Delaware law gives shareholders the right to request corporate books and records in order to investigate issues that are of interest to them. For several decades now, Delaware courts have encouraged shareholders to take advantage of this right as a matter of first course, to use the “tools at hand” and seek company records before filing litigation or making a litigation demand. In recent years, more shareholders (and their attorneys) have been following that advice, and the so-called “Section 220 books and records demand” is more common than ever.
Delaware courts have acknowledged, however, that the shareholder’s right to obtain corporate records must be balanced against the board’s right to manage the company’s business without undue interference. Accordingly, where a shareholder requests mundane company materials like stock ledgers or shareholder lists, the company generally must produce. But where the shareholder seeks more sensitive company records, the law puts the burden on the shareholder to show why the production is necessary. READ MORE
In any change-of-control business transaction, the decision by the target company’s board of directors to approve the deal is subject to heightened scrutiny by the courts. These days, virtually every M&A deal is sure to attract at least one strike suit challenging the board’s decision, so it is essential that the board’s decision-making process be robust and untainted by any conflicts of interest.
One way in which a board can insulate its decision-making process is to employ a special committee of independent, outside directors to evaluate and negotiate any potential sale. Although boards are not required by law to use special committees when brokering change of control transactions, Delaware courts have repeatedly held that the use of a special committee can be powerful evidence of a fair and adequate process. That is especially true where (i) the contemplated transaction is with a controlling stockholder or (ii) a majority of the directors are conflicted, two situations where courts will employ the even-more exacting “entire fairness” standard of review. As the Delaware Supreme Court recently noted, “the effective use of a properly functioning special committee of independent directors” is an “integral” part “of the best practices that are used to establish a fair dealing process.” READ MORE
What makes a director “independent”? That question is important, not only to investors who want to ensure that boards of directors exercise objective judgment on corporate affairs, but also to companies, who need assurance that their boards will not run afoul of exchange listing requirements, and to directors themselves, for protection against shareholder lawsuits challenging board decisions.
Listing requirements for both the New York Stock Exchange and NASDAQ provide basic checklists for directors independence, and state generally that directors cannot be employed by the company, cannot have family members who are employed by the company and cannot have a controlling interest in the company’s substantial business partners. But the exchanges’ listing requirements also contemplate that the question of independence is far broader than any checklist. The NYSE’s listing requirements further note that directors should have “no material relationship” with the Company; NASDAQ’S requirements state directors should have no relationship which “would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” READ MORE