Securities Regulation Daily AmerisourceBergen must hand over books to plaintiffs investigating opioid wrongdoing
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Monday, January 13, 2020

AmerisourceBergen must hand over books to plaintiffs investigating opioid wrongdoing

By Anne Sherry, J.D.

The drug distributor tried to attack the plaintiffs’ potential claims on their merits, but all that is required for an inspection is a credible basis to infer wrongdoing, not an actionable claim.

AmerisourceBergen stockholders won the right to see the company’s books and records in order to investigate wrongdoing in connection with the distribution of opioids. Contrary to AmerisourceBergen’s arguments, shareholders making a Section 220 demand need not possess an actionable claim or even state their ultimate objective upfront, the Delaware Court of Chancery held. Having found that the plaintiffs stated a proper purpose for the inspection, the court ordered AmerisourceBergen to turn over formal board materials to give the plaintiffs a foothold toward identifying further documents in discovery (Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corporation, January 13, 2020, Laster, J.).

The plaintiffs’ inspection demand stated its purposes to investigate possible breaches of fiduciary duty, mismanagement, and other violations of law by AmerisourceBergen directors and officers in connection with the distribution of prescription opioids and to evaluate the independence and disinterestedness of the members of the board. Additional listed purposes were the consideration of remedies and to evaluate possible litigation "or other corrective measures." The court treated these two latter purposes as elaborations of the former and found that the plaintiffs had made the showing necessary to establish their stated purposes.

Government investigations created credible basis. If a stockholder’s stated purpose is to investigate alleged improprieties or mismanagement, the stockholder must show a credible basis from which the court can infer possible mismanagement warranting further investigation. The "credible basis" standard is the lowest possible burden of proof, and the stockholder need only establish that basis by a preponderance of the evidence. The plaintiff may rely on circumstantial evidence and on hearsay that is sufficiently reliable. Here, the plaintiffs’ reliance on government investigations and lawsuits relating to AmerisourceBergen’s opioid distribution practices sufficed to establish a credible basis to infer that the company may have violated the Controlled Substances Act. The court rejected AmerisourceBergen’s argument that the investigations and litigation were directed at the broader pharmaceutical industry: "That may be true, but the argument that ‘everyone else is doing it’ is rarely a persuasive response."

Merits-based defenses fail. The company’s main line of defense against the inspection demand derived from characterizing the plaintiffs’ purposes as "confined to investigating a Caremark claim with the sole objective of bringing litigation." AmerisourceBergen then raised merits-based defenses against that future lawsuit. The court rejected this approach.

First, a stockholder need not commit to a particular strategy or objective prior to seeing the results of the investigation. The court criticized cases that required a stockholder to state not only a proper purpose for the demand but also its plans for the information as imposing a "magic words" requirement. Such a threshold only serves to privilege sophisticated stockholders who know enough to add the magic words to their demand. The statute only requires a proper purpose, and the Delaware Supreme Court has not gone further.

Similarly, the court declined to adopt a requirement that stockholders introduce evidence from which the court can infer the existence of an actionable claim against the board. Rather than establish such a requirement, the Delaware Supreme Court has repeatedly urged stockholders to seek books and records before filing derivative actions because otherwise plaintiffs typically lack the necessary facts to plead an actionable claim. It follows logically that a stockholder does not have to introduce evidence suggesting an actionable claim in order to obtain books and records. Again the court criticized a recent line of chancery cases requiring a plaintiff to provide evidence from which a Caremark claim could be inferred. This standard, which is functionally identical to the standard for surviving a motion to dismiss, is "likely insurmountable for a stockholder who can point to corporate wrongdoing, but who lacks internal information about what the directors actually did or knew," the court wrote, and it goes beyond Delaware Supreme Court precedent.

Finally, the court rejected AmerisourceBergen’s merits-based defenses that the plaintiffs would be unable to plead a non-exculpated claim or that any future lawsuit would be time-barred. Again, Delaware Supreme Court precedent does not require an actionable claim as a predicate to a books and records inspection. Even so, the inspection could potentially lead to non-exculpated and timely claims.

Scope of inspection. The court next turned to the inspection’s scope. The starting point for an adequate inspection is the corporation’s formal documents at the board level, such as meeting minutes. With a proper showing, the inspection may extend to informal materials such as communications outside of formal board meetings or even to officer-level materials. The AmerisourceBergen stockholders requested all of these types of documents, but the court could not determine whether they were entitled to more than the formal board materials, particularly because AmerisourceBergen did not disclose what types of records it maintains and where they are located. The court allowed the plaintiffs access to the formal board-level materials dating back to 2010—despite AmerisourceBergen’s argument that conduct that old would be inactionable due to the statute of limitations—and granted leave to conduct discovery to learn what other documents exist.

The case is No. 2019-0527-JTL.

Attorneys: Samuel L. Closic (Prickett, Jones & Elliott, P.A.) and Gregory V. Varallo (Bernstein Litowitz Berger & Grossmann LLP) for Lebanon County Employees’ Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan. Stephen C. Norman (Potter Anderson & Corroon LLP) for AmerisourceBergen Corp.

Companies: Lebanon County Employees’ Retirement Fund; Teamsters Local 443 Health Services & Insurance Plan; AmerisourceBergen Corp.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FiduciaryDuties DelawareNews

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