Originally published in ALM's Delaware Business Court Insider
Stockholders in a Delaware corporation are entitled to inspect certain of the company’s books and records, under Delaware General Corporation Law Section 220. A prerequisite to inspection is that the stockholder has a proper purpose. Investigating wrongdoing by a corporate fiduciary is a recognized proper purpose. But, as a gating issue, Delaware law requires the stockholder establish a credible evidentiary basis to suspect and permit investigation of the potential wrongdoing.
Credible basis is “the lowest possible burden of proof.” As demonstrated by the Delaware Court of Chancery’s recent decision in State of Rhode Island Office of the General Treasurer, v. Paramount Global, C.A. No. 2024-0457-SEM, a stockholder may establish a credible basis from a variety of sources including—as the court held here—from events reported in newspaper stories relying on anonymous interviewees, and even where some of the articles post-date a stockholder’s demand. Both of the court’s holdings are marked developments in the credible basis caselaw.
Background and the Court of Chancery’s Decision
A stockholder in Paramount Global (Paramount), a Rhode Island state pension fund (pension fund stockholder), served a books and records demand on Paramount to investigate potential wrongdoing in connection with the controlling-stockholder’s alleged “steering bidders away” from a company-level transaction to a parent-level transaction. The pension fund stockholder referred to these alleged actions as both usurpation of the company’s opportunities and, more, broadly a breach of the duty of loyalty by the company’s controller.
In support, the pension fund stockholder pointed to over 40 newspaper articles from several reputable publications, like the Wall Street Journal, New York Times, Financial Times and Bloomberg, which reported on the controlling stockholder’s actions. The newspapers relied, for their reporting, on confidential sources referred to as “close to the situation” or “close to the negotiations.” On the same day as the demand, and during the time leading up to trial, additional newspaper articles were published, again, citing anonymous sources, reporting on further developments relating to the controlling stockholder allegedly steering company-level transactions away to the parent-level. Post-demand, the pension fund stockholder also relied on these additional news reports.
Paramount rejected the pension fund stockholder’s demand, arguing that newspaper articles based on confidential, uncorroborated sources did not support a credible basis and nor could the stockholder rely on sources post-dating the demand. Post-trial, and reviewing the stockholder’s exceptions taken from the Magistrate-in-Chancery’s report in favor of Paramount Global, the Court of Chancery disagreed with Paramount’s positions. The Court of Chancery ruled the pension fund stockholder had, on the contrary, stated a proper purpose supported by a credible evidentiary basis.
As to Paramount’s arguments that newspaper reports based on uncorroborated, anonymous sources did not have sufficient indica of reliability, the Court of Chancery found that the sheer volume of newspaper reports (numbering close to 50 articles) from reputable publications belied any concerns. The Court of Chancery noted that the reputable publications had high internal standards for fact-checking confidential sources and that the sources themselves, termed “close to negotiations” were likely drawn from either internal personnel involved in the deal or professional advisers, like lawyers and investment bankers. Accordingly, the Court of Chancery held that, under these circumstances, the newspaper reports had sufficient indicia of reliability. This was, as the court noted, in contrast to a prior decision of the Court of Chancery which had denied a books and records demand based on only two newspaper stories that merely mentioned the corporation, rather than “directly implicating” anyone in the alleged wrongdoing.
The Court of Chancery, similarly, rejected Paramount’s argument that a stockholder cannot, as a blanket rule, rely on events or sources post-dating the demand. Distinguishing events post-dating a demand from situations where information is available to a stockholder pre-demand which the stockholder neglects to include, the court—apparently as a matter of first impression—permitted the stockholder to rely on post-demand information. While stating it was not creating a rule for all cases, the Court of Chancery found the pension fund stockholder could rely on the post-demand newspaper articles because the information was not available to the stockholder pre-demand; the stockholder disclosed it would rely on these sources pretrial; and the information related to the opposing party—here, Paramount—and, thus, Paramount could not claim surprise or prejudice.
Key Takeaways
The Court of Chancery’s Paramount decision is a notable development in both what sources of information may constitute a credible evidentiary basis and when. According to the Paramount court, newspaper articles—like other materials potentially supporting a credible evidentiary basis—do not, per se, lack indicia of reliability and should be reviewed on a case-by-case basis. Similarly, according to the Paramount court, information post-dating a demand is also not per se impermissible, and may support a credible basis, where disclosed pretrial and where there is no prejudice to the opposing party.
Credible basis is “the lowest possible burden of proof.” As demonstrated by the Delaware Court of Chancery’s recent decision in State of Rhode Island Office of the General Treasurer, v. Paramount Global, C.A. No. 2024-0457-SEM, a stockholder may establish a credible basis from a variety of sources including—as the court held here—from events reported in newspaper stories relying on anonymous interviewees, and even where some of the articles post-date a stockholder’s demand.
