The Race to the Bottom and Shareholder Accessibility to Information: Norfolk County Retirement v. Jos. A Bank Clothier (Part 2)

We are discussing Norfolk County Retirement System v. Jos A. Bank Clothiers.

This would, at first blush, seem to be an ordinary matter, involving little controversy.  The Company was sued under federal law for assorted statements alleged to have been falsely made during late 2005 through mid-2006.  Plaintiff filed a derivative suit arising out of the same behavior.  The derivative suit was dismissed and the Company formed a special litigation committee.  Despite the fact that the securities suit surived a motion to dismiss, the SLC found no improper behavior.  As the Court noted:

• The SLC concluded that: the Company’s inventory was not impaired or excessive; sales and promotions used by the Company were not out of the ordinary; and management did not make material misstatements or withhold information concerning the level of inventory. In the opinion of the SLC, senior management “acted honestly and appropriately in preparing and releasing [the Company’s] financial disclosures.” The SLC also concluded the Maryland Derivative Action and the Securities Class Action were without merit.

So far everything is as usual.  In response, plaintiff sought to invoke its inspection rights under Section 220. 8 Del. C. § 220.  As the court noted, plaintiff sought "to inspect books and records of the Company regarding the same underlying conduct at issue in the securities class action and the derivative action in Maryland."  The Company turned over the SLC’s Report, the exhibits, and the minutes of the meeting of the Board of Directors approving the formation of the SLC, and the minutes of the meetings of the SLC.  In other words, the Company produced nothing that would allow plaintiff to go beneath the decision of the SLC.

Delaware courts have imposed unnecessary burdens in this area.  They have required that shareholders plead facts that provide a "credible basis" for wrongdoing.  While professing that this is a low standard, the courts have in fact denied access to records even when shareholders have come forward with evidence that the company paid excessive executive compensation.  In other words, it is not enough for shareholders to demonstrate a harmful act.  They must present "credible" evidence that the harmful act resulted from director misbehavior.

In this case, though, there was plenty of evidence of misbehavior.  There was a securities case largely arising out of the same behavior.  Moreover, the securities case survived a motion to dismiss, primarily based upon the failure to prove scienter.  The trial court, therefore, held that the plaintiffs in the securities case had met the elevated pleading standards of the PSLRA.  In other words, the very securities case that the SLC had concluded had no merit managed to survive a motion to dismiss in federal court.  If ever there was credible evidence that the SLC process was flawed, the court's decision in the securities case demonstrated this.

But, as we shall see, in fact the Chancery Court decided otherwise.

For primary materials on this case and on the securities case, go to the DU Corporate Governance web site.