregate grant, which remained at $56 million, but they did affect de Castro's incentives and the size of his payout if he was terminated without cause. Because of the other changes Mayer had made, de Castro would receive 100% of his Make-Whole RSUs if he was terminated without cause, but only an additional twelve months of Incentive RSUs and Options. Shifting value from the Incentive RSUs and Options to the Make-Whole RSUs benefited de Castro by moving value into a category of Equity Award that would accelerate fully. It also benefited de Castro because the Options had performance-vesting metrics that had to be met, while the Make-Whole RSUs did not. The shifts worked with Mayer's other changes to increase substantially the value of the Equity Awards that de Castro would receive for an early termination.
Table 3 compares the different categories of value conveyed to de Castro under the Original Offer Letter versus the Final Offer Letter. The figures reflect the total value of the vested portion of the Equity Award that de Castro would receive if terminated without cause, including both what de Castro would have received from prior service and the additional amounts from accelerated vesting. The calculations use the target value of the awards and the percentages calculated in Tables 1 and 2. Amounts are in millions.
Table 3 Make-Whole RSUs Incentive RSUs Options Total Termination Original Final Original Final Original Final Original FinalDate ($16) ($20) ($20) ($18) ($20) ($18M) ($56M) ($56M)November 24,2012 $8 $20 $0 $4.5 $0 $4.5 $8 $29November 24, 2013 $13 $20 $6.25 $9 $7.5 $9 $26.75 $38November 24, 2014 $16 $20 $11.875 $13.5 $13.75 $13.5 $41.625 $47November 24, 2015 $16 $20 $17.50 $18 $20 $18 $53.5 $56
Tables 4 compares the Original Offer Letter and the Final Offer Letter by focusing on the amount of target compensation that de Castro would receive due to accelerated vesting. Table 4 reflects the percentage of the Equity Awards that de Castro would receive as severance. The calculation excludes Equity Awards that de Castro already would have received through service as of the date of termination.
Table 4 Make-Whole RSUs Incentive RSUs Options Termination Original Final 16 Original Final 17 Original Final 18 Date November 24,2012 50% 100% 0% 25% 0% 25%November 24, 2013 56.25% 75% 6.25% 25% 12.5% 25%November 24, 2014 50% 50% 9.375% 25% 18.75% 25%November 24, 2015 25% 25% 12.5% 25% 25% 25%[Editor's Note: The preceding image contains the references for footnotes16 ,17 ,18 ]
Table 5 reflects the total dollar amounts de Castro would receive as severance. The calculations are based on the target value of the Equity Awards and the percentages from Table 4.
Table 5 Make-Whole Incentive RSUs Options Total RSUs Termination Original Final Original Final Original Final Original FinalDate ($16) ($20) ($20) ($18) ($20) ($18M) ($56M) ($56M)November 24,2012 $8 $20 $0 $4.5 $0 $4.5 $8 $29November 24, 2013 $9 $15 $1.25 $4.5 $2.5 $4.5 $12.75 $24November 24, 2014 $8 $10 $1.875 $4.5 $3.75 $4.5 $13.625 $19November 24, 2015 $4 $5 $2.5 $4.5 $5 $4.5 $11.5 $14
Mayer's changes thus resulted in payouts that made earlier termination without cause dramatically more favorable to de Castro. For a termination on November 24, 2012, after twelve days of service, her changes increased the value of his payout by $21 million, or 263%. For a termination on November 24, 2013, after one year and twelve days of service, her changes increased the value of his payout by $11.25 million, or 94%.
The categories of Equity Awards that provided de Castro with his increased payout each contained elements that the Committee had never approved, had approved based on incorrect information, or both. The final terms of the Make-Whole RSUs incorporated 100% vesting for a termination without cause and the incremental value that Mayer reallocated. The Committee never approved either change. The final terms of the Incentive RSUs and the Options used the Twelve-Month Tail, which the Committee never considered because Mayer told the directors incorrectly that the Original Offer Letter already included a Twelve-Month Tail. The final terms of the Incentive RSUs and the Options also eliminated the Specified Percentage, which the Committee approved based on the incorrect assumption that the Original Offer Letter already included the Twelve-Month Tail. The Committee never received any calculations showing the value of the changes, much less the aggregate effect of all of the changes.
On October 15, 2012, de Castro executed the Final Offer Letter, and Yahoo issued a press release announcing the hiring. In the press release, Mayer cited de Castro's expertise in "Internet advertising and his proven success in structuring and scaling global organizations." JX 14 at 1.
That same day Yahoo issued a Form 8-K that attached the Final Offer Letter. Public reception was mixed to negative. The Wall Street Journal described the compensation package as "staggering." JX 16 at 1. The Business Insider ran an article titled, "Did Marissa Mayer Just Make a Horrible Mistake? Several Ex-Googlers Think So." JX 17 at 1. It cited sources from Google who expressed generally negative reviews of de Castro's competence and personality. One source stated that "Google should pay Yahoo to take him." JX 17 at 3. Another described him as the "literally the worst hire ever." Id. at 4. The sources who praised de Castro as smart and disciplined nevertheless questioned his ability to get along with others.
On November 12, 2012, de Castro started at Yahoo. His pay package for his first
de Castro's responsibilities included running "sales, operations, media and business development functions." JX 15 at 6. Mayer expected him to boost Yahoo's revenue by expanding the scope of its digital advertising. A key part of his job was building relationships with big advertisers.
de Castro did not perform. In every quarter after he started, Yahoo's advertising revenue declined. de Castro also did not get along well with Yahoo management. Within a year of hiring him, Mayer personally took control of de Castro's advertising team.
In January 2014, fourteen months after de Castro started as COO, Mayer decided to fire him. The Committee approved her decision through action by written consent dated January 12, 2014. The resolutions stated:
JX 25 at 1.
The Committee did not actually meet in person or by phone. There is no evidence of what information the Committee had, other than the vague reference in the resolution to management having "discussed with the Committee the termination without cause." There is no evidence that the Committee evaluated the alternative of a for-cause termination or was provided with a calculation of the severance benefits that de Castro would receive.
In an internal memo to Yahoo employees, Mayer took responsibility for the firing, stating: "I made the difficult decision that our COO, Henrique de Castro, should leave the company." JX 27 at 2. On January 15, 2014, Yahoo filed a Form 8-K announcing simply that de Castro was "leaving the Company" and would receive "severance benefits provided for in his [Final] Offer Letter." JX 29 at 3.
The media provided extensive coverage of the termination. A New York Times article attributed de Castro's termination to poor performance. JX 28. Another described his pay package as "stratospheric" "[e]ven by Silicon Valley standards." JX 31 at 1.
Investors reacted negatively. The CtW Investment Group was an organization that represented union pension funds owning own approximately 2 million shares of Yahoo. CtW "called on Yahoo to take steps to ensure it won't overpay for executive talent." JX 34 at 1. CtW also called on Mayer to resign from her position as a director of Wal-Mart Stores, Inc. and questioned Yahoo's decision to pay de Castro a make-whole bonus.
On February 4, 2014, the Committee met for the first time since de Castro's
The Committee met again on February 27, 2014. Despite having approved de Castro's termination without cause via action by written consent on January 12, this meeting was the first time the Committee discussed the reasons for his termination. Mayer explained that "de Castro had not achieved his revenue or operational objectives, including those with respect to advertisers. Overall he had not performed to the desired level ... [and] she had given him feedback on the deficiencies in his performance and he still failed to correct or improve his performance." JX 36 at 7. The Committee decided not to award de Castro a bonus under the Executive Incentive Plan.
On April 16, 2014, in the proxy statement for its annual meeting, Yahoo finally disclosed to its stockholders that de Castro had been terminated without cause, triggering $59.96 million in severance. The payout comprised the following amounts:
• $1.14 million in cash, representing his base salary for twelve months ($600,000) plus a target annual bonus equal to 90% of his base salary ($540,000).
• $9.62 million in value from the accelerated vesting of 238,474 Incentive RSUs, representing the additional 25% of the remaining Incentive RSUs that would have vested within twelve months after his termination date.
• $16.02 million in value from the accelerated vesting of Options to acquire 746,362 shares of common stock, representing 79% of the additional 25% of the remaining Options that would have vested within twelve months after his termination date.
• $31.18 million from the accelerated vesting of 772,832 Make-Whole RSUs, representing 100% of the original award.
JX 39 at 82-83. If Yahoo had terminated de Castro for cause, he would have forfeited his unvested Equity Awards.
Based on the target value of the Equity Awards, their anticipated value for a termination in early January 2014 was $23.58 million (versus $11.25 million under the Original Offer Letter). Combined with his cash severance of one year base salary plus bonus, the anticipated value of the total severance package was around $24.72 million.
de Castro's actual severance payout was nearly $60 million, with the difference driven by an increase in Yahoo's stock price from $15.68 to $40.34 during the fourteen months that he was employed. The bulk of that increase was attributable to Yahoo's investment in Alibaba Group Holding Limited, an e-commerce company based in China.
At the 2014 annual meeting, Yahoo held its advisory say-on-pay vote. Holders of 71% of Yahoo's outstanding shares voted in favor of Yahoo's executive compensation
Meanwhile, on February 24, 2014, Amalgamated served a demand on Yahoo for books and records. See JX 35 (the "Demand"). Amalgamated contended that it had a legally recognized purpose for exploring these matters, namely the "investigation of potential mismanagement, including mismanagement in connection with the payment of compensation to a corporation's officers and directors." Id. at 2. The Demand recited some of the facts surrounding de Castro's hiring and firing. Id. at 2-3. The Demand asked for five categories of documents and provided ten illustrative subcategories that it identified as falling under the first category. The specific requests appear and are addressed in the Legal Analysis, infra.
On March 3, 2014, Yahoo rejected the Demand. Yahoo took the position that (i) Amalgamated's documentation of its share ownership did not strictly comply with Section 220; (ii) Amalgamated lacked authority to make the demand; (iii) the Demand did not identify a credible basis to infer wrongdoing; and (iv) the scope of the inspection was overly broad. Compl. Ex. B at 1-2. Yahoo agreed to "allow an appropriate inspection of its books and records, consistent with section 220" so long as Amalgamated addressed Yahoo's concerns and executed a confidentiality agreement. Id. at 3.
On March 13, 2014, Amalgamated provided Yahoo with additional documentation evidencing its ownership of Yahoo stock. The documents consisted of account statements for two of the funds for which Amalgamated served as trustee, demonstrating that the funds held Yahoo stock from January 2012 through the date of the Demand. After that, until this litigation was filed, Yahoo did not contest Amalgamated's standing to make a Section 220 demand.
On May 14, 2014, Yahoo offered to provide Amalgamated "board-level materials-minutes and attachments, resolutions, presentations, and reports-reflecting decisions or discussions by the [Board] (including committees) about considering, recommending, or approving, the appointment, compensation, severance, or termination of [de Castro]." Compl. Ex. D at 1 (the "Board-Level Materials"). In response, Amalgamated sought to clarify whether the Board-Level Materials included documents that Mayer had reviewed, but which the full Board or a committee had not reviewed. Yahoo declined to provide any documents other than what the Board or a committee had reviewed. The record at trial established that the Board-Level Materials did not include documents that Mayer had reviewed, but which the full Board or a committee had not reviewed.
On August 12, 2014, Amalgamated accepted Yahoo's proposed document production while reserving its right to file suit to compel the production of additional documents. On September 12, 2014, Amalgamated and Yahoo entered into a confidentiality agreement. On September 17, 2014, Yahoo produced 677 pages of documents. The production included minutes and materials from sixteen meetings of the Board or the Committee between September 2012 and February 2014 that related to the hiring, compensation, or termination of de Castro. The production also contained comparative executive compensation data, drafts of the offer letters that the directors had considered, and the final agreements between de Castro and Yahoo. Although Yahoo had declined to answer Amalgamated's question about the scope of
On October 14, 2014, Amalgamated requested eleven more categories of documents. Yahoo denied the request because it did not believe Amalgamated had a credible basis to infer wrongdoing or that the new categories were necessary or essential to its stated purpose. On March 10, 2015, Amalgamated filed this action.
Section 220(b) of the Delaware General Corporation Law provides as follows:
8 Del. C. § 220(b). "The Section 220 demand for books and records under the Delaware General Corporation Law serves many salutary goals in the corporate governance landscape, but the burden on the plaintiff is not insubstantial." Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 565 (Del. 1997).
To obtain books and records under Section 220(b), the plaintiff must establish by a preponderance of the evidence that the plaintiff (i) is a stockholder, (ii) complied with statutory requirements specifying the form and manner for making a demand, and (iii) possesses a proper purpose for conducting the inspection. Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 144 (Del. 2012). After meeting these requirements, the plaintiff must demonstrate by a preponderance of the evidence that "each category of books and records is essential" to the plaintiff's purpose. Sec. First, 687 A.2d at 569.
Once the plaintiff has made the necessary showing, the court must determine the scope of the inspection. The order should permit access to books and records that are "essential" for the plaintiff to achieve its purpose, but should stop at the quantum of information that the court deems "sufficient." Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996). The production order "must be carefully tailored." Sec. First, 687 A.2d at 565. Framed metaphorically, it should be "circumscribed with rifled precision" to target the plaintiff's proper purpose. Id. at 570. It should not be a sawed-off shotgun blast.
If the party seeking books and records is not a record holder of the corporation's stock, then Section 220 requires that the demand attach prima facie evidence that the party making the demand is either a beneficial owner or a duly empowered agent acting on behalf of a record holder or beneficial owner. The statutory language states:
8 Del. C. § 220(b) (enumeration added). "Delaware courts require strict adherence to the section 220 inspection demand procedural requirements." Cent. Laborers, 45 A.3d at 145. "Strict adherence to the section 220 procedural requirements for making
In this case, Amalgamated satisfied the statutory requirements by (i) stating in the Demand, under oath, that the Long-View LargeCap 500 Index Fund and the LongView LargeCap 500 Index Fund Veba (together, the "Funds") owned shares of Yahoo common stock, (ii) providing documentary evidence supporting the Funds' ownership at a point proximate to the date of the Demand and stating in the Demand, under oath, that the documentation was what it appeared to be, and (iii) stating in the Demand, under oath, that Amalgamated was acting as the trustee of the Funds for purposes of making the Demand. See JX 35 at 1, 7.
Yahoo correctly observes that the Demand attached account statements reflecting the Funds' ownership of Yahoo common stock as of February 21, 2014, three days before the date of the Demand. According to Yahoo, this is statutorily inadequate because the date of the account statements is not the same as the date of the Demand. Yahoo also observes that the Funds did not continually update their documentation to provide evidence of their continuing ownership of Yahoo common stock. Neither observation provides a valid basis for defeating an inspection.
Section 220 must be applied with some appreciation of the practical considerations surrounding its use. It takes a non-trivial amount of time to obtain documentation evidencing stockholder status. The most commonly used method is account statements, which are issued periodically. If Section 220 truly required evidence of stock ownership as of the moment that the demand was sent, then a stockholder could not comply without some form of same-day record. In my view, requiring that level of documentation would be an unreasonable reading of the statute. What Section 220 instead requires is documentation sufficiently proximate in time to the date of the demand as to be consistent with and corroborate the averment of stock ownership made in the demand itself. Recent brokerage statements are adequate. See Paul v. China MediaExpress Hldgs., Inc., 2012 WL 28818, at *3 n.19 (Del. Ch. Jan. 5, 2012). In this case, evidence of the Funds' ownership dated a few days before the Demand certainly sufficed.
Amalgamated and the Funds also were not required to provide Yahoo with an ongoing stream of daily trading and ownership records confirming their continuing stock ownership. The plain language of the statute only requires evidence that the demanding party is a stockholder at the time of the demand. See 8 Del C. § 220(b). The statute does not require a continuing showing, which would be impractical and overly burdensome for both the party making the demand and for the company responding to it. No one wants to send or receive a box of daily account statements covering a period of months (except perhaps a law firm paid by the hour to assemble or review them).
Nevertheless, the use of Section 220 carries with it an implicit obligation on the part of the demanding party to advise the company if it loses its status as a stockholder or its authority to act on behalf of a stockholder. In an appropriate case, a court might well impose a remedy on an erstwhile stockholder or a once-but-no-longer-authorized agent that continued to use Section 220 under false pretenses. That was not the case here.
Finally, Amalgamated established its authority to act on behalf of the Funds by
A party seeking to inspect books and records must have a proper purpose. In the language of the statute, "[a] proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder." 8 Del. C. § 220(b).
Amalgamated's Demand described the purposes for the inspection as follows:
JX 35 at 1-2. The Demand summarized Amalgamated's reasons for believing de Castro's compensation resulted from mismanagement or constituted waste.
"[A] stockholder's desire to investigate wrongdoing or mismanagement is a `proper purpose.'" Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 121 (Del. 2006). To conduct an inspection, a stockholder "is not required to prove by a preponderance of the evidence that waste
"[T]he `credible basis' standard sets the lowest possible burden of proof." Id. The "threshold may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing." Id. at 123 (quotation marks omitted); accord Sec. First, 687 A.2d at 568. The trial court may rely on "circumstantial evidence." Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1273 (Del. 2014). Hearsay statements may be considered, provided they are sufficiently reliable.
In this case, Amalgamated established a credible basis to suspect wrongdoing in connection with de Castro's hiring and firing. The possible wrongdoing may fall under the headings of breach of fiduciary duty or waste.
Mark Twain is often credited (perhaps erroneously) with observing that history may not repeat itself, but it often rhymes. The credible basis for concern about wrongdoing at Yahoo evokes the Disney case, with the details updated for a twenty-first century, New Economy company. Like the current scenario, Disney involved a CEO hiring a number-two executive for munificent compensation, poor performance by the number-two executive, and a no-fault termination after approximately a year on the job that conferred dynastic wealth on the executive under circumstances where a for-cause termination could have been justified. Certainly there are factual distinctions, but the assonance is there.
The Disney saga began with a complaint filed without the benefit of a Section 220 inspection. Chancellor Chandler dismissed the complaint for failing to plead with particularity that demand was futile. In re Walt Disney Co. Deriv. Litig. (Disney I),
Id. Later in the decision, the high court observed that "[o]ne can understand why Disney stockholders would be upset with such an extraordinarily lucrative compensation agreement and termination payout awarded a company president who served for only a little over a year and who underperformed to the extent alleged." Id. at 267.
After affirming the dismissal of the complaint as framed, the Delaware Supreme Court noted that the plaintiffs "may well have the `tools at hand' to develop the necessary facts for pleading purposes," including using Section 220. Id. at 266. Citing the "unusual nature of this case," the senior tribunal reversed the dismissal "only to the extent that the dismissal ordered by the Court of Chancery was with prejudice." Id. at 267. The without-prejudice dismissal would "permit plaintiffs to file an amended complaint in accordance with the rulings of this Court as set forth in this opinion." Id. The high court noted that it did not "presume to direct the Court of Chancery how it should decide any proceeding under Section 220" but that "[f]rom a timing perspective ... such a proceeding is a summary one that should be managed expeditiously." Id.
The plaintiffs took the hint. They used Section 220, obtained books and records, and filed an amended complaint. This time, the claims survived a motion to dismiss for failure to plead that demand was futile. In re Walt Disney Co. Deriv. (Disney III), 825 A.2d 275 (Del. Ch.2003). The Chancellor helpfully summarized his reasoning:
Id. at 278 (quotation marks and footnote omitted).
Eventually, after a full trial, the defendants prevailed on the merits. In re Walt Disney Co. Deriv. Litig. (Disney IV), 907 A.2d 693 (Del. Ch.2005), aff'd, 906 A.2d 27 (Del. 2006). Because the Disney saga went the distance, we came to know the facts as developed after extensive discovery and as analyzed by the court. Those facts differed materially from the pleading-stage allegations and the reasonable inferences they supported.
From my standpoint, both factually and legally, the current showing regarding the events at Yahoo falls somewhere between Disney I and Disney III. Amalgamated has collected publicly available materials and received some information from Yahoo. The resulting record is troubling and fails to answer important questions about the conduct of Mayer, the Committee, and the Board in both the hiring and firing of de Castro. I need not and do not hold that the record developed to date establishes wrongdoing, nor even that it supports a claim for wrongdoing. It does, in my view, provide a "credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation." Seinfeld, 909 A.2d at 123. To state what should be obvious, the existence of a credible basis to suspect possible wrongdoing sufficient to warrant further investigation does not mean that wrongdoing actually occurred. Even in Disney, where the complaint survived a motion to dismiss, the defendants ultimately prevailed.
One basis for potential wrongdoing is a possible breach of fiduciary duty. For analytical clarity, this decision first discusses de Castro's hiring, then turns to his firing. That separation is artificial, because the two decisions are factually and legally interrelated. Taken together, they are more troubling than either individually.
There is a credible basis to suspect possible breaches of fiduciary duty by Mayer during the hiring process. Officers are corporate fiduciaries who owe the same fiduciary duties to the corporation and its stockholders as directors. Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009). Officers also are agents who report to the board of directors in its capacity as the governing body for the corporation.
It may be that Mayer's conduct did not constitute a breach of fiduciary duty, but it is worthy of investigation. Based on the current record, it is not clear why Mayer did these things, and a range of explanations are possible. She may have made an innocent mistake, and if this case ever proceeds on the merits, it might be shown to be inconsequential. She may have been negligent to some degree. Although it seems unlikely, perhaps she had some improper motive. Amalgamated observes that just as Eisner was negotiating with his friend Ovitz in the Disney case, Mayer was negotiating with a colleague from her former employer. At this stage, I am not suggesting, nor inferring, that Mayer intentionally hid information or lied to the Committee. This decision determines only that there is a credible basis for further investigation.
The credible basis becomes stronger, in my view, because of the changes that Mayer made to the Final Offer Letter. The Committee approved the Original Offer Letter, signed off on the elimination of the Specified Percentage for the Incentive RSUs and Options, and reserved its authority to approve any material changes in de Castro's employment agreement. In preparing the Final Offer Letter, Mayer made additional changes to the terms of de Castro's employment that materially increased his potential compensation. Mayer does not appear to have informed the Committee about the changes, and they do not appear to have been authorized by the Committee. Again, based on the current record, it is not clear why Mayer did these things, and the explanation may well be innocent or innocuous. Regardless, further investigation is warranted.
Grounds also exist for investigation into the roles played by the Yahoo directors. At the pleading stage in Disney III, Chancellor Chandler held that the directors' lack of involvement in Ovitz' hiring stated a claim for bad faith conduct. There, as here, the corporation's CEO conducted the negotiations. When Eisner eventually briefed Disney's compensation committee, Eisner did not give the directors all of the information he had, only a rough and incomplete summary of the terms of the offer he had made. The committee members also did not receive any "analytical document showing the potential payout to Ovitz throughout the contract, or the possible cost of his severance package upon a non-fault termination." 825 A.2d at 280 (formatting omitted). After a short meeting, the compensation committee approved the offer and gave Eisner the authority to finalize the contract if the terms fell within the framework of the summary. The full Disney board then met and appointed Ovitz to the office of President. Two months later, the final employment agreement
Based on the current record, the Yahoo directors were more involved in the hiring than the Disney directors were, but the facts still bear a close resemblance to the allegations in Disney III. The directors' involvement appears to have been tangential and episodic, and they seem to have accepted Mayer's statements uncritically. A board cannot mindlessly swallow information, particularly in the area of executive compensation: "While there may be instances in which a board may act with deference to corporate officers' judgments, executive compensation is not one of those instances. The board must exercise its own business judgment in approving an executive compensation transaction." Haywood v. Ambase Corp., 2005 WL 2130614, at *6 (Del. Ch. Aug. 22, 2005). Directors who choose not to ask questions take the risk that they may have to provide explanations later, or at least produce explanatory books and records as part of a Section 220 investigation.
This decision does not hold that the Yahoo directors breached their duties. It holds only that compared with the bookends of Disney I and Disney III, there is a credible basis to investigate possible claims of breach of duty by the Committee and the Board.
The same is true for de Castro's firing, where there is a credible basis to suspect the possibility of wrongdoing by Mayer, the Committee, and the Board. The issue at this stage turns on why Yahoo's fiduciaries agreed to a without-cause termination when a for-cause alternative was potentially available. The same issue troubled the court in Disney III. See 825 A.2d at 287-88. Mayer decided initially to terminate de Castro and characterize it as "without cause." Despite the financial implications, the Committee did not question Mayer's decision. They do not appear to have asked any questions at all. Instead, they rubberstamped what Mayer had done through a quick email exchange of written consents. The directors did not engage until three weeks later, when the Committee determined to what degree Yahoo had met the performance criteria for option vesting. The Committee did not receive a report about the reasons for de Castro's termination until three weeks after that, when they decided not to award de Castro a bonus under the Executive Incentive Plan. As in Disney III, this suggests ostrich-like conduct warranting further investigation.
In addition to a credible basis to suspect wrongdoing involving potential breaches of fiduciary duty, there is also
Id.
Despite the difficult standard for waste, Delaware courts have permitted complaints challenging senior executive compensation as waste to survive the pleading stage. For example, Chancellor Chandler held that a stockholder plaintiff had stated a claim for waste involving a $68 million compensation package for the outgoing CEO of Citigroup, Inc., Charles Prince, "whose failures as CEO were allegedly responsible ... for billions of dollars of losses at Citigroup." In re Citigroup Inc. S'holder Deriv. Litig., 964 A.2d 106, 138 (Del. Ch.2009). The court explained that although directors have discretion when setting executive compensation, "there is an outer limit" to that discretion, "at which point a decision of the directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste." Id. (quoting Disney II, 746 A.2d at 262-63 & n.56). Chancellor Chandler credited the allegation that Prince's $68 million severance package was "so one sided" that it met the "admittedly stringent" waste standard. Id. at 138-39.
The question for present purposes is whether there is reason to believe that waste may have occurred. There is reason to believe that by making changes to the Final Offer Letter, Mayer increased de Castro's compensation unilaterally, without Committee or Board approval, suggesting waste. There is also reason to believe that de Castro could have been fired for cause, thereby avoiding the payment of any severance. Instead, Mayer decided that the termination would be without cause, and the Committee members went along. On the facts presented, Amalgamated has established a basis for further investigation.
Another purpose for using Section 220 is to investigate questions of director disinterestedness and independence.
More recently, the Delaware Supreme Court has indicated that a plaintiff could obtain "a file of the disclosure questionnaires for the board" or similar materials that could "provide more detail about the thickness of the relationship[s]" in the boardroom. Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1024 (Del. 2015). At the same time, the Delaware Supreme Court candidly observed that Section 220 likely has "limited utility" for purposes of uncovering this type of information.
In this case, Amalgamated identified a proper purpose in seeking to obtain books and records for the purpose of investigating questions of director disinterestedness and independence.
In a recent decision, this court held that a stockholder who sought books and records for the purpose of bringing a derivative action for breach of fiduciary duty lacked a proper purpose for conducting an inspection where the corporation had an exculpatory provision and the stockholder had not identified a credible basis for believing that that the directors had engaged in non-exculpated conduct. Se. Pa. Transp. Auth. v. Abbvie, Inc., 2015 WL 1753033, at *14 (Del. Ch. Apr. 15, 2015), aff'd, 2016 WL 235217 (Del. Jan. 20, 2016) (ORDER). Yahoo has an exculpatory provision. Relying on Abbvie, Yahoo argues that Amalgamated lacks a proper purpose and that the inspection should be denied.
The Abbvie decision and this case are distinguishable on their facts. First, the evidence of possible wrongdoing in Abbvie was flimsy at best: the directors had agreed to pay a termination fee to an acquirer if an inversion transaction failed to go through. 2015 WL 1753033, at *14. The potential for regulatory problems was a known risk, the parties to the transaction bargained over it, and the board approved
Second, the Abbvie decision noted that there were a variety of purposes for which a stockholder could use books and records, but concluded "from the Plaintiffs' statements at oral argument ... that both Plaintiffs seek an investigation to aid in future derivative litigation" and that "litigation is the sole motivation for the Plaintiffs' investigations." 2015 WL 1753033, at *12. Amalgamated has not similarly limited its potential uses of the fruits of its investigation. The Delaware Supreme Court has stated that
Seinfeld, 909 A.2d at 119-20 (quotation marks and alterations omitted); accord Saito v. McKesson HBOC, Inc., 806 A.2d 113, 117 (Del. 2002). Exculpation is not an impediment to the potential use of information obtained pursuant to Section 220 for taking action other than filing a lawsuit.
Third, given the meager showing of potential wrongdoing by the plaintiffs in Abbvie, the court understandably concluded that there was no basis to suspect the possibility of misconduct that might support a non-exculpated claim. That is not the case here. The claim that survived a motion to dismiss in Disney III was that the directors had not acted in good faith, which is an aspect of the duty of loyalty and hence not subject to exculpation.
I have doubts that Amalgamated will be able to pursue and prevail on a non-exculpated claim against Yahoo's outside directors. My skepticism rests on a combination of confidence in what the record will show about the directors' oversight, knowledge of the significant protections disinterested and independent directors enjoy, and familiarity with the difficulties involved in litigation. The question now, however, is not whether Amalgamated will prevail. Nor is the question even whether it is reasonably conceivable that Amalgamated could prevail. The inquiry is whether Amalgamated has established a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation. Seinfeld, 909 A.2d at 123. On the facts, I do not believe that the potential for directors to rely on exculpation if and when
There is also the possibility of a claim against Mayer in her capacity as an officer. Section 102(b)(7) does not authorize exculpation for officers.
Because Amalgamated has satisfied the prerequisites for conducting an inspection, this court's task is to determine its scope. "[I]t is the responsibility of the trial court to tailor the inspection to the stockholder's stated purpose." Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 569 (Del. 1997).
"[T]he burden of proof is always on the party seeking inspection to establish that each category of the books and records requested is essential and sufficient to [the party's] stated purpose."
Subtle connotations aside, the terms "necessary" and "essential" are functionally synonymous for purposes of Section 220. Sanders v. Ohmite Hldgs., LLC, 17 A.3d 1186, 1194 n.2 (Del. Ch.2011). The plaintiff can obtain books and records that "address the `crux of the shareholder's purpose' and if that information is unavailable from another source.'" Wal-Mart, 95 A.3d at 1271 (quoting Espinoza, 32 A.3d at 371-72).
To reinforce the foundation of indispensability (however framed), the operative standard trowels a layer of sufficiency ("essential and sufficient"). Thomas & Betts, 681 A.2d at 1035. The inspection should stop at the quantum of information that the court deems "sufficient" to accomplish the plaintiff's stated purpose. Id. If the books and records are not "essential" for the stockholder's purpose, then the stockholder already has "sufficient" information and the inspection can be denied as seeking materials beyond what is "needed to perform the task." Carapico, 791 A.2d at 793 (quoting BBC Acq., 623 A.2d at 88). Stated conversely, if the stockholder already has "sufficient" information from other sources or as a result of other books and records requests, then the inspection can be curtailed because the additional materials are not "essential."
The first request in the Demand seeks "[a]ll Yahoo books and records relating to Mr. de Castro's compensation (including salary, bonus, stock options, severance payments, RSUs, and all other compensation
Id. at 3-4.
If this case was a plenary action where the complaint had survived a motion to dismiss, and if the plaintiff had framed these demands as requests for production of documents pursuant to Rule 34, then Yahoo would be obligated to produce all responsive documents in its possession, custody, and control. See Ct. Ch. R. 34. If Yahoo wished to limit the scope of its production, the burden would lie with Yahoo to identify reasonable limitations and, if necessary, obtain an order from the court. See Ct. Ch. R. 26(b)(1) & (c).
A Section 220 inspection, however, is not the equivalent of discovery in a plenary action. "The two procedures are not the same and should not be confused." Sec. First, 687 A.2d at 570. Unlike in plenary discovery, where the responding party bears the burden of limiting its scope, the burden in a Section 220 proceeding is on the party seeking production. See Thomas & Betts, 681 A.2d at 1035. Moreover, the court must tailor the production order to balance the interests of the stockholder and the corporation. See Sec. First, 687 A.2d at 569. As the Delaware Supreme Court has explained,
Saito v. McKesson HBOC, Inc., 806 A.2d 113, 114-15 (Del. 2002). "The source of the documents and the manner in which
The starting point — and often the ending point — for a sufficient inspection will be board level documents evidencing the directors' decisions and deliberations, as well as the materials that the directors received and considered.
In this case, the Board-Level Materials relating to de Castro's hiring were indisputably subject to inspection. These documents provided direct evidence of what the directors thought and did, and they were necessary for Amalgamated to investigate the hiring and the directors' disinterestedness and independence. Yahoo has represented that the Board-Level Materials have been provided. To the extent there are types of materials that did not appear in Yahoo's production, it is reasonably inferable that the directors did not receive or review them when hiring de Castro.
This court has the power to order production of documents prepared by officers and employees as part of a Section 220 inspection.
The Wal-Mart case provides one example of a situation where this court found it necessary to order access to officer and employee level documents. The plaintiffs established a credible basis to suspect wide-ranging illegal conduct at a Wal-Mart subsidiary followed by an internal cover-up. Wal-Mart, 95 A.3d at 1267-68. Chief Justice Strine, then Chancellor, ordered an inspection of documents held by (i) eleven custodians, including senior officers and employees, (ii) the Chair of Wal-Mart's Audit Committee, and (iii) anyone who served as an assistant to those twelve individuals. Id. at 1269. The final order required Wal-Mart to produce "officer (and lower)-level documents regardless of whether they were ever provided to Wal-Mart's Board of Directors or any committee thereof." Id. at 1270.
On appeal, Wal-Mart challenged the order requiring production of officer and employee documents. The Delaware Supreme Court affirmed, explaining that because the stockholder sought to investigate misconduct involving officers, "officer-level documents are necessary and essential to determining whether and to what extent mismanagement occurred and what information was transmitted." Id. at 1273. The Delaware Supreme Court added that the officer-level documents "may establish director knowledge... by establishing that certain Wal-Mart offers were in a `reporting relationship' to Wal-Mart directors, that those officers did in fact report to specific directors,
This case is not Wal-Mart, and in my view the facts of this case do not support the type of production that the Delaware Supreme Court approved there. To its credit, Amalgamated has not sought a similarly broad inspection. Amalgamated only seeks production of the Mayer Documents.
The evidence establishes that the Mayer Documents are necessary for a meaningful investigation of de Castro's hiring. The trial record establishes that Mayer was the principal corporate actor in the hiring process. She had all of the direct contact with de Castro and conducted all of the discussions. She negotiated all of the financial terms in the Original and Final Offer Letters. At present, she appears to be the person who modified the terms of the Final Offer Letter. Her documents, including notes and emails, will provide otherwise unavailable information about and insight into her discussions and negotiations. Those books and records will show what Mayer knew and when, and they will reveal any variations between what Mayer knew and what she told the Board.
The scope of the production of the Mayer Documents will include email and other electronic documents, which count as corporate books and records. Yahoo argues that electronic documents are beyond the scope of Section 220, because the statute does not mention "electronically stored information." Although it is true that Section 220 does not contain those words, Yahoo is wrong that inspection rights are limited to paper records.
Stockholder inspection rights in Delaware date from the turn of the twentieth century, when the courts recognized them under the common law. See, e.g., State ex rel. De Julvecourt v. Pan-Am. Co., 61 A. 398 (Del. Super. 1904), aff'd, 63 A. 1118 (Del.1905). In that era and for a long time afterwards, courts logically focused on paper documents, but times have changed. "`Books' as we know them may cease to exist in the evolution of the Information Age." Francis G.X. Pileggi, Kevin F. Brady, & Jill Argo, Inspecting Corporate `Books and Records' in a Digital World: The Role of Electronically Stored Information, 37 Del. J. Corp. L. 163, 165 (2012). Today, over 90% of business documents are stored electronically. Id. Limiting "books and records" to physical documents "could cause Section 220 to become obsolete or ineffective." Id. at 164.
In other areas, Delaware law has moved beyond defining corporate records as exclusively physical documents. Fifteen years ago, the General Assembly updated Section 224 of the DGCL to recognize that corporate books and records are stored in electronic form. The statute now states:
8 Del. C. § 224. Not surprisingly, Delaware precedents have ordered the production
If Mayer chose to use a personal email account to conduct Yahoo business, she must produce responsive documents. "[R]ights of shareholders secured by § 220 cannot be defeated simply by having another entity hold the records." Dobler, 2001 WL 1334182, at *10. A corporate record retains its character regardless of the medium used to create it. By analogy, if two officers used their home computers to produce a confidential corporate document that they shared with one another over their private email addresses, no one would think that the report was a personal document that the officers could sell for their own profit. See Ind. Elec. Workers Pension Tr. Fund IBEW v. Wal-Mart Stores, Inc., 7779-CS, at 97-98 (Del. Ch. May 20, 2013) (Strine, C.) (TRANSCRIPT) (using analogy to explain why Section 220 can extend to officers' and employees' personal email accounts when used for official business). As 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. See Wal-Mart, 95 A.3d at 1273.
The Additional Board Documents are held by Yahoo officers and employees and by the directors themselves. Just as this court has the power to order production of corporate documents prepared by officers and employees as part of a Section 220 inspection, this court has the power to order production of corporate documents held by directors.
In my view, Amalgamated has not carried its burden to justify a production of this scope. Amalgamated would be entitled to that type of production in a plenary proceeding, but this is a Section 220 action.
A subset of the Additional Board Documents is justified. The production will be limited to Webb, James, Ligouri, and Wilson, who were the members of the Committee. Yahoo will produce their documents regarding de Castro's hiring, including their email communications.
The second and third requests in the Demand address de Castro's termination. Request 2 asks for "[a]ll books and records relating to Mr. de Castro's termination from Yahoo, including all Board and Compensation Committee minutes and presentations relating to Mr. de Castro's termination." JX 34 at 4. Request 3 asks for "[a]ny expert's or consultant's reports or opinions concerning Mr. de Castro's termination, including books and records sufficient to determine whether Mr. de Castro was terminated for `Cause.'" Id. Here again, Yahoo has produced the Board-Level Materials. The question is what else, if anything, needs to be produced.
Request 3 is easily dealt with. The trial record established that de Castro was not terminated for "Cause," so Amalgamated has its answer. Production of any expert's or consultant's report or opinions concerning de Castro's termination is necessary for Amalgamated's inspection, because these reports or opinions (if any) establish the informational base potentially available to Mayer and the Board. By limiting its production to Board-Level Materials, Yahoo may have excluded reports or opinions that Yahoo received below the Board level. The request as framed is narrow and targeted, and Yahoo will respond to it without limitation. If Yahoo's officers, or its human resources department, obtained a report or opinion from an expert or consultant about de Castro's termination, then that is something Yahoo should know and readily be able to provide.
Request 2 presents the same issues as Request 1, except that Request 2 addresses de Castro's firing while Request 1 involves the hiring. This decision's rulings on the Mayer Documents and the specified Additional Board Documents apply equally to Request 2, albeit with the subject matter modified. If anything, the case for producing the Mayer Documents and the specified Additional Board Documents is stronger for the termination, because it was Mayer who determined that de Castro had not performed his duties or fulfilled his responsibilities and decided to fire him. The Committee then approved the termination without deliberation or
The fourth request in the Demand seeks "[a]ll books and records relating to Mr. de Castro's job performance at Yahoo, including Board and Compensation Committee minutes relating to Mr. de Castro's performance as Chief Operating Officer." Id. Yahoo already has produced the Board-Level Materials. For the reasons already discussed, Yahoo also will produce the Mayer Documents and the specified Additional Board Documents.
The record provides reason to believe that there are additional books and records beyond the Board-Level Materials that are essential to Amalgamated's inspection. For example, Mayer told the Committee that she gave de Castro "feedback on the deficiencies in his performance." JX 36 at 7. It also seems likely that Mayer may have kept some or all of the directors informed about developments with de Castro outside of formal Board meetings. That seems particularly true for events in January 2014, where the official record of Committee involvement is decidedly sparse.
The fifth and final request in the Demand is "[a]ll books and records concerning discussions, communications, or decisions as to the nominations of the current members of the Company's Board, and the placement of such directors on any committees or subcommittees of the Company's Board." JX 35 at 4. Yahoo has not produced any documents responsive to this category.
The scope of the inspection called for by this request is potentially broad, but it is something that the Delaware Supreme Court contemplated in Beam and more recently in Wal-Mart and Sanchez. I nevertheless believe the production should be tailored. In the first instance, the subject matter of the request is limited as follows:
• Rather than extending "to the nominations of the current members of the Company's Board," the request shall cover only the initial nominations of the current members of the Board.
• For purposes of the re-nomination of any existing member of the Board, the request shall apply only to the extent that there was consideration by the Board, the Nomination Committee, or Mayer about re-nominating a particular current member of the Board. Yahoo and its counsel should be able to determine relatively quickly by asking Mayer and the directors whether this has occurred. This should enable Yahoo to avoid a potentially broad search entirely or, if further investigation is necessarily, target the issue.
• The request about the placement of the directors on committees shall apply only to the directors who served on the Committee during the period that encompassed de Castro's hiring and firing.
Yahoo and its counsel should be able to determine whether and to what degree Yahoo keeps files on these matters. If Yahoo does not have a centralized file, then the custodians for purposes of production shall be Mayer, Yahoo's corporate secretary, Yahoo's head of human resources, and any officer or employee specifically tasked with director recruitment and evaluation, committee assignments, and board effectiveness. Yahoo also will produce any annual director
A final issue that runs across all of the categories sought in the Demand is consultations with counsel ("Counsel Documents"). The Delaware Supreme Court has held that if a stockholder has shown that particular documents are essential to its inspection, then the stockholder can overcome the attorney-client privilege and work product doctrine by making the showing required by Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir.1970). See Wal-Mart, 95 A.3d at 1275-81. Before reaching the Garner analysis, however, the trial court first must determine that the documents are essential, because that inquiry "is dispositive of the threshold question — the scope of document production to which the plaintiff is entitled under Section 220." Id. at 1278; accord Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 374 (Del. 2011).
At this point, I do not believe that Amalgamated has justified having Yahoo search broadly for Counsel Documents. To the extent that Yahoo previously identified any Counsel Documents during its collection of the Board-Level Documents, or if Yahoo identifies any when producing the Mayer Documents and the Additional Board Documents, then Yahoo will identify those documents on a privilege log. It is premature for this court to do anything other than require Yahoo to log documents.
Yahoo raises one issue of first impression. Yahoo asks that this court condition any further production on Amalgamated incorporating by reference into any derivative action complaint that it files the full scope of the documents that Yahoo has produced or will produce in response to the Demand (the "Incorporation Condition"). Yahoo's request is granted, and further production 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.
"Section 220(c) of the DGCL gives broad discretion to the Court of Chancery to condition a books and records inspection...." United Techs. Corp. v. Treppel, 109 A.3d 553, 557-58 (Del. 2014). By statute, the Court of Chancery "may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper." 8 Del. C. § 220(c).
"The ability to limit the use of information gathered from an inspection ... has long been recognized as within the Court of Chancery's discretion." United Techs., 109 A.3d at 558. This court has used conditions as part of its effort to "maintain a proper balance between the rights of shareholders to obtain information based upon credible allegations of corporation mismanagement and the rights of directors to manage the business of the corporation without undue interference from stockholders." Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 122 (Del. 2006).
One common limitation is to condition production on the stockholder entering into a confidentiality agreement. See CM & M Gp., Inc. v. Carroll, 453 A.2d 788, 793-94 (Del. 1982). Although once novel, now "[t]here is a presumption that the production of books and records pursuant
In this case, the Incorporation Condition protects the legitimate interests of both Yahoo and the judiciary by ensuring that any complaint that Amalgamated files will not be based on cherry-picked documents. It achieves this goal by building on the incorporation-by-reference doctrine, which permits a court to consider documents that have been incorporated by reference in a complaint when ruling on a motion to dismiss.
The incorporation-by-reference doctrine permits a court to review the actual document to ensure that the plaintiff has not misrepresented its contents and that any inference the plaintiff seeks to have drawn is a reasonable one.
The Incorporation Condition takes these concepts one step further by extending them to other documents that Yahoo produces in response to the Demand. If Yahoo feels that the plaintiff has seized on a document and taken it out of context, then
It is important to stress what the Incorporation Condition does not do. The Incorporation Condition does not change the pleading standard that governs a motion to dismiss. For purposes of a Rule 12(b)(6) motion, "all well-pleaded factual allegations" still will be accepted as true. Savor, 812 A.2d at 896. If there are factual conflicts in the documents or the circumstances support competing interpretations, and if the plaintiff makes a well-pleaded factual allegation, then the allegation will be credited. The plaintiff also will be entitled to "all reasonable inferences." Id. at 897. This means that if a document or the circumstances support more than one possible inference, and if the inference that the plaintiff seeks is reasonable, then the plaintiff receives the inference. Id.
The same applies for a Rule 23.1 motion. All particularized factual allegations still will be accepted as true. Rales v. Blasband, 634 A.2d 927, 931 (Del. 1993). The court will "draw all inferences from those particularized facts in favor of the plaintiff, and not the defendant." Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. 2015). And when determining whether a plaintiff has pled facts supporting an inference that a director cannot act independently of an interested director for purposes of demand excusal, "all particularized facts pled by the plaintiffs about the relationships between the director and the interested party" will be considered "in their totality and not in isolation from each other." Id. at 1019.
In the end, the only effect of the Incorporation Condition will be to ensure that the plaintiff cannot seize on a document, take it out of context, and insist on an unreasonable inference that the court could not draw if it considered related documents. It will allow the court to address complaints that should not advance past the pleading stage, but it will not prevent a plaintiff from stating a well-pled claim. At a functional level, the Incorporation Condition resembles an approach that Delaware decisions have taken when ruling on motions to dismiss after plaintiffs have taken expedited discovery in support of preliminary injunction applications.
Amalgamated protests that the strictures of Rule 11 make the Incorporation Condition unnecessary. See Ct. Ch. R. 11. It is true, as Amalgamated argues, that Rule 11 mitigates the cherry-picking problem to some degree, but invoking Rule 11 is strong medicine. The more common case will involve a plaintiff's counsel seeking to draw an unreasonable inference by citing a document in isolation, not in bad faith but perhaps over-zealously in the belief that the document reveals more than it does. The Incorporation Condition enables a court to deal with that in more measured fashion.
A final procedural note: The Incorporation Condition does not mean that Amalgamated should attach the entire Section 220 production to a future complaint, nor is it an invitation for the defendants in a future action to file an appendix containing the entire Section 220 production in support of their motion to dismiss. Either approach would help the State of Delaware by generating hefty filing fees, but it would not help the parties brief the motion or the judge make a ruling. Amalgamated can and should file a complaint, if it chooses to do so, as if the Incorporation Condition had not been imposed. Defense counsel must then use judgment and supply the court only with the limited documents (if any) necessary to show that it would not be reasonable to draw a particular inference on which the complaint depends.
Yahoo shall provide the additional books and records contemplated by this opinion, subject to the Incorporation Condition. The production shall be completed within thirty days. The parties shall submit a form of implementing order.
