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Delaware Supreme Court allows “reliable” hearsay to support a books-and-records demand

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Page d'accueil Perspectives Delaware Supreme Court allows “reliable” hearsay to support a books-and-records demand
In NVIDIA Corp. v. City of Westland Police & Fire Retirement System, C.A. No. 259-2021 (Del. July 19, 2020), the Delaware Supreme Court held that a stockholder seeking to inspect corporate books and records may use “reliable” hearsay to establish a proper purpose for the inspection demand. This decision is important because it highlights the fact that if stockholders plan to use “reliable” hearsay in a books-and-records demand, they must communicate honestly and early with those companies regarding the stockholders’ intent to allow those companies to rebut the hearsay evidence.

Background

This decision arose out of demands to inspect corporate books and records under 8 Del. C. § 220 (section 220) of the Delaware General Corporation Law. The stockholders’ demands for inspection alleged that the NVIDIA Corp. (the Company), through its executives, made false or misleading statements about the level of interest for its products. After making those statements, certain executives sold their stock at allegedly inflated prices before the “truth” was revealed to the market and the stock price fell. The Company also faced securities litigation involving allegations based on anonymous testimony from a former employee that the same executives had specific knowledge of the threats to the Company’s financial performance.

The Company refused to allow inspection and claimed that (i) the stockholders had not shown a proper purpose, (ii) the stockholders had not established a credible basis to infer wrongdoing, and (iii) the inspection requests were overbroad. The Court of Chancery overruled the objections and ordered production of certain documents.

The Company appealed the decision, and the Delaware Supreme Court, claiming in part that the stockholders had improperly relied on hearsay evidence and – through their inspection demands and responses to interrogatories – had failed to demonstrate and investigate corporate wrongdoing (including insider trading).

Analysis

The Delaware Supreme Court began its analysis by observing that a stockholder seeking to investigate some kind of corporate malfeasance must “show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible [wrongdoing] that would warrant further investigation.” The court also observed that the Delaware Rules of Evidence apply to all actions in Delaware courts, including Rule 802, which bars the use of hearsay evidence unless there is an exception.

All parties agreed that the inspection demands and interrogatories used to establish the purpose for the stockholders’ inspection demands constituted hearsay. Therefore, the Supreme Court looked to the 1996 decision, Thomas & Betts Corp. v. Leviton Manufacturing Co., 681 A.2d 1026 (Del. 1996), for an exception to the hearsay rule in section 220 cases.