In the ever-changing and divisive political climate facing our nation today, boards of directors and the companies they oversee face myriad pressures from numerous stakeholders to weigh in on specific political, cultural, and social issues. Helpfully, a recent decision by the Delaware Chancery Court determined that a board’s decision to utilize the company’s voice and speak out about the pertinent issue is a “business decision” by the Company. The Court reasoned that Delaware directors have “significant discretion to guide corporate strategy—including on social and political issues” and that the decision to oppose such an issue fell outside the purview of 8 Del. C. § 220’s requirement to provide company books and records related to that decision
Delaware General Corporation Law Section 220 permits a stockholder to inspect corporate books and records for a “proper purpose” related to its ownership of stock (typically to investigate suspected corporate wrongdoing), as long as the stockholder can demonstrate a “credible basis” for suspecting wrongdoing or mismanagement. If a stockholder meets both requirements, he or she is entitled to inspect those books and records that are “necessary or essential” to investigate the suspected wrongdoing or mismanagement.
Simeone v. Walt Disney Company involved the Disney board’s decision to speak out against Florida House bill HB 1557 (titled the “Parental Rights Act” but popularly referred to as the “Don’t Say Gay” law) (“HB 1577”), which restricts discussion in classrooms related to sexual orientation and/or gender identity. On the day Florida Governor Ron DeSantis, signed HB 1577 into law, Disney – following multiple Board meetings discussing its planned response – released a public statement decrying HB 1577, noting the company wished HB 1577 to be repealed “or struck down in the courts.” The Company also publicly declared it was “dedicated to standing up for the rights and safety of LGBTQ+ members of the Disney family, as well as the LGBTQ+ community in Florida and across the country.” Disney’s decision to speak out against HB 1577 followed significant internal and external criticism from critical stakeholders (most notably, its employees and its creative teams) of Disney’s original muted response to HB 1577. The evidence showed that Disney’s Board chose to speak out against HB 1577 after being confronted by this pressure.
Disney’s statement and opposition to the law led to, among other government actions, the dissolution of the special district containing Disney World and the loss of Disney’s special tax status in the state. In the subsequent months, Disney’s share price fell nearly 37% over a four-month period.
Shortly thereafter, plaintiff Kenneth Simeone (“Plaintiff”) filed a Section 220 demand to inspect certain books and records of Disney on the basis that the Board “may have breached [its] fiduciary duties to the Company and its stockholders by, inter alia, failing to appreciate the known risk that the Company’s political stance would have on its financial position and the value of Disney stock.” The Plaintiff sought corporate records related to the Board’s decision to publicly criticize HB 1577, and alleged that the Board acted even though it knew “such opposition would be harmful to the Company and stockholder value.” The Plaintiff’s demand sought board-level records, but also multiple years’ worth of emails between the Board and Disney officers. The Company pushed back on the Plaintiff’s demand, and produced only formal board-level documents concerning HB 1577. Plaintiff sued Disney to compel inspection of the other documents under 8 Del. C. § 220.
After a two-day long trial, Vice Chancellor Lori Will excoriated Plaintiff’s request for additional documents under Section 220, denying the request on three grounds.
First, the Court determined that Plaintiff’s stated “purposes” for the Section 220 demand in this case were not in fact his purposes, but rather were improperly “lawyer-driven” and “pretextual.” Plaintiff had been solicited by an ultra-conservative law firm representing the Thomas More Society (a political interest group “championing Life, Family, and Freedom”), which had then financed the litigation. While Plaintiff’s counsel could pursue litigation in support of its beliefs, the Court held that Section 220 was not the appropriate venue to “advance their beliefs.” According to the Court, this litigation was the “rare circumstance” in which a defense of this nature is available to defendants, where the litigation’s purpose is clearly driven by counsel and outside interests.
Second, the Court denied Plaintiff’s demand because it was not motivated by a “proper purpose.” Plaintiff claimed he was investigating the Board’s alleged wrongdoing in making a public statement against HB 1577 even though it had been warned against doing so by Governor DeSantis and which arguably led to the stock price falling. However, the Court held that this was not a basis for potential wrongdoing, because the exercise of corporate speech is an ordinary business decision that enjoys the protections of the business judgment rule and falls within the board’s “significant discretion to guide corporate strategy—including on social and political issues.” While exercising this type of speech “brings both risks and opportunities,” the Court firmly held that boards should be “empowered to weigh these competing considerations and decide whether it is in the corporation’s best interests to act (or not act).”
The Court formally rejected Plaintiff’s argument that the Board purposefully “ignored a known risk” (i.e., Governor DeSantis’s threats) when speaking out against HB 1577. Even if the Board “could have avoided political blowback by remaining silent,” it need not because the Board, in its discretion, determined that “doing so could have damaged the company’s corporate culture and employee morale.” At bottom, the Court theorized that the Company’s board was best positioned to determine when and how to utilize the Company’s voice in speaking out about political and cultural issues, and that the Company could consider the interests of corporate stakeholders beyond the traditional interests of stockholders. Its reason? That the board can credibly determine the interests of those corporate stakeholders (such as employees and corporate culture that “drive a company’s profits”) are “rationally related” to building long-term value for the company’s stockholders. Such a decision about whether to engage in corporate speech in an effort to promote “non-stockholder interests” is left to the discretion of the board under Delaware law. Requiring inspection of corporate records where a plaintiff merely disagrees with the decision of the corporation to use its voice to promote non-stockholder interests would “intrude upon the ‘rights of directors to manage the business of the corporation without undue influence.’”
Lastly, the Court rejected Plaintiff’s demand because further inspection of email records was unwarranted in light of the Company’s production of its responsive formal board-level materials. As the Court noted, Delaware precedent holds that “[f]ormal board-level documents are often the beginning and end of a Section 220 production.” Because Disney had already produced formal board-level materials, and indeed produced them to the Plaintiff, that production “accomplish[ed] the petitioner’s proper purpose.” As such, there was no reason to deviate from Chancery Court precedent and order additional costly email production here.
While seemingly a mundane application of Section 220 jurisprudence, the Disney case demonstrates to Delaware boards of directors that Section 220 cannot be used to target corporations that choose to exercise speech in favor of social and political interests, in the absence of any other wrongdoing. While Section 220 remains an important tool for stockholders to flesh out potential instances of wrongdoing by a corporation, it cannot be used by special interest groups and other politically-motivated attorneys to target corporations for speech with which those interest groups disagree.
What else does this mean for Delaware corporations?
- It reaffirms the need for corporate boards to continue to observe corporate formalities and maintain formal records separate and apart from any email or other informal discussions. Ensuring the completeness and accuracy of formal board-level materials will help courts to determine that productions of emails and other informal records (beyond the formal materials typically produced in a Section 220 action) remain unnecessary. This will allow boards to forego the expense of discovery more typically seen in plenary civil discovery in a Section 220 action.
- While the importance of the impact of any corporate decision on stockholders and corporate value remains paramount, boards now have the ability to consider other equally important interests beyond those of its stockholders – its employees and corporate culture/morale, its relationships with non-stock-owning stakeholders, etc. While the interests of these stakeholders might not have immediate effect on a corporation’s value, such interests can be considered by the board with respect to the long-term value of the corporation.
- Lastly, to the extent a board wishes to direct corporate speech aimed at specific political, cultural, and social issues, it may do so knowing such decisions likely enjoy the protections of the business-judgment rule (assuming a deliberative process was employed to arrive at that decision). Active, engaged boards that meet their obligations to take deliberative steps before using “using the corporation’s voice . . . on matters of social significance” will likely be shielded from intrusive books and records requests from shareholders that disagree with board’s decision. While the facts and circumstances of this case are important and distinct, the ruling likely has enormous implications for decisions facing a board in the current political climate, including issues concerning reproductive rights, gender identity and healthcare issues, and environmental, social and governance (ESG) issues. If a board determines it should speak out on these issues, and that doing so will build long-term value for the corporation, the board’s decision will likely enjoy the full protection that Delaware law has to offer.