In Espinoza v. Hewlett-Packard Co., No. 208,
2011 WL 5838882 (Del. Nov. 21, 2011), the Delaware
Supreme Court held that shareholders seeking inspection of
corporate books and records under Section 220 of the Delaware
General Corporation Law, 8 Del. C. § 220 ("Section
220"), must demonstrate that the records sought are
"essential" to the "articulated purpose for the
inspection." In so holding, the Delaware Supreme Court
affirmed the Delaware Court of Chancery's holding that a
report prepared in connection with an internal investigation into
sexual harassment allegations made against Hewlett-Packard's
("HP") former Chief Executive Officer was not
"essential" to plaintiff's "articulated purpose
for the inspection." The decision provides insight into
the limits of corporate documents a shareholder may obtain pursuant
to a Section 220 demand and the proper legal analysis for
determining whether a shareholder is within his or her right to
inspect such documents.
The action centered around the resignation of HP's former
chief executive officer, Mark Hurd ("Hurd"). On or
about June 29, 2010, HP received a letter claiming that Hurd had
sexually harassed a female contractor over the two-year period.
The letter threatened legal action against both Hurd and
HP. Thereafter, the HP Board began an internal investigation
of the allegations. The Board was presented with a report by
independent counsel retained to investigate the matter (the
"Covington Report"), which contained interim factual
findings and analysis arising out of the investigation. One
week later, on August 5, 2010, Hurd reached a confidential
settlement with the former contractor. The following day, HP
announced Hurd's departure from HP. In that announcement,
the Board explained that although its internal investigation did
not show that Hurd had committed sexual harassment, the
investigation did reveal that Hurd had breached HP's Standards
of Business Conduct. The Board did not terminate Hurd
"for cause." Instead, the Board approved a
separation agreement under which Hurd received, among other
benefits, severance payments estimated as worth over $30
million.
HP's announcement of Hurd's departure led to a flurry of
shareholder derivative actions. On August 17, 2010, plaintiff
wrote a letter to HP demanding to inspect certain HP books and
records relating to Hurd's resignation under Section
220. Section 220 permits a shareholder to seek inspection of
certain corporate books and records subject to various conditions
and limitations. [See, e.g.,
here,
here and
here for blog articles on the subject.] HP provided
extensive documentation relating to Hurd's departure, but
declined to produce the Covington Report, claiming that it was
protected from disclosure under the attorney-client privilege
and/or attorney work product doctrine. After HP refused to
produce the Covington Report, plaintiff filed a Section 220 action
in the Court of Chancery seeking a inspection of that
document. The Court of Chancery denied plaintiff's claim,
holding that he had not met his burden of demonstrating the
requisite need to override the attorney-client
privilege. Espinoza appealed.
The Delaware Supreme Court held that a shareholder seeking
inspection of documents pursuant to a Section 220 demand must show
that the documents are "essential" to the
"articulated purpose for the inspection." The Court
continued that a document is "essential" for Section 220
purposes if, at a minimum, it addresses the crux of the
shareholder's purpose, and if the essential information the
document contains is not available from another source.
In application, the Court held that while plaintiff's specific
purpose was to "investigate why the Board paid tens of
millions of dollars rather than dismiss [Hurd] for
'cause,'" Espinoza did not meet his burden of showing
the "essentiality" of the Covington Report, for three
reasons. First, the Covington Report itself did not discuss
the "for cause" issue. Second, plaintiff failed to
show that the Covington Report was "central" to the
Board's decision. Finally, HP already had disclosed the
information contained in the Covington Report that was essential to
plaintiff's Section 220 stated purpose. Having so
concluded, the Court did not address the separate question of
whether inspection of the Covington Report was precluded by the
attorney-client privilege and/or attorney work product
doctrine.
This decision clarifies the scope of relief to which a plaintiff is
entitled pursuant to a Section 220 demand. The decision
further clarifies that while a privilege/work product analysis
applies to any document for which privilege/work product is
claimed, in a Section 220 case, the predicate issue is whether the
books and records sought to be inspected are "essential"
to the plaintiff's stated purpose.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.