The Non-Inspection Inspection Rights in Delaware: Espinoza v. HP (Part 1)

We have noted a number of times the desultory nature of law with respect to inspection rights in Delaware.  To invoke their inspection rights, plaintiffs need to establish a proper purpose.  In general, proper purpose requires some allegation of wrong doing.  The courts have added to the proper purpose requirement an obligation to present a "credible" basis for the claim of wrongdoing.  Essentially, therefore, the plaintiffs must have affirmative evidence of a breach of fiduciary duties or other wrong doing. 

Although described as a low evidentiary standard, the credible basis requirement is, as a practical matter, quite difficult to overcome.  Because fiduciary violations often require some kind of showing of a process failure, plaintiffs are typically unable to obtain such information in the public domain.  The result is that their case gets dismissed, irrespective of the importance of the information sought. This is discussed in Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty. 

In addition, even if plaintiffs win, they rarely receive attorneys fees.  The courts require a showing that the company's opposition was based upon bad faith.  It is rarely found.  The result is that plaintiffs invariably must add the costs of litigation to the inspection process, something that no doubt discourages many shareholders from even invoking their rights.

What are some examples?  The Court in Seinfeld denied shareholders access to documents relating to executive compensation, despite allegations that the amounts were excessive and duplicative.  It was as if the owners of the business have no role in assessing arguably excessive compensation.  In Axcelis, shareholders were denied agendas and documents distributed to board members in connection with their decision to reject letters of resignation submitted by three directors who did not receive a majority of the votes cast. 

In other words, the provision has become so managment friendly in its approach that it has become entirely divorced from the actual informational needs of shareholders.  The doctrine has advanced so far in this direction that when this Blog challenged this approach, one Delaware court characterized it as "sensationalized criticism."

But severe though these are, they do not represent the only hurdles confronted by shareholders seeking to invoke their inspection rights.  When courts find a proper purpose and a credible basis, they still have broad discretion to deny access to particular documents, even if relevant and important to the purpose alleged. 

That is what happened in Espinoza v. Hewlett-Packard.  Plaintiff sought documents related to the departure of Mark Hurd, the former CEO, from HP.  The Plaintiff successfully alleged a proper purpose and a credible basis.  Yet when it came to a document of singular importance -- the report by a law firm that had conducted an investigation of the matter -- the court denied access.  The basis?  That Plaintiff had enough information and did not need it.

Primary materials can be found at the DU Corporate Governance web site.