Delaware Court of Chancery Grants Stockholder’s Section 220 Demand for Books and Records
By Annette E. Becker and Frank J. Mazzucco
In Michael Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019), the Delaware Court of Chancery granted a plaintiff stockholder’s demand for a company’s books and records under Section 220 of the Delaware General Corporation Law in connection with a proposed merger.
Keryx Biopharmaceuticals, Inc. (“Keryx” or the “Company”) is a commercial stage biopharmaceutical company. Baupost Group Securities, LLC (“Baupost”) was Keryx’s largest stockholder and had a contractual right to appoint one director to Keryx’s seven-member board of directors. The president and CEO of Akebia Therapeutics, Inc. (“Akebia”) served as Baupost’s appointee on Keryx’s board until late 2017, at which point he was replaced with a new director. Several months later, the Keryx board formed a special committee — chaired by Baupost’s new director appointee — to explore a merger with Akebia. Although the special committee initially recommended against the Akebia merger and initiated preliminary discussions with other potential strategic partners, following certain management changes at Keryx and additional due diligence on Akebia conducted directly by Baupost, the Company’s board reengaged Akebia in merger negotiations. Ultimately, the special committee recommended, and the board approved, Keryx’s merger with Akebia, which closed in late 2018.
Michael Donnelly (the “Plaintiff”) was a stockholder of Keryx. Prior to stockholder approval of the merger, the Plaintiff served a demand letter on Keryx under Section 220 of the Delaware General Corporation Law seeking books and records related to the transaction. In particular, the Plaintiff’s demand letter referenced alleged breaches of the duty of loyalty and improper disclosure and articulated concerns related to the fairness of the merger price, excessive influence by Baupost, and inadequate proxy disclosures that precluded stockholders from making an informed decision. After Keryx declined to produce the requested books and records, the Plaintiff filed a lawsuit.
The Court initially observed that, under Section 220, a stockholder seeking inspection of books and records must be a stockholder of record, comply with the form and manner requirements when making the demand, and state a “proper purpose” for the inspection sought. Section 220 defines a proper purpose as one “reasonably related to the party’s interest as a stockholder.” In this regard, the Court found that the Plaintiff had stated a proper purpose; investigation of potential mismanagement, waste, or wrongdoing indeed constitutes a proper purpose for inspection, as long as it is directed ultimately to a stockholder-related end. The Court noted further that minor discrepancies in the reasons for inspection between those set forth in the Plaintiff’s demand letter and those articulated by the Plaintiff in his deposition did not render the Plaintiff’s request for information pretextual or driven solely by his attorney. As a result, the Court found that Keryx failed to prove that the Plaintiff’s demand involved false pretenses.
The Court also concluded that the Plaintiff offered a “credible basis” for his demands regarding an alleged breach of the duty of loyalty. The Court stated that, to meet his burden for inspection, the Plaintiff was required to show only a credible basis from which the Court could infer possible mismanagement warranting further investigation. According to the Court, the Plaintiff did not need to offer specific, tangible evidence of his claim; rather, he needed merely to assert some evidence casting an inference of actionable wrongdoing. In the Court’s view, the Plaintiff’s evidence was sufficient to suggest that Baupost was a controlling stockholder and that it relied on this position to exert improper influence on the merger and to extract an additional benefit not shared with the other Keryx stockholders. Therefore, the Court concluded that the Plaintiff was entitled to investigate potential wrongdoing in connection with the merger through a Section 220 demand for books and records.
Finally, the Court declined to accept the Plaintiff’s argument that Keryx should be responsible for his legal fees, because, in the Court’s view, Keryx had not acted in bad faith during the litigation.