In KT4 Partners, the stockholder-plaintiff KT4 Partners LLC (“KT4”) sought inspection of Palantir Technologies Inc. (“Palantir”) under Section 220 for the purposes of (i) valuing its interest in Palantir and (ii) investigating possible wrongdoing in connection with Palantir amending an Investors’ Rights Agreement that excluded KT4.⁴  Palantir rejected KT4’s books-and-records demand.  As a result, KT4 filed an action in the Delaware Court of Chancery under Section 220 to enforce its inspection rights on an expedited basis.⁵  The Court of Chancery determined that KT4 stated a proper purpose to inspect for wrongdoing in connection with the amendments to the Investors’ Rights Agreement, but the trial court did not require Palantir to produce emails regarding those amendments.  The Court of Chancery held that KT4 failed to state a proper purpose for valuing its interest.  On appeal to the Delaware Supreme Court, KT4 argued that the Court of Chancery erred in not holding that Palantir had to produce electronic communications, including emails, because Palantir’s board and management did not adhere to certain traditional corporate formalities with regard to recordkeeping.

The Delaware Supreme Court stated the well-established principle that a stockholder-plaintiff seeking to inspect a corporation’s books and records “bears the burden of proving that each category of books and records is essential … [to] the stockholder’s articulated purpose.”⁶  This standard is satisfied if (i) the books and records sought “address the crux of the shareholder’s purpose” and (ii) “if that information is unavailable from another source.”⁷  Whether a stockholder has stated a proper purpose requires a “fact-specific determination” that will necessarily depend on the context in which the demand arises.⁸  However, only records that are “essential and sufficient” are those that are necessary.⁹  The “necessary and sufficient” standard helps to keep corporations from engaging in full electronic discovery, which is often a very expensive and time-consuming process.  Emails are commonly one of the largest components of electronic discovery.  Thus, under established Delaware law, “[b]ooks and records actions are not supposed to be sprawling, oxymoronic lawsuits with extensive discovery.”¹⁰ 

On the issue of emails, Delaware laws dictates that the Court of Chancery “should not order emails to be produced when other materials (i.e., traditional board-level materials, such as minutes) would accomplish the [stockholder-plaintiff’s] proper purpose.”¹¹  However, when a stockholder-plaintiff can show that the documents it needs likely exist in electronic communications and not in other, more-traditional forms, “the corporation cannot insist on a production that excludes emails” when other documents are not available.¹²

In KT4, the Delaware Supreme Court expanded on the need for corporate formalities to guard against the production of emails.  Indeed, Delaware law does not presumptively require a corporation to produce emails and other electronic communications when that corporation keeps records through the traditional corporate formalities.¹³  However, if a corporation that is faced with a Section 220 books-and-records request “conducts formal corporate business without documenting its actions in minutes and board resolutions or other formal means,” and maintains records of key governance communications only in emails, those responsive emails that satisfy a proper purpose would need to be produced.¹⁴

 Key takeaways

• Books and records actions are an important tool for stockholders to gain information, to communicate with other stockholders, to value their interest, and/or to investigate potential wrongdoing, and Delaware courts encourage stockholders to use the tools available to them (like Section 220) prior to filing a lawsuit.  

• Books and records actions are not meant to allow stockholder-plaintiffs complete access to information and documents that might otherwise be available during discovery.  Instead, those stockholders seeking information are only entitled to inspect those books and records that are “essential and sufficient” to address the “crux” of their propose purpose.  What is “necessary and sufficient” is a fact-specific inquiry that depends on the proper purpose.  

• Corporations are not always required to produce electronic communications, including emails, when other traditional records are available and sufficient to allow the stockholder-plaintiff to investigate a proper purpose.

• When a corporation fails to keep records of its actions through traditional corporate formalities, the corporation may be compelled to produce electronic communications, including emails, when there is a basis for the court to infer that those records likely exist in electronic form.  The important consideration is the substance of the information sought, not the form in which that information is maintained.

• Observing corporate formalities such as board minutes and resolutions may help a Delaware corporation save on administrative and legal costs if a books-and-records action is brought against it, because those documents can often be produced easier and cheaper than electronic communications.

Reed Smith has significant experience, on the one hand, representing stockholders seeking inspection of books and records and, on the other hand, representing Delaware companies responding to books-and-records requests.

1. 2019 WL 347934 (Del. Jan. 29, 2019).  Although this decision dealt specifically with a Delaware corporation, its holding may be applied to other Delaware entities such as limited liability companies and limited partnerships.
2. The Court also addressed jurisdictional use restrictions that require stockholder litigation to be filed in the Delaware Court of Chancery, instead of another jurisdiction.  Id. at *13-19.  The court clarified that “[n]othing in [Section] 220’s text or our case law have ever suggested that the only possible place a stockholder can sue using those books and records is in the Delaware Court of Chancery…. [S]tockholders of Delaware corporations can bring actions in the courts of other jurisdictions if those courts can obtain personal jurisdiction over the defendants.”  Id.  The Delaware Supreme Court distinguished a 2014 decision in United Technologies Corp. v. Treppel, 109 A.3d 553 (Del. 2014), in which the Court upheld a jurisdictional use restriction because of a forum selection bylaw that required the action to be brought in Delaware.  Id. at *18.
3. See South v. Baker, 62 A.3d 1, 6 (Del. Ch. 2012) (citing Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1056 (Del. 2004)).  
4. When KT4 acquired its interest in Palantir, it did so subject to an Investors’ Rights Agreement, which entitled it to notice of new stock offerings and the opportunity to participate.  See KT4 Partners LLC v. Palantir Techs., Inc., 2018 WL 1023155, at *1 (Del. Ch. Feb. 22, 2018).  However, Palantir accused KT4 of stealing certain trade secrets, which caused Palantir and its other stockholders to execute two amended Investors’ Rights Agreements, which increased the equity percentage required for notice of new stock offerings and the opportunity to participate.  Id.  The amended Investors’ Rights Agreements were drafted so that KT4 was no longer entitled to those rights. Id.  
5. Id. 
6. KT4 Partners LLC, 2019 WL 347934, at *9.  
7. Id.
8. Id.
9. Id.
10. Id. at *11.  The limited nature of documents that a corporation will be compelled to produce is meant to reduce the burden on the corporation because “comprehensive discovery” is often expensive and time-consuming and thus not purpose of production under Section 220.  Id. at *9.
11. KT4 Partners LLC, 2019 WL 347934, at *10. 
12. Id. *12.  
13. Id.
14. Id. at *13.