In this decision, the Delaware Supreme Court affirmed in part and reversed in part the Court of Chancery’s final order and judgment concerning the production of emails in response to a stockholder’s books and records request under Section 220 of the General Corporation Law of the State of Delaware (the “DGCL”).
Palantir Technologies Inc. (“Palantir”), KT4 Partners LLC (“KT4”), and certain other Palantir stockholders were parties to an investors’ rights agreement that, among other things, granted KT4 the right to inspect Palantir’s books and records and a right of first offer as to future Palantir stock offerings. After KT4 and Palantir’s relationship soured, KT4 attempted to sell its stake in Palantir. However, the sale was not consummated because, according to KT4, Palantir intentionally foiled the transaction.
After the failed sale attempt, KT4 sought to inspect Palantir’s books and records under the investors’ rights agreement. Palantir responded that it was reviewing the request and would respond “soon.” Instead of responding, however, Palantir amended the investors’ rights agreement to, among other things, retroactively eliminate KT4’s inspection rights and right of first offer (the “Amendments”). With its contractual informational rights retroactively abolished, KT4 sued under Section 220 of the DGCL to inspect Palantir’s books and records for the purpose of investigating alleged wrongdoing related to, among other things, the Amendments.
The Court of Chancery’s post-trial opinion held that KT4 had stated several proper purposes for its inspection demand under Section 220, including investigating suspected wrongdoing in connection with the Amendments. The Court further held that KT4 was entitled to inspect “all books and records relating to” the Amendments. The parties, however, were unable to agree on a form of implementing order with respect to several issues, including whether the books and records that the Court held KT4 was entitled to inspect included emails and other electronically stored information. The Court resolved the dispute by ruling, among other things, that “the inspection of electronic mail is not essential to fulfilling KT4’s stated investigative purpose” and that KT4 was only entitled to receive board-level documents relating to the Amendments. KT4 appealed, arguing that the Court of Chancery erred by holding that emails were not necessary for its investigative purpose.
The Delaware Supreme Court reversed the Court of Chancery, in part, explaining that emails and other electronic communications were necessary for KT4 to investigate purported wrongdoing related to the Amendments because KT4 satisfied its burden by presenting “some evidence” of wrongdoing. On appeal, Palantir did not dispute that it had a history of failing to adhere to corporate formalities and conducting business informally over email and, specifically, that much of the alleged wrongdoing relating to the Amendments had occurred over email. In other words, because there were no traditional board-level documents relating to the Amendments, the only information that Palantir had related to the Amendments—which was in the form of emails—was necessarily essential for KT4’s investigative purpose.
Echoing prior Supreme Court and Court of Chancery opinions, the Supreme Court reaffirmed that emails will not be ordered to be produced in a Section 220 action if there are sufficient board-level documents available for a stockholder to investigate a proper purpose. However, “[i]f a respondent in a § 220 action conducts formal corporate business without documenting its actions in minutes and board resolutions or other formal means, but maintains its records of the key communications only in emails, the respondent has no one to blame but itself for making the production of those emails necessary.
The Supreme Court found no error with respect to two additional issues raised by KT4, and affirmed the Court of Chancery.
The Palantir decision reiterates the importance of adhering to corporate formalities to prevent intrusive productions in response to Section 220 actions. The case also highlights the fact that Section 220 is a living statute, the application of which necessarily evolves with companies’ use of modern technologies, including email.