Delaware Supreme Court Provides Guidance on Availability of Electronic Documents Through Section 220 Demand

Skadden, Arps, Slate, Meagher & Flom LLP

KT4 Partners LLC v. Palantir Techs. Inc.No. 281, 2018 (Del. Jan. 29, 2019)

On January 29, 2019, the Delaware Supreme Court reversed a decision of the Court of Chancery on two issues raised in an appeal of a stockholder Section 220 Delaware General Corporation Law (DGCL) action for books and records. The stockholder, KT4 Partners LLC, prevailed below on its demand for several categories of the books and records of Palantir Technologies Inc. but argued that the Court of Chancery had erred in not requiring the production of electronic communications and in denying its proposed exception to a jurisdictional use restriction.

On the first issue, the Delaware Supreme Court held that a production order limited to formal board minutes and board materials was insufficient because Palantir did not keep formal minutes. The Supreme Court stated that “[i]f the only documentary evidence of the board’s and the company’s involvement in the amendments comes in the form of emails, then those emails must be produced.” Because KT4 presented sufficient evidence that Palantir did not honor traditional corporate formalities and acted through email in connection with the alleged wrongdoing that KT4 was seeking to investigate, the Supreme Court concluded that KT4 had made a sufficient showing that emails were necessary to investigate potential wrongdoing related to amendments to an LLC agreement. The Supreme Court noted, however, that “[i]f a corporation has traditional, non-electronic documents sufficient to satisfy the petitioner’s needs, the corporation should not have to produce electronic documents.” The Supreme Court continued, “if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions, and official letters, it will likely be able to satisfy a § 220 petitioner’s needs solely by producing those books and records.”

As to the second issue, the Supreme Court held that the Court of Chancery abused its discretion by refusing KT4’s request to limit a jurisdictional use restriction the Court of Chancery had imposed. In its final order below, the Court of Chancery had imposed a broad restriction on the use of the materials KT4 was entitled to inspect, such that KT4 could not use them in litigation outside the Court of Chancery. The Court of Chancery rejected KT4’s requests that it be allowed to bring suit either (1) in the first instance in the Superior Court of Delaware, where other litigation between the parties was pending; or (2) in a court located in another jurisdiction for any nonderivative action where one of Palantir’s directors, officers or agents is named as a defendant and that person would not consent to personal jurisdiction in Delaware. The Supreme Court held that because the Court of Chancery found a credible basis to investigate potential wrongdoing related to the violation of contracts executed in California, governed by California law and among parties living or based in California, the Court of Chancery lacked reasonable grounds for limiting KT4’s use in litigation of the inspection materials to Delaware and specifically the Court of Chancery.

This summary can be found in the March 2019 issue of Inside the Courts.