Delaware Supreme Court Orders Production of Emails in Response to Section 220 Demand and Refuses to Restrict Knock-On Litigation to Delaware

In KT4 Partners LLC v. Palantir Technologies Inc., the Delaware Supreme Court required a corporation to produce emails in response to a “books and records” demand under 8 Del. C. §220; it also refused to limit any knock-on litigation on the merits to the Delaware Court of Chancery.

KT4 is a stockholder in Palantir and received certain rights under a series of Investor Rights Agreements and a First Refusal and Co-Sale Agreement. After a falling out between KT4 and Palantir’s management, Palantir amended the Investor Rights Agreement in ways detrimental to KT4. KT4 responded with a request to inspect Palantir’s “books and records” pursuant to 8 Del. C. §220, which entitles a stockholder to inspect a corporation’s “books and records” if, and to the extent that, the requested inspection “is for a proper purpose.”

Palantir refused to comply, and KT4 filed a §220 action in the Delaware Court of Chancery to compel production of the requested documents. The Court of Chancery ruled that KT4 had a statutory “proper purpose” of investigating three areas of potential corporate wrongdoing: 1) Palantir’s failure to hold stockholder meetings, 2) Palantir’s amendment of the Investor Rights Agreement, and 3) Palantir’s potential breach of the Investor Rights and Co-Sale Agreements. The Court of Chancery further held that KT4 was “entitled to inspect books and records that are essential to fulfill” these three purposes.

As the parties sought to prepare an order implementing the Court of Chancery’s decision, two disputes arose: 1) whether Palantir must produce, in addition to traditional corporate records such as meeting minutes and resolutions, informal emails relating to the three investigative purposes and 2) whether KT4 should be limited to commencing any litigation arising from Palantir’s §220 production to the Delaware Court of Chancery or whether, as KT4 proposed, it could commence such litigation in other states’ courts if a defendant does not first consent to jurisdiction in Delaware.

The Court of Chancery resolved both lingering disputes against KT4, finding that Palantir did not have to produce emails and providing that any subsequent lawsuit filed by KT4 must be brought in the Delaware Court of Chancery in the first instance.

The Delaware Supreme Court reversed the Court of Chancery on both points.

While cautioning that “§220 inspections are not tantamount to ‘comprehensive discovery’” and are “much less extensive than would likely be produced in discovery under the standards of Rule 26,” the Court held that, under the particular facts presented to it, Palantir’s management’s emails were “necessary” to the three investigative purposes identified by the Court of Chancery and thus must be produced. The Court anchored its finding of necessity on the facts that Palantir’s management conducted “its corporate business informally over email and other electronic media,” that “the potential wrongdoing appeared to have occurred by email,” and that “there [were] no board-level documents” relating to the three approved areas of investigation.

Regarding the jurisdictional limitation on subsequent lawsuits by KT4, the Delaware Supreme Court said that the Court of Chancery is authorized to impose such limitations when resolving a §220 action, but it must exercise caution and impose such a limitation only when “case specific factors” call for it. The Court found the “case specific factors” before it—including that the likely targets of a knock-on lawsuit are California residents and that the Investor Rights and First Refusal Agreements contain California choice-of-law provisions—cut against Delaware-only jurisdiction restriction and allowed KT4 to commence possible future litigation outside Delaware if the defendants in such litigation do not first consent to Delaware’s jurisdiction.

The KT4 decision obviously is a welcome development for those investigating corporate misbehavior. But it is also a reminder of the importance of following corporate formalities and board best practices. Had Palantir maintained formal minutes and resolutions documenting its board’s deliberations, the result may very well have been different, and it may have been able to avoid producing emails in response to KT4’s §220 demand.

 

Christopher Walsh is a Director in the Gibbons Commercial & Criminal Litigation Department.
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