Delaware courts encourage stockholders to use the “tools at hand” by obtaining a corporation’s books and records before initiating lawsuits.  Stockholder plaintiffs, in turn, have utilized this tool with increased frequency.  In the past few years, Delaware courts have even placed limits on defenses companies may assert in a books and records action.  In a July 7, 2023 letter opinion in Lawrence B. Seidman v. Blue Foundry Bancorp, C.A. No. 2022-1155-MTZ, the Delaware Court of Chancery shifted fees for “glaringly egregious litigation conduct” by defense counsel in a Section 220 (books and records) action.  This recent decision is a powerful reminder that the Court of Chancery expects companies to reasonably comply with books and records demands and avoid “overly aggressive litigation strategies.”

The background of this action is relatively straightforward.  In 2021, the plaintiff, a stockholder of record and beneficial owner of Blue Foundry common stock, became concerned about Blue Foundry’s plan to grant additional compensation in the form of equity awards to non-employee directors and senior management.  The plaintiff felt that this additional compensation was excessive in light of the company’s recent financial performance.  Plaintiff met with senior management on multiple occasions, expressed his concerns, and argued that the equity awards should be subject to “an appropriate performance standard.”  Management declined to take any action in response to the plaintiff’s concerns or suggestions.

In July 2022, the company filed a proxy statement with the SEC disclosing that the company’s board had unanimously approved, and was recommending that the stockholders approve, the company’s proposed equity incentive plan. The proxy statement represented that in determining the amount of the equity awards, the company’s compensation committee had considered a “peer group analysis” of compensation awarded by other comparable companies.  However, when questioned at the August 2022 annual meeting, management denied that such a peer group analysis had been conducted.  Nonetheless, the stockholders voted to approve the equity incentive plan.  In October 2023, the compensation committee began granting awards to senior management.

In the meantime, Plaintiff made a written demand pursuant to Section 220, seeking books and records including, among other things copies of any “compensation consulting reports” received by the board in connection with the equity incentive plan.  The company rejected the demand, refusing to produce a single document.  In response, the plaintiff filed suit (originally in New Jersey, but then voluntarily dismissed and refiled in Delaware).

Throughout the litigation, defendant engaged in obstructionist tactics according to the Court, including: (i) insisting (without justification) on a deposition of plaintiff in-person in Delaware when they knew plaintiff was located in Florida; (ii) pressing a line of questioning at Plaintiff’s deposition based on a mischaracterization of a statement made by Plaintiff; (iii) introducing a new affirmative defense on the night before the close of discovery (hence depriving Plaintiff of the opportunity to take discovery on it); and (iv) telling Plaintiff that they expected to call him as a live witness at trial and then misrepresenting to the Court that it was Plaintiff who insisted on live testimony.

On the eve of trial, the defendant finally agreed to produce compensation consulting reports and responsive formal board materials.  When ultimately produced, these materials amounted to approximately sixty pages of documents, with the two compensation consulting reports that were the subject of the original demand totaling only fifteen pages.  

Plaintiff filed a motion for fees and expenses.  In the briefing on the fee motion, Defendant’s obstructionist tactics continued according to the Court, including misrepresenting its conduct at Plaintiff’s deposition and arguing that it “did not know” that Plaintiff was located in Florida (when the record clearly established that they did).

The Court granted fee-shifting, citing the “glaringly egregious” standard established by previous Delaware decisions.  The Court reaffirmed the appropriateness of fee-shifting where a corporate defendant engages in “overly aggressive litigation strategies by blocking legitimate discovery, misrepresenting the record, and taking positions for no apparent purpose other than obstructing the exercise of Plaintiff’s statutory rights” to books and records.  In addition to awarding the fees and expenses of the original action, the Court asked Plaintiff’s counsel to draft a proposed opinion, at Defendant’s cost.

The Court’s final opinion cited multiple factors that, collectively, amounted to the “glaringly egregious” standard.  In addition to the Defendant’s obstructionist conduct in litigation and misrepresentations to the Court cited above, Defendant took litigation positions that were simply not credible according to the Court.  Defendant argued that Plaintiff was not entitled to inspection because he could not establish a credible basis to support both of his stated purposes for inspection, but the record showed otherwise. Defendant also argued that Plaintiff was not entitled to inspection because, essentially, Plaintiff had not demonstrated that a future claim would be actionable.  But Delaware law is clear that a books and records proceeding is not the appropriate venue for assessment of the merits of a future claim that a plaintiff might decide to bring based on that information.  In other words, a “stockholder who demonstrates a credible basis from which the court can infer wrongdoing or mismanagement need not demonstrate that the wrongdoing or mismanagement is actionable.”

Finally, the Court appeared swayed by the fact that Defendant initially refused to produce any documents whatsoever in response to the Plaintiffs demand, even though the documents that the company ultimately voluntarily produced in settlement amounted to only approximately sixty pages total, with the documents requested by the original demand numbering only 15 pages.