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Chancery Court Awards Fees After “Wrongful” Refusal Of Inspection Demand

The Delaware Court of Chancery has awarded attorneys’ fees in a books and records action after the company refused stockholders’ inspection demand despite clear law entitling stockholders to the corporate records.  

In a recent Delaware Court of Chancery decision, Pettry v. Gilead Sciences, Inc., No. 2020-0132-KSJM (July 22, 2021), stockholders of Gilead Sciences, Inc. successfully obtained attorneys’ fees after prevailing in a books and records action against the company.  The stockholders had demanded that the company produce certain corporate records as part of their investigations into potential misconduct in connection with an AIDS drug under development.  When the company refused, the stockholders filed an action, which was tried before Chancellor McCormick on June 23, 2021, resulting in a win for stockholders.

On July 22, 2021, the court awarded attorneys’ fees to the plaintiffs’ lawyers in connection in light of the company’s “glaringly egregious” conduct.  The company had “declined to produce a single document to any of the [stockholders] thereby forcing them to commence litigation.”  Thereafter, the company “took a series of positions during litigation that, when viewed collectively, were glaringly egregious.”  

The court rejected the company’s argument that the stockholders “were not entitled to inspection because any follow-on claims challenging the wrongdoing at issue would be dismissed.”  The court noted that a stockholder “need not demonstrate that the alleged mismanagement or wrongdoing is actionable in order to be entitled to inspection,” but need only show a credible basis to investigate misconduct—“the lowest possible burden of proof.”  The company was ordered to pay nearly $1.76 million in attorneys’ fees.

The holding highlights the importance of stockholder inspection rights under Delaware law.  The Court of Chancery and the Delaware Supreme Court have in recent years repeatedly “encouraged stockholders suspicious of a corporation’s management or operations to exercise this right,” and have chastised companies who have baselessly refused to comply.  See AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund, No. 60, 2020 (Del. Dec. 10, 2020).  This is the right policy decision.  An Inspection demand does not assume misconduct; rather, it merely seeks to investigate it.  A company’s refusal to produce documents to stockholders (including potentially exculpatory evidence) merely guarantees subsequent litigation, even in the absence of misconduct.  Refusing to cooperate is also simply bad business.  As we saw in Gilead, the company depleted corporate assets to pay its legal team to wrongfully refuse the demand, then to engage in back and forth with stockholders prior to litigation, and then to litigate the books and records action.  Then, after all of that, the company had to pay the plaintiffs’ legal team for their time spent in opposing the company’s efforts to squash the demand.

Experience suggests that there is typically a more efficient alternative for the parties than litigating a books and records demand.  The Gilead decision is yet another reminder for counsel to work diligently and collaboratively to find that alternative before setting course for trial.