Annual Meetings and Special Meetings

Shareholders generally act by voting at meetings. The annual shareholder meeting is a meeting that occurs once per year in which shareholders typically vote on routine matters. You can find the date of a public company's annual meeting in its SEC filings. Some companies specify the annual meeting date in their bylaws.

Sometimes shareholder action is needed between annual meetings. Special meetings are shareholders meetings held between annual meetings for urgent matters. For example, if someone offers to acquire the company the shareholders may vote on whether to approve the merger. 

Authority to Call Meetings

A special meeting may be called by the board of directors or any other person authorized in the articles or bylaws to call such a meeting. MBCA § 7.02; DGCL § 211(d). In MBCA states, shareholders of at least 10% of the voting shares may also call a special meeting. MBCA § 7.02(a)(2). Companies sometimes expand this list in their bylaws. For example, Alphabet (Google's parent company) allows the chair of the board to call a special meeting.

Agenda

Prior to the shareholder meeting, the company will provide an agenda. The directors fiercely defend the meeting agenda against any additions by shareholders. At well-known companies, shareholders often make shareholder proposals that would change the corporate governance system or advance social causes. If directors are to be elected at the meeting, shareholders may propose their own nominees. Management typically uses every avenue available to keep these items off the agenda.

Notice and Quorum

The company must provide between ten and sixty days notice for both annual and special shareholder meetings. MBCA § 7.05(a); DGCL § 222. The notice must state the purpose for which the meeting is being held. MBCA § 7.05(c). For public companies, you can find the agenda items in the company's SEC filings.

The shareholders cannot take any actions without a quorum. A quorum is the minimum number of attendees that must be present in order for the body to conduct any official business. At shareholder meetings, the quorum refers not to the number of persons, but the number of shares held by those persons. The quorum requirement for a shareholder meeting is a majority of outstanding shares, although the articles of incorporation can specify a higher or lower quorum threshold. MBCA § 7.25(a); DGCL § 216.

Record Dates

Vote Required to Approve Action

When voting, shareholders have three options, "for," "against" or "abstain." How should we treat the abstentions?

In Delaware, a matter is approved if a majority of the shares present vote to approve. So in Delaware abstaining votes are counted as “no” votes. DGCL § 216.

In MBCA states, a matter is approved if there are more votes cast "for" than "against." This means abstaining votes are ignored. MBCA § 7.25(c); see also MBCA §§ 10.03 cmt e, 11.04 cmt e, 12.02 cmt e.

These standards are just default statutory minimums. Corporations can create higher or lower thresholds in their articles of incorporation.

Shareholders rarely attend shareholder meetings. It's a hassle. Instead, shareholder vote by granting someone their proxy. Granting someone a proxy means authorizing that person to vote your shares at the meeting. This is usually done electronically and can be revoked any time before the meeting.

To facilitate this, companies produce a proxy statement. A proxy statement is a document that details the agenda and logistics of a shareholder meeting and requests the shareholder's proxy.

Because almost all votes are voted by proxy, and because proxies are issued in advance, the managers typically know how the vote will turn out in advance. They are the ones casting most of the votes.

The default rules allow shareholders to act without a meeting by getting a written consent. But they differ in how many shares you need to consent to the action.

In Delaware, you need the same level of consensus that you would need to approve the action if you held a meeting. DGCL § 228. So if you would need a majority of the votes to approve the action at a meeting, then you need consent from shareholders representing a majority of the shares in order to act by written consent.

The MBCA requires the consent be unanimous among all those entitled to vote. MBCA § 7.04. But you can modify the charter to match the rule in Delaware. MBCA § 7.04(b).  

Many public companies have amended their charter to prohibit or severely restrict the use of shareholder written consents. The concern is hostile takeovers. A would-be acquiror that can act by written consent can more more quickly and more broadly than one that must hold meetings. Eliminating the ability for shareholders to act by written consent makes hostile takeovers more difficult.

Directors are elected to their positions by the shareholders. MBCA § 7.28; DGCL § 216. They are hold their positions until the "next annual shareholders" meeting under MBCA § 8.05(b), or until their succsessor is elected under DGCL § 141(b). This annual cycle is the default rule and can be modified in the charter. 

Classified Boards

One not-too-uncommon modification is a classified board. Classified boards, also called staggered boards, are boards in which directors are divided into multiple classes (typically three), and only one class is up for election each year. See MBCA § 8.06; DGCL § 141(d).

For example, in a corporation with nine directors and three classes, each class would comprise three directors. In the first year, the shareholders would vote to elect directors for the first class, who serve a three-year term. The following year, sharheolders would elect directors for the second class, who then serve a three-year term. In the third year, the shareholders elect directors for the third class, who then serve a three-year term. In the fourth year, the first class of directors is up for election again and the cycle repeats. 

Shareholders mostly hate this. Recall that one of the shareholders' primary controls over the directors is the threat of voting them out of office. In a classified board with three classes it would take two elections to replace a majority of the board. (The first election you remove 1/3rd, the second election you remove 1/3rd).

Selecting Nominees

The election process begins with the nominee selection process. At public companies, the selection process is done by the board's Nomination and Governance Committee. Typically, they just select the current directors unless one is retiring. If there is a vacancy, public company boards will often use a search consultant to identify candidates. Boards will conduct background checks and interview candidates selected by the search consultant. There is always high demand for candidates with finance experience. Recently, there has also been high demand for candidates with experience in privacy, technology and international relations.

In smaller companies, the process is simpler. The nominees are selected by the board, often among people known by the executives.

Once the candidates are recommended by the board, their names are provided to the shareholders for a vote. We'll discuss this process more in the next sections. 

Votes Required for Director Elections

Most public company directors run unopposed, making the results a little anticlimactic. Running against the current directors is expensive (you have to find a nominee, pay to mail out proxy cards that we will describe in the following sections). If a shareholder is unhappy, it's easier to just sell the shares than to sink hundreds of thousands of dollars to change the board. It's just not worth the fight.

But shareholders can still register their discontent by voting against the directors. A typical director election will allow the shareholder to vote "For," "Against," or "Abstain" for each director nominee. This is different than, say, the U.S. presidential election, where voters have only one "for" vote which they cast for only one candidate.

By default, directors are elected by a plurality. MBCA § 7.25(c); DGCL § 216. The available seats are filled by the directors with the highest votes in favor. This means if there are five director seats available, then the five directors with the most votes get the seats, even if more votes were cast against them than for them. 

Here's a quick example. Assume the following four directors are running for reelection.

Assume there are four director seats up for election. The first goes to Alanis, who got the most votes. The next goes to Beck. Next, Courtney and Dylan are elected, even though they did not win a majority of the votes. Because there are four seats to fill and only four nominees, Dylan could have been elected with even a single "for" vote.

This plurality system is the default rule. But among the largest public companies in the U.S., most require majority voting. Under these systems if a director is running unopposed and does not receive a majority of "for" votes, the director is not elected and must tender a resignation to the board. But typically, the board will reject that resignation and the director will continue to serve. Recall that a director's term continues until their replacement is duly elected. DGCL § 141(b). Because no replacement was elected, and because their resignation was rejected, they just continue to serve like nothing happend.

So in the example above, if the company used majority voting, Courtney and Dylan would be required to resign, but the board would likely reject the resignation and they would both continue on the board.

Unpopular directors still face reputational consequences. Companies are less likely to nominate the director again. And the director will have a more difficult time being nominated to other boards at other companies. Much of the director selection process is driven by reputation, and folks are weary about bringing on a director that has failed to win shareholder support in the past.

Assume I own 51% of the shares and you own 49% of the shares. Assume that there are three director seats available. Under a fair system, how many would I be able to elect and how many would you be able to elect?

Straight Voting

By default, corporations use straight voting. Straight voting means each share votes "for," "against" or "abstain" for each director nominee, and the directors with the most votes are elected.

Under straight voting, a person holding 51% of the shares can outvote someone holding 49% of the shares to elect every director.

In this example, assume there are 100 shares outstanding and three seats available.

Using straight voting, my preferred nominees (Chandler, Joey and Monica) would each be elected because they have more votes than your preferred nominees (Phoebe, Rachel and Ross). Even though you hold 49% of the voting power, you're not able to elect even a single nominee. Straight voting makes it difficult for minority shareholders to influence the board.

Cumulative voting

Cumulative voting is an alternative voting system in which each share can cast a number of votes equal to the number of available seats, and the votes can be divided among the director nominees. See MBCA § 7.28(c). In this system you don't vote "for" or "against" nominees. You only vote "for," and you have a limited number of "for" votes.

For example, if I own one share and there are three board seats available, I have three votes (1 * 3 = 3). If I own two shares, then I could cast six votes (2 * 3 = 6). Let's see how that affects our example above. 

In this example, assume I hold 51 shares and you hold 49 shares. Assume there are three director seats available. So I have 153 votes (51 shares * 3 seats available = 153), and you have 147 votes (49 shares * 3 seats available = 147).

In this example, Chandler, Joey and Phoebe would be elected to the board. Effectively, I would elect two directors and you would elect one. (Notice that if I tried to split my votes among three directors, each would end up with 51 votes, so you would end up electing two directors and I would end up electing one, a worse outcome for me.)

Cumulative voting empowers minority shareholders because it allows them to pool votes toward their preferred nominees. In a situation with two shareholders, this seems more fair. But in a large public company, it is less clear why a director that lacks majority support should be helping run the company.

Cumulative voting is the rule in California, but most states use straight voting.

To calculate the how many directors each shareholder can elect under cumulative voting, I usually just guess and check. But if you prefer a formula:

X = Round down [(B+1) * (S -1) * (1 / T)]

X is the number of directors you can elect

B is the number of board seats up for election

S is the number of shares you own

T is the total number of shares outstanding

Marble Analogy

Some find it helpful conceptually to think of the systems in terms of jars and marbles. Imagine each nominee's name is pasted to a glass jar.

In straight voting, you put exactly one green marble or red marble in each jar. The jars that have more green marbles than red marbles win.

In cumulative voting when you enter the room, you're given a handful of marbles equal to the number of available director seats for each share you won. You can divide these marbles however you want among the jars. The jars with the most marbles win.

C.F.R § 240.14a-8: Shareholder proposals.

This section addresses when a company must include a shareholder's proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders. In summary, in order to have your shareholder proposal included on a company's proxy card, and included along with any supporting statement in its proxy statement, you must be eligible and follow certain procedures. Under a few specific circumstances, the company is permitted to exclude your proposal, but only after submitting its reasons to the Commission. We structured this section in a question-and-answer format so that it is easier to understand. The references to “you” are to a shareholder seeking to submit the proposal.

(a) Question 1: What is a proposal? A shareholder proposal is your recommendation or requirement that the company and/or its board of directors take action, which you intend to present at a meeting of the company's shareholders. Your proposal should state as clearly as possible the course of action that you believe the company should follow. If your proposal is placed on the company's proxy card, the company must also provide in the form of proxy means for shareholders to specify by boxes a choice between approval or disapproval, or abstention. Unless otherwise indicated, the word “proposal” as used in this section refers both to your proposal, and to your corresponding statement in support of your proposal (if any).

(b) Question 2: Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible?

  (1) To be eligible to submit a proposal, you must satisfy the following requirements:

(i) You must have continuously held:

(A) At least $2,000 in market value of the company's securities entitled to vote on the proposal for at least three years; or

(B) At least $15,000 in market value of the company's securities entitled to vote on the proposal for at least two years; or

(C) At least $25,000 in market value of the company's securities entitled to vote on the proposal for at least one year; or

(D) The amounts specified in paragraph (b)(3) of this section. This paragraph (b)(1)(i)(D) will expire on the same date that § 240.14a–8(b)(3) expires; and

(ii) You must provide the company with a written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, through the date of the shareholders' meeting for which the proposal is submitted; and

(iii) You must provide the company with a written statement that you are able to meet with the company in person or via teleconference no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal. You must include your contact information as well as business days and specific times that you are available to discuss the proposal with the company. You must identify times that are within the regular business hours of the company's principal executive offices. If these hours are not disclosed in the company's proxy statement for the prior year's annual meeting, you must identify times that are between 9 a.m. and 5:30 p.m. in the time zone of the company's principal executive offices. If you elect to co-file a proposal, all co-filers must either:

(A) Agree to the same dates and times of availability, or

(B) Identify a single lead filer who will provide dates and times of the lead filer's availability to engage on behalf of all co-filers; and

(iv) If you use a representative to submit a shareholder proposal on your behalf, you must provide the company with written documentation that:

(A) Identifies the company to which the proposal is directed;

(B) Identifies the annual or special meeting for which the proposal is submitted;

(C) Identifies you as the proponent and identifies the person acting on your behalf as your representative;

(D) Includes your statement authorizing the designated representative to submit the proposal and otherwise act on your behalf;

(E) Identifies the specific topic of the proposal to be submitted;

(F) Includes your statement supporting the proposal; and

(G) Is signed and dated by you.

(v) The requirements of paragraph (b)(1)(iv) of this section shall not apply to shareholders that are entities so long as the representative's authority to act on the shareholder's behalf is apparent and self-evident such that a reasonable person would understand that the agent has authority to submit the proposal and otherwise act on the shareholder's behalf.

(vi) For purposes of paragraph (b)(1)(i) of this section, you may not aggregate your holdings with those of another shareholder or group of shareholders to meet the requisite amount of securities necessary to be eligible to submit a proposal.

  (2) One of the following methods must be used to demonstrate your eligibility to submit a proposal:

(i) If you are the registered holder of your securities, which means that your name appears in the company's records as a shareholder, the company can verify your eligibility on its own, although you will still have to provide the company with a written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, through the date of the meeting of shareholders.

(ii) If, like many shareholders, you are not a registered holder, the company likely does not know that you are a shareholder, or how many shares you own. In this case, at the time you submit your proposal, you must prove your eligibility to the company in one of two ways:

(A) The first way is to submit to the company a written statement from the “record” holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held at least $2,000, $15,000, or $25,000 in market value of the company's securities entitled to vote on the proposal for at least three years, two years, or one year, respectively. You must also include your own written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, through the date of the shareholders' meeting for which the proposal is submitted; or

(B) The second way to prove ownership applies only if you were required to file, and filed, a Schedule 13D (§ 240.13d–101), Schedule 13G (§ 240.13d–102), Form 3 (§ 249.103 of this chapter), Form 4 (§ 249.104 of this chapter), and/or Form 5 (§ 249.105 of this chapter), or amendments to those documents or updated forms, demonstrating that you meet at least one of the share ownership requirements under paragraph (b)(1)(i)(A) through (C) of this section. If you have filed one or more of these documents with the SEC, you may demonstrate your eligibility to submit a proposal by submitting to the company:

(1) A copy of the schedule(s) and/or form(s), and any subsequent amendments reporting a change in your ownership level;

(2) Your written statement that you continuously held at least $2,000, $15,000, or $25,000 in market value of the company's securities entitled to vote on the proposal for at least three years, two years, or one year, respectively; and

(3) Your written statement that you intend to continue to hold the requisite amount of securities, determined in accordance with paragraph (b)(1)(i)(A) through (C) of this section, through the date of the company's annual or special meeting.

(c) Question 3: How many proposals may I submit? Each person may submit no more than one proposal, directly or indirectly, to a company for a particular shareholders' meeting. A person may not rely on the securities holdings of another person for the purpose of meeting the eligibility requirements and submitting multiple proposals for a particular shareholders' meeting.

(d) Question 4: How long can my proposal be? The proposal, including any accompanying supporting statement, may not exceed 500 words.

(e) Question 5: What is the deadline for submitting a proposal? (1) If you are submitting your proposal for the company's annual meeting, you can in most cases find the deadline in last year's proxy statement. However, if the company did not hold an annual meeting last year, or has changed the date of its meeting for this year more than 30 days from last year's meeting, you can usually find the deadline in one of the company's quarterly reports on Form 10–Q (§ 249.308a of this chapter), or in shareholder reports of investment companies under § 270.30d–1 of this chapter of the Investment Company Act of 1940. In order to avoid controversy, shareholders should submit their proposals by means, including electronic means, that permit them to prove the date of delivery.

(2) The deadline is calculated in the following manner if the proposal is submitted for a regularly scheduled annual meeting. The proposal must be received at the company's principal executive offices not less than 120 calendar days before the date of the company's proxy statement released to shareholders in connection with the previous year's annual meeting. However, if the company did not hold an annual meeting the previous year, or if the date of this year's annual meeting has been changed by more than 30 days from the date of the previous year's meeting, then the deadline is a reasonable time before the company begins to print and send its proxy materials.

(3) If you are submitting your proposal for a meeting of shareholders other than a regularly scheduled annual meeting, the deadline is a reasonable time before the company begins to print and send its proxy materials.

(f) Question 6: What if I fail to follow one of the eligibility or procedural requirements explained in answers to Questions 1 through 4 of this section? (1) The company may exclude your proposal, but only after it has notified you of the problem, and you have failed adequately to correct it. Within 14 calendar days of receiving your proposal, the company must notify you in writing of any procedural or eligibility deficiencies, as well as of the time frame for your response. Your response must be postmarked, or transmitted electronically, no later than 14 days from the date you received the company's notification. A company need not provide you such notice of a deficiency if the deficiency cannot be remedied, such as if you fail to submit a proposal by the company's properly determined deadline. If the company intends to exclude the proposal, it will later have to make a submission under § 240.14a–8 and provide you with a copy under Question 10 below, § 240.14a–8(j).

(2) If you fail in your promise to hold the required number of securities through the date of the meeting of shareholders, then the company will be permitted to exclude all of your proposals from its proxy materials for any meeting held in the following two calendar years.

(g) Question 7: Who has the burden of persuading the Commission or its staff that my proposal can be excluded? Except as otherwise noted, the burden is on the company to demonstrate that it is entitled to exclude a proposal.

(h) Question 8: Must I appear personally at the shareholders' meeting to present the proposal?

(1) Either you, or your representative who is qualified under state law to present the proposal on your behalf, must attend the meeting to present the proposal. Whether you attend the meeting yourself or send a qualified representative to the meeting in your place, you should make sure that you, or your representative, follow the proper state law procedures for attending the meeting and/or presenting your proposal.

(2) If the company holds its shareholder meeting in whole or in part via electronic media, and the company permits you or your representative to present your proposal via such media, then you may appear through electronic media rather than traveling to the meeting to appear in person.

(3) If you or your qualified representative fail to appear and present the proposal, without good cause, the company will be permitted to exclude all of your proposals from its proxy materials for any meetings held in the following two calendar years.

(i) Question 9: If I have complied with the procedural requirements, on what other basis may a company rely to exclude my proposal?

(1) Improper under state law: If the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization;

Note to paragraph (I)(1):

Depending on the subject matter, some proposals are not considered proper under state law if they would be binding on the company if approved by shareholders. In our experience, most proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law. Accordingly, we will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise.

(2) Violation of law: If the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject;

Note to paragraph (I)(2):

We will not apply this basis for exclusion to permit exclusion of a proposal on grounds that it would violate foreign law if compliance with the foreign law would result in a violation of any state or federal law.

(3) Violation of proxy rules: If the proposal or supporting statement is contrary to any of the Commission's proxy rules, including § 240.14a-9, which prohibits materially false or misleading statements in proxy soliciting materials;

(4) Personal grievance; special interest: If the proposal relates to the redress of a personal claim or grievance against the company or any other person, or if it is designed to result in a benefit to you, or to further a personal interest, which is not shared by the other shareholders at large;

(5) Relevance: If the proposal relates to operations which account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business;

(6) Absence of power/authority: If the company would lack the power or authority to implement the proposal;

(7) Management functions: If the proposal deals with a matter relating to the company's ordinary business operations;

(8) Director elections: If the proposal:

(i) Would disqualify a nominee who is standing for election;

(ii) Would remove a director from office before his or her term expired;

(iii) Questions the competence, business judgment, or character of one or more nominees or directors;

(iv) Seeks to include a specific individual in the company's proxy materials for election to the board of directors; or

(v) Otherwise could affect the outcome of the upcoming election of directors.

(9) Conflicts with company's proposal: If the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting;

Note to paragraph (I)(9):

A company's submission to the Commission under this section should specify the points of conflict with the company's proposal.

(10) Substantially implemented: If the company has already substantially implemented the proposal;

Note to paragraph (I)(10):

A company may exclude a shareholder proposal that would provide an advisory vote or seek future advisory votes to approve the compensation of executives as disclosed pursuant to Item 402 of Regulation S–K (§ 229.402 of this chapter) or any successor to Item 402 (a “say-on-pay vote”) or that relates to the frequency of say-on-pay votes, provided that in the most recent shareholder vote required by § 240.14a–21(b) of this chapter a single year (i.e., one, two, or three years) received approval of a majority of votes cast on the matter and the company has adopted a policy on the frequency of say-on-pay votes that is consistent with the choice of the majority of votes cast in the most recent shareholder vote required by § 240.14a–21(b) of this chapter.

(11) Duplication: If the proposal substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting;

(12) Resubmissions. If the proposal addresses substantially the same subject matter as a proposal, or proposals, previously included in the company's proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote was:

(i) Less than 5 percent of the votes cast if previously voted on once;

(ii) Less than 15 percent of the votes cast if previously voted on twice; or

(iii) Less than 25 percent of the votes cast if previously voted on three or more times.

(13) Specific amount of dividends: If the proposal relates to specific amounts of cash or stock dividends.

(j) Question 10: What procedures must the company follow if it intends to exclude my proposal? (1) If the company intends to exclude a proposal from its proxy materials, it must file its reasons with the Commission no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the Commission. The company must simultaneously provide you with a copy of its submission. The Commission staff may permit the company to make its submission later than 80 days before the company files its definitive proxy statement and form of proxy, if the company demonstrates good cause for missing the deadline.

(2) The company must file six paper copies of the following:

(i) The proposal;

(ii) An explanation of why the company believes that it may exclude the proposal, which should, if possible, refer to the most recent applicable authority, such as prior Division letters issued under the rule; and

(iii) A supporting opinion of counsel when such reasons are based on matters of state or foreign law.

(k) Question 11: May I submit my own statement to the Commission responding to the company's arguments? Yes, you may submit a response, but it is not required. You should try to submit any response to us, with a copy to the company, as soon as possible after the company makes its submission. This way, the Commission staff will have time to consider fully your submission before it issues its response. You should submit six paper copies of your response.

(l) Question 12: If the company includes my shareholder proposal in its proxy materials, what information about me must it include along with the proposal itself?

(1) The company's proxy statement must include your name and address, as well as the number of the company's voting securities that you hold. However, instead of providing that information, the company may instead include a statement that it will provide the information to shareholders promptly upon receiving an oral or written request.

(2) The company is not responsible for the contents of your proposal or supporting statement.

(m) Question 13: What can I do if the company includes in its proxy statement reasons why it believes shareholders should not vote in favor of my proposal, and I disagree with some of its statements?

(1) The company may elect to include in its proxy statement reasons why it believes shareholders should vote against your proposal. The company is allowed to make arguments reflecting its own point of view, just as you may express your own point of view in your proposal's supporting statement.

(2) However, if you believe that the company's opposition to your proposal contains materially false or misleading statements that may violate our anti-fraud rule, § 240.14a–9, you should promptly send to the Commission staff and the company a letter explaining the reasons for your view, along with a copy of the company's statements opposing your proposal. To the extent possible, your letter should include specific factual information demonstrating the inaccuracy of the company's claims. Time permitting, you may wish to try to work out your differences with the company by yourself before contacting the Commission staff.

(3) We require the company to send you a copy of its statements opposing your proposal before it sends its proxy materials, so that you may bring to our attention any materially false or misleading statements, under the following timeframes:

(i) If our no-action response requires that you make revisions to your proposal or supporting statement as a condition to requiring the company to include it in its proxy materials, then the company must provide you with a copy of its opposition statements no later than 5 calendar days after the company receives a copy of your revised proposal; or

(ii) In all other cases, the company must provide you with a copy of its opposition statements no later than 30 calendar days before its files definitive copies of its proxy statement and form of proxy under § 240.14a–6.

Under the common law, MBCA 16.02 and DGCL § 220(b), stockholders have the right to inspect a corporation's books and records and the list of stockholders.

DGCL & Common Law

"Books and records" is broadly defined under Delaware and the common law. In Delaware it includes board minutes, reports, data, emails and other electronic records. This can even include privileged documents and attorney work product. Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264 (Del. 2014).

And this right isn't just to inspect the records; the shareholder is allowed to make copies.

Standing alone, this is bonkers. Think what it would mean if Pepsi could buy one share of Coca-Cola and then ask for the secret formula.

Let's look at some of the limits to keep this from getting out of hand.

Limits on DGCL Books & Records Requests

Delaware has a few requirements before granting access to the books and records:

1. The requester must be a qualified shareholder, meaning either a holder of record or a beneficial owner;
2. The demand must be under oath;
3. The inspection must be during usual business hours; and
4. The purpose for the inspection must be proper.

This last one is where the action is. Most books and records cases turn on whether the purpose was proper. We'll define the contours of "proper purpose" in the rest of this chapter.

MBCA

The MBCA isn't as expansive as Delaware. The MBCA divides information up into two categories. The first category includes routine governance documents, namely the charter, bylaws, recent communications to shareholders and the names and addresses of officers and directors. Shareholders are entitled to these routine documents as a matter of course. MBCA 16.02(a); 16.01(a).

The second category comprises the financial statements, accounting records, excerpts of meeting minutes, excerpts of action by consent and the list of shareholders. To get these, shareholders must make a demand for the documents "in good faith and for a proper purpose." MBCA 16.02(c)(1). The demand must describe with "reasonable particularity" (i) the shareholder’s purpose in receiving the records and (ii) the records the shareholder wants to inspect. The corporation is required to provide the requested records the the extent they are "directly connected with the shareholder’s purpose." MBCA 16.02(c).

Test Drive Questions

Let's test drive these concepts.

8.2.2.1 Adam, a customer of Best Bikes, is impressed by the corporation’s retail facility while he is casually shopping. Out of curiosity Adam would like to know how much money Best Bikes, Inc. made last year and so he requests the corporation’s financial statements. Is Adam entitled to inspect these records under DGCL § 220(b)?

8.2.2.2. Same as above, but assume Adam also owns one share of stock. Does this change the result?

8.2.2.3 Same as above, but Adam is requesting information on a recently announced federal indictment of the board chair for corruption. Does this change the result?

Answers

8.2.2.1 No, customers do not have rights to the corporation's books and records.

8.2.2.2 No, but this time it's because Adam lacks a proper purpose. Idle curiousity isn't enough to justify a books and records request.

8.2.2.3 Yes, a court is likely to permit this as it reflects a proper purpose.

(a) As used in this section:

(1) “Stockholder” means a holder of record of stock in a stock corporation, or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person.

(2) “Subsidiary” means any entity directly or indirectly owned, in whole or in part, by the corporation of which the stockholder is a stockholder and over the affairs of which the corporation directly or indirectly exercises control, and includes, without limitation, corporations, partnerships, limited partnerships, limited liability partnerships, limited liability companies, statutory trusts and/or joint ventures.

(3) “Under oath” includes statements the declarant affirms to be true under penalty of perjury under the laws of the United States or any state.

(b) Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from:

(1) The corporation’s stock ledger, a list of its stockholders, and its other books and records; and

(2) A subsidiary’s books and records, to the extent that:

a. The corporation has actual possession and control of such records of such subsidiary; or

b. The corporation could obtain such records through the exercise of control over such subsidiary, provided that as of the date of the making of the demand:

1. The stockholder inspection of such books and records of the subsidiary would not constitute a breach of an agreement between the corporation or the subsidiary and a person or persons not affiliated with the corporation; and

2. The subsidiary would not have the right under the law applicable to it to deny the corporation access to such books and records upon demand by the corporation.

In every instance where the stockholder is other than a record holder of stock in a stock corporation, or a member of a nonstock corporation, the demand under oath shall state the person’s status as a stockholder, be accompanied by documentary evidence of beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in this State or at its principal place of business.

(c) If the corporation, or an officer or agent thereof, refuses to permit an inspection sought by a stockholder or attorney or other agent acting for the stockholder pursuant to subsection (b) of this section or does not reply to the demand within 5 business days after the demand has been made, the stockholder may apply to the Court of Chancery for an order to compel such inspection. The Court of Chancery is hereby vested with exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought. The Court may summarily order the corporation to permit the stockholder to inspect the corporation’s stock ledger, an existing list of stockholders, and its other books and records, and to make copies or extracts therefrom; or the Court may order the corporation to furnish to the stockholder a list of its stockholders as of a specific date on condition that the stockholder first pay to the corporation the reasonable cost of obtaining and furnishing such list and on such other conditions as the Court deems appropriate. Where the stockholder seeks to inspect the corporation’s books and records, other than its stock ledger or list of stockholders, such stockholder shall first establish that:

(1) Such stockholder is a stockholder;

(2) Such stockholder has complied with this section respecting the form and manner of making demand for inspection of such documents; and

(3) The inspection such stockholder seeks is for a proper purpose.

Where the stockholder seeks to inspect the corporation’s stock ledger or list of stockholders and establishes that such stockholder is a stockholder and has complied with this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the corporation to establish that the inspection such stockholder seeks is for an improper purpose. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper. The Court may order books, documents and records, pertinent extracts therefrom, or duly authenticated copies thereof, to be brought within this State and kept in this State upon such terms and conditions as the order may prescribe.

(d) Any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to the director’s position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger and the list of stockholders and to make copies or extracts therefrom. The burden of proof shall be upon the corporation to establish that the inspection such director seeks is for an improper purpose. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.

282 A.3d 1 (2022)

NVIDIA CORPORATION, Defendant Below, Appellant,
v.
CITY OF WESTLAND POLICE AND FIRE RETIREMENT SYSTEM, Dennis Horanic, Ellen Hoke, Kallestad Trust, and Stephen P. Farkas, Plaintiffs Below, Appellees.

No. 259, 2021.

Court Below: Court of Chancery of the State of Delaware C.A. No. 2020-0075.

Upon appeal from the Court of Chancery. AFFIRMED IN PART, REVERSED AND REMANDED IN PART.

Gregory P. Williams, Esquire, Brock E. Czeschin, Esquire, Christian C.F. Roberts, Esquire, RICHARDS, LAYTON, & FINGER, P.A., Wilmington, Delaware; John C. Dwyer, Esquire, Patrick E. Gibbs, Esquire (argued), Claire A. McCormack, Esquire, COOLEY LLP, Palo Alto, California; for Appellant NVIDIA Corporation.

Seth D. Rigrodsky, Esquire, Gina M. Serra, Esquire, Herbert W. Mondros, Esquire, RIGRODSKY LAW, P.A., Wilmington, Delaware; Frank R. Schirripa, Esquire (argued), Hillary Nappi, Esquire, HACH ROSE SCHIRRIPA & CHEVERIE LLP, New York, New York; Gregory Mark Nespole, Esquire, Daniel Tepper, Esquire, LEVI & KORSINSKY, LLP, New York, New York; Travis E. Downs III, Esquire, Erik W. Luedeke, Esquire, ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California; Thomas J. McKenna, Esquire, Gregory M. Egleston, GAINEY MCKENNA & EGLESTON, New York, New York; Beth A. Keller, MONTEVERDE & ASSOCIATES PC, New York, New York; for Appellees City of Westland Police and Fire Retirement System, Dennis Horanic, Ellen Hoke, Kallestad Trust, and Stephen P. Farkas.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en banc.

MONTGOMERY-REEVES, Justice, for the Majority:

This appeal arises from a final judgment of the Court of Chancery that ordered NVIDIA Corporation ("NVIDIA" or the "Company") to produce books and records to certain NVIDIA stockholders under Section 220 of the Delaware General Corporation Law. In the underlying action, the stockholders alleged that certain NVIDIA executives knowingly made false or misleading statements during Company earnings calls that artificially inflated NVIDIA's stock price, and then those same executives sold their stock at inflated prices. As such, the stockholders sought to inspect books and records to investigate possible wrongdoing and mismanagement at the Company, to assess the ability of the board to consider a demand for action, to determine whether the Company's board members are fit to serve on the board, and to take the appropriate action in response to the investigation.

NVIDIA argued that the stockholders were not entitled to the relief they sought because (1) the scope of the original demands failed to satisfy the form and manner requirements; (2) the documents sought at the trial were not requested in the original demands; (3) the stockholders failed to show a proper purpose; (4) the stockholders failed to show a credible basis to infer wrongdoing; and (5) the requests were overbroad and not tailored to the stockholders' stated purpose.

The Court of Chancery rejected these arguments and ordered the production of two sets of documents—certain communications with the CEO and certain specific sets of emails. NVIDIA has appealed and challenges each of the Court of Chancery's rulings.

Having reviewed the parties' briefs and the record on appeal, and after oral argument, the Court holds that: (1) the stockholders' original demands did not violate Section 220's form and manner requirements; (2) the stockholders did not expand their requests throughout litigation; (3) the Court of Chancery did not err in holding that sufficiently reliable hearsay evidence may be used to show proper purpose in a Section 220 litigation, but did err in allowing the stockholders in this case to rely on hearsay evidence because the stockholders' actions deprived NVIDIA of the opportunity to test the stockholders' stated purpose; (4) the Court of Chancery did not err in holding that the stockholders proved a credible basis to infer wrongdoing; and (5) the documents ordered to be produced by the Court of Chancery are essential and sufficient to the stockholders' stated purpose. Thus, the judgment of the Court of Chancery is AFFIRMED in part, REVERSED in part, and REMANDED for proceedings consistent with this opinion.

I. RELEVANT FACTS AND PROCEDURAL BACKGROUND

A. General Background

NVIDIA is a California-based technology company that designs, manufactures, and markets, among other things, graphics processing units ("GPUs").^[1] GPUs are computer chips that perform rapid mathematical calculations.^[2] Traditionally, NVIDIA sold its GPUs for video gaming; these GPUs are marketed under the name "Ge-Force" ("Gaming GPU").^[3] NVIDIA's gaming segment generates the vast majority of its revenue.^[4]

In early 2017, NVIDIA experienced an increase in Gaming GPU sales as consumers began purchasing the product for use in cryptocurrency mining.^[5] In response, NVIDIA created a new GPU specifically for mining that does not contain graphics capabilities ("Crypto GPU").^[6] NVIDIA's goal in producing the Crypto GPU was to protect the Gaming GPU supply for gaming customers.^[7] This strategy, however, did not appear to work; crypto miners continued to purchase Gaming GPUs for mining purposes.^[8]

The increase in demand for Gaming GPUs created a unique problem for NVIDIA. NVIDIA does not sell Gaming GPUs directly to end users, but rather through a multi-level distribution channel.^[9] The channel encompasses the time from when NVIDIA sells the GPU to when an end user purchases it.^[10] The channel will, at any given time, have some GPUs in inventory.^[11] And while NVIDIA suggests a retail price for its GPUs, it does not control channel or retail prices.^[12] "If sales at the end of the channel accelerate suddenly, before NVIDIA can increase the supply coming into it, supply for end users can get tight and prices can increase beyond what some are willing to pay."^[13] Thus, during the increase in purchases of Gaming GPUs by crypto miners, Gaming GPUs were scarce and prices increased.^[14] This had the effect of pricing gamers out of the market.^[15]

B. The Earnings Calls and Stock Sales

From mid-2017 to late-2018, NVIDIA executives made a series of statements in various earnings calls about the effect of crypto mining on the channel and NVIDIA's revenue and about NVIDIA's ability to manage the increasing demand for Gaming GPUs. These statements, detailed below, are the basis for various lawsuits against NVIDIA, including this action.

On an August 10, 2017 earnings call, NVIDIA executives discussed an increase in GPU sales driven by a spike in cryptocurrency prices.^[16] During the call, Jensen Huang, NVIDIA's CEO, stated, "There's still small miners that buy Gaming GPUs here and there, and that probably also increased the demand of Gaming GPUs.... [T]here's still cryptocurrency mining demand that we know is out there."^[17] Collette Kress, NVIDIA's CFO, agreed that GPU sales "were lifted by demand from increasing mining activity" and noted that NVIDIA's "strategy is to stay alert to this fast-changing market ...."^[18]

On November 9, 2017, during an earnings call, Kress suggested that NVIDIA "remains nimble in [its] approach to the cryptocurrency market."^[19]

During a February 8, 2018 earnings call, Kress stated that miners were buying both Crypto GPUs and Gaming GPUs.^[20] On this call, Huang stated that gamers' difficulty in purchasing Gaming GPUs due to the spike in crypto mining was leading to "fairly sizeable pent-up demand ...."^[21]

During earnings calls on May 10, 2018, and August 16, 2018, Huang and Kress expressed optimism that "the gaming demand is strong" because there was still pent-up demand for Gaming GPUs from gamers.^[22] During the August call, Huang stated that "channel inventory would work itself out" and "we're not concerned about channel inventory."^[23] Huang also stated that "`the larger of a GPU company you are, the greater ability you could [sic] absorb the volatility [and] because we have such large volumes, we have the ability to rock and roll with this market as it goes.'"^[24]

Between August 11, 2017, and September 28, 2018, NVIDIA's stock price rose from $155.96 to $281.02 per share.^[25] On September 6, 2017, Huang sold 110,000 shares of NVIDIA for $18.2 million.^[26] And, pursuant to a 10b-5 plan, Kress sold 36,333 shares for $7.7 million between October 2017 and September 2018.^[27]

On November 15, 2018, NVIDIA announced that the pent-up gaming demand it predicted had not materialized, leading to excess inventory in the channel and a revenue miss.^[28] Huang stated that "excess channel inventory ... declined slower than we expected and — but while it was declining, we were expecting sales volume to grow, demand to grow and for pricing to be — for volume to be elastic with pricing."^[29] NVIDIA's stock price declined 28.5 percent in the days following the call.^[30] On November 19, 2018, NVIDIA closed at $144.70 per share.^[31]

On January 28, 2019, NVIDIA lowered its earnings estimate for the fourth quarter of 2019, explaining that "[t]he Q4 guidance [] in November reflected the effect of excess channel inventory of Pascal midrange GPUs that resulted from the sharp decline of cryptocurrency demand. We delayed the planned production ramp of several new products to allow excess channel inventory to deplete, which resulted in the significantly lowered Q4 guidance."^[32]

On February 14, 2019, NVIDIA announced that Gaming GPU revenue for the fourth quarter was down forty-five percent year-over-year and forty-six percent quarter-over-quarter.^[33]

By November 2019, NVIDIA's stock price returned to over $200 per share.^[34]

C. Federal Securities Class Action

On June 21, 2019, certain NVIDIA stockholders filed a consolidated class action complaint (the "Securities Complaint") in the United States District Court for the Northern District of California (the "Securities Class Action").^[35] The Securities Class Action, which named NVIDIA and several of its directors as defendants, including Huang and Kress, alleged that the defendants violated federal securities laws by making false or misleading statements about the effect of crypto mining on NVIDIA's revenue and the demand for Gaming GPUs.^[36] The Securities Complaint supported its allegations with public filings, NVIDIA transcripts and presentations, testimony from relevant experts, and information from former NVIDIA employees, among other things.^[37]

On March 16, 2020, the United States District Court for the Northern District of California dismissed in part the Securities Class Action, holding that the plaintiffs failed to meet the standard of proof for falsity and raise a strong inference of scienter with respect to any of the individual defendants.^[38] The court dismissed the motion with leave to amend.^[39] The plaintiffs then filed an amended securities complaint (the "Amended Securities Complaint").

The Amended Securities Complaint added anonymous testimony from a former NVIDIA employee, named FE 1, alleging that Huang and other executives had specific knowledge of the impact of cryptocurrency on the channel.^[40] Relevant to this appeal, the Amended Securities Complaint alleged that during a March 2017 meeting, FE 1 warned Senior Vice President and Head of Gaming, Jeff Fisher, and other executives that NVIDIA had to "take care" given the growing reliance on crypto miners in China, which Fisher called "dangerous" during the meeting.^[41] The Amended Securities Complaint also alleged a close relationship between Fisher and Huang, noting that "Fisher reported directly to Huang," that Fisher was one of NVIDIA's oldest employees, and that Fisher met with Huang weekly.^[42] It also alleged that weekly sales reports quantifying the impact of crypto-mining demand on Gaming GPU sales was sent to Fisher and other executives throughout 2017.^[43] NVIDIA filed a motion to dismiss the Amended Securities Complaint, which the court granted.^[44]

D. Procedural History

Between February 22, 2019, and April 16, 2019, City of Westland Police and Fire Retirement System, Dennis Horanic, Ellen Hoke, Kallestad Trust, and Stephen P. Farkas, all NVIDIA stockholders, (collectively, the "Stockholders"), separately served Section 220 demands to NVIDIA (the "Original Demands").^[45] Although these demands contained a variety of requests, City of Westland's first demand was for "[a]ll documents forming the basis, if any, for NVIDIA's public statements about its ability to manage the inventory, supply chain and sales channel concerns around the cryptocurrency boom experienced by NVIDIA during the time period from 2017 to 2019."^[46] The Stockholders eventually served NVIDIA with consolidated requests (the "Consolidated Demands"), which sought, among other things, "[a]ll documents and/or communications used by NVIDIA's CEO, CFO and/or other executives with direct reporting responsibilities to the Board concerning the demand for the Company's GPUs, GPU inventory levels, sales channel conditions and other key business metrics monitored by the NVIDIA Board during the time period from 2017 to 2019."^[47]

NVIDIA produced 78 documents that totaled about 530,000 pages.^[48] In response, the Stockholders requested "the documents that formed the basis of Huang's and Kress's public statements about the Company's ability to manage its GPU sales considering the increased cryptocurrency demand ...."^[49] NVIDIA responded that it had not agreed to that request and that such a request was too broad and could not be answered.^[50]

On February 10, 2020, the Stockholders filed an action in the Court of Chancery seeking inspection of various NVIDIA books and records.^[51] In their complaint, the Stockholders alleged that NVIDIA executives and Board members, including Huang and Kress, "knowingly made, or allowed to be made, false and misleading public statements concerning the Company's internal controls, prospects, and earnings, while contemporaneously selling $147 million of Company stock at artificially inflated prices."^[52] In particular, the Stockholders alleged that the following twelve public statements made by either Huang or Kress during earnings calls were false or misleading (collectively, the "Public Statements"):

• "[W]hen you think about crypto in the context of our company overall, the thing to remember is that we're the largest GPU computing company in the world. And our overall GPU business is really sizable and we have multiple segments."

• "[C]rypto usage of GPUs will be small but not 0 for some time."

• "[T]here's a fairly sizable pent-up demand going into this quarter" among gamers looking to purchase NVIDIA GPUs.

• The GPU supply "channel is relatively lean," and NVIDIA was "working really hard to get GPUs down to the marketplace for the gamers."

• "[W]e try to as transparently reveal our numbers as we can. And ... our strategy is to create a[n] SKU that allows the crypto miners to fulfill their needs ... as much as possible, fulfill their demand that way."

• "[We are] `not concerned about the channel inventory ....'"

• "We are masters at managing our channel, and we understand the channel very well."

• "GPU sales [] benefited from continued cryptocurrency mining" ... the Company "remains nimble in our approach to the cryptocurrency market" ... "[the crypto-currency boom]" will not distract us from focusing on our core gaming market."

• "[C]hannels had been influenced by not only the strength of the overall gaming that we had seen for the overall holiday season, but also the large uptick that we've seen in the overall valuation of cryptocurrency."... "[We are] mak[ing] sure [] gamers worldwide receive the cards that we want to do."

• "[W]e do believe we can serve [cryptocurrency miners] primarily with those specialized cards and that's going to be our goal going forward"... "we're going to really try our hardest to really focus our overall GPUs for gaming for overall gamers going forward."

• "[NVIDIA] met some of this [cryptocurrency] demand with a dedicated board in our OEM business, and some was not met with our gaming GPUs...." "[T]his contributed to lower than historical channel inventory levels of our gaming GPUs throughout the quarter."

• "[O]verall contribution of cryptocurrency to our business ... was a higher percentage of revenue than the prior quarter...." "[O]ur main focus remains on our core gaming market."^[53]

The Stockholders also alleged that the NVIDIA insiders materially benefited by selling their stock when stock prices were artificially high.^[54]

Before trial, the Stockholders told NVIDIA that they had not yet determined which witnesses they were going to call to testify regarding the purpose of the demand.^[55] NVIDIA similarly did not identify witnesses, instead reserving the right to depose and cross-examine any witnesses identified by the Stockholders.^[56] The Stockholders then told NVIDIA "very late in the process" that they were considering using an affidavit instead of live witness testimony; NVIDIA responded that it would need to see the affidavit and then depose any individual testifying by affidavit.^[57] The Stockholders eventually chose not to call any witnesses to testify to their purpose, instead relying on the purpose expressed in the Original Demands and interrogatories.^[58]

On February 10, 2021, the Court of Chancery issued a transcript ruling.^[59] The court started its analysis by determining whether the Stockholders had established a proper purpose.^[60] The court found that the Company's demand stated the following purpose:

investigating potential wrongdoing and mismanagement at the Company related to NVIDIA's GPU sales and insider stock sales; assessing the ability of the board to consider a demand for action; determining whether the current directors are fit to continue serving on the Board; and taking appropriate action in response, including discussing potential reforms with the board and management or filing a derivative action.^[61]

For purposes of the ruling, the court treated these purposes as a single purpose to "investigat[e] potential wrongdoing" and found that "the investigation of mismanagement is a proper purpose under Delaware law...."^[62]

The court next tackled the question of whether the Stockholders had established a credible basis for inspection with respect to wrongdoing. In finding a credible basis for demand, the court stated that "[v]iewed collectively, the categories support a finding that there is a credible basis to infer that an insider trading scheme existed."^[63]

Finally, the court determined the scope of relief to be granted and ultimately required NVIDIA to produce:

(i) communications about the statements Fisher is alleged in [the Amended Securities Complaint] to have made to Huang, if any, regardless of where they are found, be it in email, or in written notes taken by Fisher, Huang, or others present for conversations between them; (ii) the Top 5 emails sent to or by Huang or Kress during the Relevant Period to the extent they relate to the Responsive Topics.^[64]

II. STANDARD OF REVIEW

On appeal, this Court applies a de novo standard of review to determine "which types of books and records are included in the actual written demand, except to the extent that the written demand is ambiguous and there are factual determinations underlying the Court of Chancery's resolution of that ambiguity."^[65] We review questions of law, including whether a proper purpose can be established with hearsay evidence, de novo.^[66] "When a stockholder seeks to investigate corporate wrongdoing, the Court of Chancery's determination that a credible basis to infer wrongdoing exists is a mixed finding of fact and law, to which we afford considerable deference."^[67] "This Court reviews the scope of relief ordered in a books and records action for abuse of discretion."^[68]

III. ANALYSIS

Under Section 220 of the Delaware General Corporation Law, stockholders have a right to inspect corporate books and records.^[69] This right, however, is not unfettered. Section 220 first imposes strict form and manner requirements.^[70] Next, the stockholder must have a proper purpose to inspect corporate books and records.^[71] "A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder."^[72] "[A] stockholder has the burden of proof to demonstrate a proper purpose by a preponderance of the evidence."^[73]

"It is well established that a stockholder's desire to investigate wrongdoing or mismanagement is a `proper purpose.'"^[74] But where a stockholder seeks to investigate wrongdoing, the stockholder must also "show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation...."^[75] Finally, "[t]he [stockholder] bears the burden of proving that each category of books and records is essential to accomplishment of the stockholder's articulated purpose for the inspection."^[76]

NVIDIA challenges whether the Stockholders have satisfied each of these requirements. First, NVIDIA argues that the Stockholders' demand for all documents forming the basis of the Public Statements is overbroad, in violation of the statute's form and manner requirements.^[77] The Company also contends that the Stockholders constantly changed their requests throughout litigation, adding entirely new categories of documents in violation of the statute's form and manner requirements.^[78] Second, NVIDIA argues that the Stockholders' reliance on impermissible hearsay evidence to establish a proper purpose failed to meet the burden of proof required by the statute.^[79] Third, NVIDIA argues that the Stockholders did not show a credible basis from which the court could infer wrongdoing or mismanagement.^[80] Fourth, the Company alleges that the court's order of production is not essential and sufficient to the stockholders' stated purpose.^[81] We address each challenge in turn.

A. The Stockholders' Request Does Not Violate Section 220's Form and Manner Requirements

NVIDIA argues that the Stockholders' request for documents that formed the basis of the Public Statements violates Section 220's form and manner requirements because it is impermissibly broad.^[82] The Company also contends that the Stockholders expanded their document requests throughout litigation in violation of Section 220's form and manner requirements.^[83] We disagree.

A stockholder's right to inspect the books and records of a corporation is codified in Section 220(b) of the Delaware General Corporation Law.^[84] Under the statute, "[a]ny stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right ... to inspect for any proper purpose ... [t]he corporation's... books and records...."^[85] Beneficial stockholders are permitted to inspect a corporation's books and records if "the demand under oath shall state the person's status as a stockholder, be accompanied by documentary evidence of beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be."^[86] Section 220(c) provides that stockholders seeking to inspect the corporation's books and records, other than stockholder lists, "`shall first establish that: (1) [s]uch stockholder is a stockholder; (2) [s]uch stockholder has complied with [section 220] respecting the form and manner of making demand for inspection of such documents; and (3) [t]he inspection such stockholder seeks is for a proper purpose.'"^[87]

As such, the statute suggests that the form and manner requirements are expressed in Section 220. They include, for example, requirements that the stockholder provide a written demand, under oath, that states the person's status as a stockholder, and for beneficial stockholders that includes documentary evidence of beneficial ownership of the stock that states that such documentary evidence is a true and correct copy of what it purports to be. The plain language of Section 220 does not explicitly address the scope or breadth of the documents available for inspection, other than to make clear that stockholders may inspect both stockholder lists and other books and records. Simply put, a determination of the appropriateness of the scope of a stockholder's requests, or any change to the stockholder's requests, has no bearing on whether the plaintiff has satisfied the statute's form and manner requirements. To be sure, a Company can challenge the appropriateness of the scope of document requests and changes to the document requests, but we do not view those challenges as form and manner requirement challenges.

Thus, we hold that the scope of the Stockholders' requests, even if they were initially overbroad, and changes to the Stockholders' requests throughout litigation, do not violate Section 220's form and manner requirements.

The Company next appears to argue that under Highland Select Equity Fund, L.P. v. Motient Corp.,^[88] the court does not have the "responsibility to pick through the debris" of an overbroad demand and should instead deny any overbroad demand outright.^[89] In Highland Select, the court analyzed "whether the stockholder made a proper demand or, instead, has presented such a sweeping and overbroad request as to constitute an impermissible use of the statutory right to inspect the corporation's books and records."^[90] In denying the stockholder's request as overbroad, the court stated, "Section 220 is also not a way to circumvent discovery proceedings, and is certainly not meant to be a forum for the kinds of wide-ranging document requests permissible under Rule 34."^[91] It then noted that "it is not the court's responsibility to pick through the debris of a Section 220 demand."^[92] According to the Company, this language created a blanket rule in which the Court of Chancery must deny all demands that are overbroad.^[93]

There is no blanket rule that requires the Court of Chancery to outright deny those demands that it finds to be overbroad. In Highland Select the court opted not to determine which documents were necessary and essential to the stockholder's purpose after determining that the stockholder's impermissibly broad demand, coupled with its improper purpose, abused the Section 220 process. The Court of Chancery has discretion to look at an overbroad demand and either identify the records that should be produced or to decide that it will not "pick through the debris" of an impermissibly overbroad demand that abuses the Section 220 process. Here, the Court of Chancery did not abuse its discretion by refusing to deny the demand outright due to its breadth. In other words, it was not an abuse of discretion for the Court of Chancery to choose to craft a production order circumscribed with rifled precision. Plaintiffs in Section 220 proceedings, however, should take heed that the deference we afford the Court of Chancery in these instances means that a Chancellor's or Vice Chancellor's denial of a demand as impermissibly overbroad will also be subject to an abuse of discretion standard and deference from this Court.

B. The Stockholders Did Not Improperly Change Their Requests Throughout Litigation

NVIDIA next argues that the Stockholders improperly changed their requests throughout litigation.^[94]

Delaware case law has held that Section 220 plaintiffs cannot broaden the scope of their requests throughout litigation, as such a change would be prejudicial to the corporate defendant. For example, in Fuchs Family Trust v. Parker Drilling Company, the Court of Chancery denied the plaintiff's inspection demand because the plaintiff attempted to broaden its request eight days before trial and after briefing:

On November 4, 2014, just eight days before trial, Fuchs issued a supplemental inspection demand, to provide, in part, sufficient proof of its beneficial ownership of Parker stock. In addition to requesting documents sufficient to identify the anonymous wrongdoers, Fuchs attempted to broaden its demand (shortly before trial and after briefing had commenced) to include any report prepared by Parker's board, or any committee thereof, concerning investigation of the Nigerian Bribing Scheme, and all documents relied upon by the board or any committee thereof. Given the circumstances, Fuchs's late attempt to expand its inspection must be rejected.^[95]

But Delaware case law has also held that Section 220 plaintiffs may narrow their requests throughout litigation when the narrowing is made in good faith:

While Plaintiffs' lack of precision in formulating its Demand, particularly with respect to the scope of documents requested, has provoked justified frustration and has prompted questions regarding possible abuse of the Section 220 process, I am satisfied there has been no such abuse here. Plaintiffs' stated purposes for inspection have remained constant throughout the various iterations of their Demand. And their lack of focus regarding the documents they seek, while unfortunate, does not evidence a lack of good faith. In my view, the proper approach here is to hold Plaintiffs to the request for documents as stated in the Pre-Trial Order, a request that was refined by the parties' several meet and confer sessions.^[96]

Thus, under Delaware case law, Section 220 plaintiffs may narrow their requests during litigation if they do so in good faith and such narrowing is not prejudicial to the company.

In one of the Original Demands made upon NVIDIA, the Stockholders sought the following: "All documents forming the basis, if any, for NVIDIA's public statements about its ability to manage the inventory, supply chain and sales channel concerns around the cryptocurrency boom experienced by NVIDIA during the time period from 2017 to 2019."^[97] Before litigation, on May 28, 2019, the Stockholders sent NVIDIA the Consolidated Demands, the first of which requests "[a]ll documents and/or communications used by NVIDIA's CEO, CFO and/or other executives with direct reporting responsibilities to the Board concerning the demand for the Company's GPUs, GPU inventory levels, sales channel conditions and other key business metrics monitored by the NVIDIA Board during the time period from 2017 to 2019."^[98] Although the wording is slightly different, the gist of the request remains the same—the Stockholders want documents and communications used by NVIDIA's executives that informed the Public Statements regarding NVIDIA's ability to manage its supply chain and cryptocurrency demand.

On September 24, 2019, before this litigation began, the Stockholders again reiterated their request: "Accordingly, the Stockholders demand to know by the close of business on October 1, 2019, whether NVIDIA will be producing the documents that formed the basis of Huang's and Kress's public statements about the Company's ability to manage its GPU sales considering the increased cryptocurrency demand...."^[99]

In the complaint, the Stockholders made the exact same request, seeking "only the documents that formed the basis of Huang's and Kress's public statements about the Company's ability to manage both its GPU inventory levels and sales channels considering the increased demand in GPUs was a product of cryptocurrency demand and not traditional gaming."^[100]

In the pre-trial order and stipulation, the Stockholders sought "documents (including email) from the period of August 2017 and November 2018 received or authored by Huang and or any member of NVIDIA's Board or Officers/senior members of management relating to ... the impact of cryptocurrency on the GPU market," "the Company's sales of GPUs between August 2017 and November 2018" and "the Company's strategy with respect to cryptocurrency."^[101] This request is consistent with the request for those documents forming the basis of the Public Statements, as all of the Public Statements relate to "the impact of cryptocurrency on the GPU market" and "the Company's strategy with respect to cryptocurrency." But this request also is narrower because it identifies potential custodians of responsive documents and shortens the time period in which those documents might have been received or authored.

In their post-trial brief, the Stockholders further narrowed their request by identifying five specific categories of documents (the "Five Requests"):

(1) sales data specifically identifying and quantifying global GeForce sales to cryptominers consolidated in a central database that Huang had access to; (2) documents pertaining to quarterly internal meetings in which NVIDIA's vice presidents presented crypto specific Ge-Force sales to Huang, particularly from Fisher, Alben, and Tomassi, not dozens of insiders; (3) weekly reports sent directly to Huang, at his request, detailing cryptominers' voracious demands for GeForce GPUs from regions around the world; (4) usage data from a software program bundled into the GeForce GPUs, called GeForce Experience, which reflected how the processors were being utilized by end users that was compiled in monthly reports sent to Huang, and accessed by Kress; and (5) weekly sales emails quantifying GeForce sales to cryptominers in NVIDIA's largest market in an internal study.^[102]

These categories of documents fall within the pre-trial order and stipulation's request for documents relating to "the impact of cryptocurrency on the GPU market" and "the Company's strategy with respect to cryptocurrency." But based on information learned in the Amended Securities Complaint, the Stockholders identified precise topics, meetings, reports, data, and documents that relate to NVIDIA's control of the channel in light of the increase in cryptocurrency mining.

As such, an examination of the Stockholders' requests throughout litigation reveals that they did not broaden their requests; instead, they consistently sought those records and communications that formed the basis of the Public Statements. And any changes to the Stockholders' requests had the effect of narrowing exactly which documents and records might fulfill that demand.^[103]

If a Section 220 plaintiff's overarching request remains the same, the plaintiff may narrow the scope of that request throughout litigation, if such narrowing does not prejudice the defendant.^[104] Notably, the Company does not argue that it was prejudiced by the Stockholders narrowing requests.

The Company makes a final argument on this point that we are compelled to address. The Company argues that the Stockholders' improperly and constantly changing requests confused the Court of Chancery and caused it to order the production of records that do not exist.^[105] We disagree.

As an initial matter, we reiterate that the Stockholders' request was narrowed, not broadened or completely changed, for the reasons stated above. Next, we note that the Court of Chancery was far from confused. The Amended Securities Complaint contains allegations from an anonymous former employee who "was employed by NVIDIA for over 10 years as a Senior Account Manager in China ...."^[106] The Amended Securities Complaint states that this former employee gave "a presentation in March 2017 to other high-level NVIDIA executives—including Fisher []—that emphasized the explosion of crypto-related sales of GeForce GPUs in China and reported that sales to crypto miners had caused GeForce sales to almost double in a short period. At this meeting, Fisher called crypto-related demand `dangerous.'"^[107] Moreover, the Amended Securities Complaint claims a close relationship existed between Fisher and Huang:

Huang and Kress had ready access to Fisher, whose office was no more than 100 yards from Huang's, who met with Huang on a weekly basis, and who, as described above, received detailed crypto specific GeForce sales data on a weekly and quarterly basis, traveled to China to review the effect of crypto-related demand on GeForce sales, and commissioned a study that quantified sales to miners on a monthly basis in China and addressed how NVIDIA could exploit the trend.^[108]

The Amended Securities Complaint then states that "[i]t is absurd to think that Fisher did not relay this data to Huang or otherwise discuss the effect of crypto related demand—which he deemed `dangerous' —on the Gaming segment, which was NVIDIA's most important business unit and the source of more than half of the Company's revenues."^[109] Essentially, the Amended Securities Complaint stops a hair short of alleging that Fisher told Huang about the "dangerous" effect of crypto mining on the channel. Given the allegations in the Amended Securities Complaint, it was reasonable for the Court of Chancery to infer that Fisher and Huang communicated about topics detailed in the Five Requests.

Moreover, it is likely because the court makes this inference that the court's order only requires the production of communications between Huang and Fisher to the extent they exist: "communications about the statements Fisher is alleged in [the Amended Securities Complaint] to have made to Huang, if any ...."^[110]

Thus, the Court of Chancery was not confused by the Stockholders' request and did not err in determining that the Stockholders' Five Topics request narrowed their original request.^[111]

C. Although Sufficiently Reliable Hearsay Is Admissible in a Section 220 Action, the Court of Chancery Erred by Allowing Stockholders to Establish Their Purpose with Hearsay Evidence in This Case

In its opinion, the Court of Chancery held that that the Stockholders could establish a proper purpose through hearsay statements contained in their demand letters and interrogatory responses. In coming to this conclusion, the court first analyzed the nature of Section 220 actions, noting that the statute imposes form and manner requirements and gives the Court of Chancery discretion to resolve such actions as summary proceedings.^[112] The court then observed that "[s]ummary proceedings are a special type of proceeding under Delaware law. Delaware courts have interpreted the statutory designation to mean[] that judges should aim to resolve the action `expeditiously,' as our high court explained in AmerisourceBergen."^[113] The court noted that requiring Section 220 plaintiffs to establish a proper purpose without hearsay, absent a stipulation to proceed on a paper record, would amount to a requirement that all Section 220 plaintiffs testify live at trial, resulting in "inefficiency in the process."^[114] The court then held that the Original Demands are sufficient to establish a proper purpose because they state that the Stockholders want to investigate possible wrongdoing, comply with the form and manner requirements, are made under oath and under penalty of perjury, and are accompanied by power of attorney.^[115]

The Company argues that the Court of Chancery erred in allowing the Stockholders to establish a proper purpose with their demand letters and interrogatory responses because those pieces of evidence are inadmissible hearsay.^[116] And because the Delaware Uniform Rules of Evidence apply in all actions and proceedings in Delaware courts, without an exception for Section 220 proceedings, the court erred in accepting inadmissible hearsay as competent evidence of a proper purpose.^[117] The Company also argues that requiring live testimony from Section 220 plaintiffs would not result in any meaningful delay; but even if inefficiencies were a legitimate concern, the Company contends that is no justification to set aside the rules of evidence.^[118] The Company further avers that the inadmissible hearsay was no longer reliable evidence of Stockholders' purpose because "trial occurred about 19 months after [Stockholders] identified their purpose in their [Original] Demands" and, during that time, "NVIDIA's stock price more than doubled, and the channel inventory issue had proven to be short-lived."^[119]

In response, the Stockholders argue that Delaware case law permits the use of hearsay in a Section 220 proceeding so long as the hearsay is sufficiently reliable.^[120] The Stockholders add that Delaware case law "imposes no ... limitation on the ways sufficiently reliable hearsay may be used in a books and records proceeding."^[121] The Stockholders then aver that the Original Demands are sufficiently reliable because they are made under penalty of perjury and that their verified complaint, which restated their purpose, was notarized and attested to the correctness and truthfulness of the filing.^[122] The Stockholders contend that because they submitted multiple sworn statements of their proper purpose, their burden was satisfied and that the Company now carries the burden of proving that their purpose was not proper.^[123]

Delaware Uniform Rules of Evidence, Rule 1101(a) provides that the Rules of Evidence "apply to all actions and proceedings in all the courts of [Delaware]." Rule 1101(b) outlines exceptions, but no one argues that those exceptions apply here. Rule 801(c) defines hearsay as a statement that "the declarant does not make while testifying at the current trial or hearing" and that "a party offers in evidence to prove the truth of the matter asserted in the statement."^[124] The parties agree that the Stockholders' statements of a proper purpose, which are made in the Original Demands and the interrogatories, are out-of-court statements. They also agree that the statements are offered for the truth of the matter asserted—that the Stockholders want the documents for the purpose of investigating wrongdoing. Thus, the parties agree that the statements at issue are hearsay. Rule 802 provides that "[h]earsay is not admissible except as provided by law or by the[] Rules." The parties do not argue that any exception provided in the Rules applies here. Thus, the parties agree that, under the plain language of the Rules, the Original Demands and interrogatories are not admissible to show the stockholder's proper purpose. The parties dispute, however, whether there is (or should be) an exception, by law, that would permit the Stockholders to rely on hearsay evidence in a books and records action to establish a proper purpose.

To answer this question, the parties focus on a line of cases from the Court of Chancery (stretching back for at least eighteen years) that holds that hearsay is admissible in books and records litigation to show that a credible basis to infer wrongdoing exists.^[125] These cases rely on this Court's ruling in Thomas & Betts Corp. v. Leviton Mfg. Co., Inc.^[126] The Court of Chancery has interpreted that case as refusing to accept hearsay in a Section 220 action to show a credible basis because it was "unreliable."^[127] Thus, the argument goes, if hearsay is sufficiently reliable, it can be used to show a credible basis.

In Thomas & Betts, the plaintiff corporation, Thomas & Betts, desired to either acquire or pursue a joint venture with the defendant corporation, Leviton.^[128] After preliminary negotiations proved unfruitful, the plaintiff purchased a 29.1 percent stake in Leviton from one of Leviton's employees and former group vice president, Thomas Blumberg.^[129] Blumberg also provided the plaintiff with confidential internal Leviton documents and disclosed information about Leviton's internal strategies and accounting figures.^[130] After the plaintiff acquired a minority stake in Leviton, it attempted to negotiate an amicable working relationship with Leviton, which was rebuffed.^[131] At that point, the plaintiff served the defendant with a demand seeking inspection of ten categories of documents.^[132] The plaintiff then offered, yet again, to buy the remainder of Leviton's shares, threatening litigation if the final offer was rejected.^[133] Leviton refused the offer and the inspection demand.^[134] The plaintiff then filed a Section 220 action seeking to compel inspection of the defendant's books and records, stating that its purpose was to investigate waste and mismanagement. To show a credible basis for its purpose, the plaintiffs offered witness testimony from its own employees who relayed the discussions they had with Blumberg regarding Leviton's accounting mismanagement.^[135] The court characterized these statements as hearsay.^[136]

The Court of Chancery denied the plaintiff's request for two reasons: (1) the plaintiff was not motivated by its stated purpose, but was actually attempting to acquire Leviton; and (2) the plaintiff did not show a credible basis for mismanagement because it did not meet a "greater-than-normal evidentiary burden."^[137] On appeal, the plaintiff argued that the Court of Chancery applied the wrong legal standard for showing a credible basis and that the Court of Chancery incorrectly determined that the testimonial evidence presented to show a credible basis was hearsay.^[138]

On appeal, the Supreme Court held that the Court of Chancery correctly determined that the testimony contained hearsay, but the Supreme Court held that the Court of Chancery applied the wrong legal standard. Applying the correct legal standard and addressing the hearsay evidence, the Court reasoned that "as the trial court found, Blumberg was actively engaged in the process of defecting to the Thomas & Betts camp. Statements made in this context lack independent guarantees of trustworthiness and are inherently unreliable."^[139] The Court then noted that "[m]ore significantly, the trial court did not exclude this testimony. Rather, the Vice Chancellor heard the testimony and found it unworthy of belief. In this posture, plaintiff's evidentiary objections carry little weight."^[140]

Next, the Court considered another Court of Chancery case that it determined admitted hearsay testimony in the context of examining the purpose of the demand. The Court stated, "Similarly, Thomas & Betts' citation to Skoglund v. Ormand Industries is unavailing .... As in the case at bar, the Skoglund court allowed hearsay testimony regarding statements made by a corporate insider. Unlike the instant case, however, the trial court in Skoglund chose to credit that testimony as worthy of belief."^[141] Thus, the Court ruled that the hearsay evidence in Thomas & Betts could not be used, not because it was inadmissible hearsay, but because it was unreliable. Stated differently, when faced with a direct question regarding the admissibility of hearsay evidence in a books and records action, the Court examined two cases, one that considered the hearsay evidence in the context of examining the stockholder's purpose and one that did not consider the hearsay evidence in the context of examining the credible basis. The Court then ruled that the analysis regarding admissibility turned, not on the fact that the testimony was inadmissible hearsay, but instead on the reliability of the evidence.

Thus, it appears to us, that this Court, twenty-six years ago, created an exception in the 220 context that allows the use of sufficiently reliable hearsay in books and records actions. The Court of Chancery has applied this exception many times since that ruling. That this exception encompasses more than just the credible basis context seems inherent in this Court's reference to Skoglund, a case in which sufficiently reliable hearsay was permitted to show the stockholder's purpose. In laying out the hearsay exception for showing a credible basis, this Court noted that it was ruling differently than Skoglund because of the reliability of the hearsay—not because of what the hearsay was being used to show. If this Court wanted to limit the hearsay exception to the credible basis context, it would not have used Skoglund approvingly as a point of comparison. As such, it appears to us that Thomas & Betts has provided an answer to the hearsay issue: hearsay is admissible in a Section 220 proceeding when that hearsay is sufficiently reliable.

We note that the Company does not argue that Thomas & Betts was wrongly decided and does not ask us to revisit that decision. The Company does not argue that the numerous cases since Thomas & Betts that hold that hearsay is admissible in 220 actions are wrongly decided.^[142] Instead, the Company argues that the Chancery cases relying on Thomas & Betts should not be extended to apply to the proper purpose requirement. However, as mentioned above, Thomas & Betts stands for the proposition that hearsay is admissible in a Section 220 action if it is sufficiently reliable; and the ruling does not appear to be limited to the credible basis context. We are not inclined to reconsider Thomas & Betts when neither party has asked us to do so. Moreover, because overruling precedent requires a complex analysis that involves consideration of factors such as reliance interests, the workability of the precedent, and the age of the precedent,^[143] we decline to overrule Thomas & Betts without proper briefing and arguments on those points.

The Company next argues that even if a Section 220 plaintiff can rely on sufficiently reliable hearsay to show a proper purpose, the evidence submitted here should be excluded for two reasons: (1) the Stockholders deprived the Company of its ability to test that purpose through cross-examination by using misleading tactics as to their plans regarding witnesses; and (2) the evidence is unreliable.^[144]

It is established that a company in a Section 220 action has a right to depose the stockholder.^[145] It is also clear that these depositions can be and often are used to test the stockholder's stated purpose.^[146] In this case, the Company asked the Stockholders to provide a list of persons they intended to call as witnesses in order for the Company to depose those persons identified.^[147] The Stockholders then suggested that they were considering affidavits in lieu of live testimony; the Company did not agree. Instead, the Company stated that it would need to first see the affidavits in order to decide, yet again, whether to depose the affiants.^[148] The Stockholders, however, failed to identify any witnesses by the deadline articulated in the scheduling order.^[149] The Stockholders also failed to produce any affidavits for the Company's review.^[150] Eight days after the deadline to identify trial witnesses, and only in response to an email from the Company alleging that the Stockholders could not "meet [their] burden of proof without testimony," the Stockholders responded to the Company's email by suggesting that they would discuss the Company taking the deposition testimony of certain Stockholders.^[151] At that point, the Company made the strategic decision to raise the issue to the Court of Chancery.^[152]

The hearsay exception articulated above inures to the benefit of Section 220 plaintiffs. That benefit, however, should not be abused. Plaintiffs in a Section 220 proceeding must be upfront about their plans regarding witnesses. Such transparency ensures that companies can choose whether to depose the stockholders during discovery or call the stockholders as witnesses at trial. Here, the Stockholders deprived the Company of the ability to test the Stockholders' stated purpose by refusing to cooperate with the Company regarding the identification of trial witnesses or affiants. This type of behavior creates the potential for gamesmanship, which should be discouraged. If stockholders are going to introduce sufficiently reliable hearsay to establish a proper purpose, they must communicate honestly and early with companies regarding their intent so as to allow companies to decide whether to depose the stockholders or to identify their own witnesses for trial.

This concern is especially critical here because the Company raised reasons to doubt the reliability of the evidence of the Stockholders' purpose. As the Company stated, "trial occurred about 19 months after [the Stockholders] identified their purpose in their [Original Demands]. During that time, NVIDIA's stock price more than doubled, and the channel inventory issue had proven to be short-lived."^[153] Although the Company points to these facts and challenges the reliability of the hearsay, we need not decide that particular issue because we hold that a stockholder cannot hide its intent to rely on demands in what appears to be an effort to deprive the company of its right to examine the stockholder through depositions or otherwise.

Therefore, we reverse the Court of Chancery's holding that the Stockholders could show a proper purpose by relying on the Original Demands and interrogatories —not because sufficiently reliable hearsay may not be used to show a proper purpose but because the Stockholders deprived the Company of its ability to test that purpose through depositions or otherwise—and remand for further proceedings consistent with this opinion. Because we have found that the Stockholders deprived the Company of its ability to test the Stockholders' purpose, requiring a remand, we need not address the remaining arguments. Nonetheless, we do so in the interest of efficiency on remand.

D. The Court of Chancery Did Not Err by Concluding That the Stockholders Proved a Credible Basis to Infer Wrongdoing

The Stockholders relied on the following evidence to show a credible basis from which to infer wrongdoing: (1) NVIDIA's response to the cryptocurrency demand, (2) the Public Statements, (3) the sale of personally held stock by Huang, Kress, and other NVIDIA insiders, (4) NVIDIA's revision of its revenue guidelines, and (5) the Securities Class Action.^[154] The Court of Chancery grouped the evidence into the following three categories: (1) false or misleading public statements, (2) the securities litigation, and (3) insider stock sales.^[155]

The Company argues that the Court of Chancery erred in holding that the Stockholders established a credible basis to suspect wrongdoing because none of the Stockholders' evidence, individually or collectively, is enough to infer an insider trading scheme.^[156] As it relates to the stock sales, NVIDIA argues that the sales were not suspicious given the small amount of stock sold and the fact that the sales were made pursuant to 10b-5 plans.^[157] As to the Securities Class Action, the Company alleges that it cannot be used to infer wrongdoing because it did not contain allegations about insider trading.^[158] And as to the Public Statements, the Company contends that they do not give rise to an inference of wrongdoing because they are either forward-looking, objectively accurate, or immaterial.^[159]

In response, the Stockholders argue that the court correctly determined that they needed to show a credible basis to infer wrongdoing or mismanagement, not just insider trading.^[160] Thus, they contend, NVIDIA improperly "limits the reasoning of the Court of Chancery to a single purpose and to a specific iron-clad theory of NVIDIA's wrongdoing."^[161] The Stockholders aver, and the Court of Chancery agreed, that the court could infer that the timing and size of the stock sales were suspicious, despite being made pursuant to a 10b-5 plan.^[162] The Stockholders argue, and the lower court agreed, that the Public Statements, when viewed in light of other circumstances—such as Huang and Kress' unfulfilled projections concerning NVIDIA's ability to meet mining demands, the inventory backlog, and the stock sales—support an inference of wrongdoing.^[163] Finally, the Stockholders argue, and the Court of Chancery agreed, that the Amended Securities Complaint supports an inference of wrongdoing because it alleges that Huang and Kress were aware of the discrepancy in demand between Crypto GPUs and Gaming GPUs.^[164]

In holding that the Stockholders met the low burden of showing a credible basis from which to infer the possibility of wrongdoing, the court weighed the evidence collectively, noting:

At this stage, I must simply be able to "connect the dots" in order to be able to reasonably infer the possibility of wrongdoing. As this Court held in Sprouts, considering [Stockholders] have presented evidence of insider stock sales, public statements that may have been false or misleading, and concurrent securities litigation that is bolstered by allegations supported by ample research, I can connect the dots here regarding the picture that [Stockholders] seek to portray of a possible insider trading scheme at NVIDIA.^[165]

The Stockholders' asserted purpose for seeking books and records is to investigate wrongdoing or mismanagement.^[166] "[I]nvestigating corporate waste, mismanagement, or wrongdoing is a proper purpose for which to demand inspection of books and records."^[167] "[A] stockholder whose stated purpose is investigating mismanagement must provide `some evidence' to suggest a `credible basis' from which this Court may infer possible mismanagement, waste, or wrongdoing may have occurred."^[168] This standard does not require stockholders to show actual waste or mismanagement.^[169] "Stockholders need only show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation...."^[170] The credible basis "threshold may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing."^[171] It is "the lowest possible burden of proof" under Delaware law.^[172]

As an initial matter, we disagree with the Company that the Court of Chancery should have determined whether Stockholders showed a credible basis solely on the grounds of insider trading. When showing a credible basis for possible wrongdoing, Section 220 plaintiffs are not confined to a single theory and "need not identify the particular course of action the stockholder will take...."^[173]

Further, while each category of evidence individually might not be sufficient to establish a credible basis to suspect wrongdoing, when viewed collectively, we cannot conclude that the Court of Chancery abused its discretion in determining that the Stockholders established a credible basis for inspection. When the Public Statements are overlaid on the stock sales and viewed in light of the allegations from the Amended Securities Complaint—that Huang and Kress were given data informing them of the incongruity in the demand between Crypto GPUs and Gaming GPUs—it is possible to infer that Huang and Kress knowingly made false or misleading statements that boosted NVIDIA's stock price shortly before selling stock. In other words, when looking at the Public Statements, stock sales, and the Amended Securities Complaint collectively, we cannot conclude that the Court of Chancery erred. It did not abuse its discretion in determining that the Stockholders sufficiently showed that Huang and Kress were informed that there would be a lack of demand for Gaming GPUs after the crypto mining boost and used that information to bolster NVIDIA stock prices by making false or misleading statements about the demand for Gaming GPUs before selling stock at the bolstered stock price. While this evidence likely would fall far short of that necessary to support an actual claim, we cannot say that it is insufficient to meet the lowest possible burden of proof—a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation.

Thus, we affirm the Court of Chancery's holding that the Stockholders properly demonstrated a credible basis for inspection.

E. The Court of Chancery Did Not Err in Determining That the Records Ordered to Be Produced Are Essential and Sufficient to the Stockholders' Stated Purpose

NVIDIA argues that even if the Stockholders have properly narrowed the scope of their requests, "there is no evidentiary basis for finding that [the court's ordered] documents are `necessary, essential and sufficient' for [Stockholders'] stated purpose."^[174]

A Section 220 plaintiff's right to inspection is limited to those records that are "`essential and sufficient to the stockholder's stated purpose.'"<sup>[175]</sup> "That determination is "`fact specific and will necessarily depend on the context in which the shareholder's inspection demand arises.'"^[176] "The plaintiff bears the burden of proving that each category of books and records is essential to the accomplishment of the stockholder's articulated purpose for the inspection."^[177] "A document is "essential" for Section 220 purposes if, at a minimum, it addresses the crux of the stockholder's purpose, and if the essential information the document contains is unavailable from another source."^[178] "Keeping in mind that Section 220 inspections are not tantamount to `comprehensive discovery,' the Court of Chancery must tailor its order for inspection.... In other words, the court must give the petitioner everything that is `essential,' but stop at what is `sufficient.'"<sup>[179]</sup> This Court, in reviewing the Court of Chancery's scope of relief, will only reverse the court's order if it is an abuse of discretion.<sup>[180]</sup> And "[w]hether any Informal Board Materials or Officer-Level Materials [or emails] are necessary and essential awaits the Court of Chancery's `fact specific' determination, which is committed to the court's sound discretion."^[181]

In determining whether the Stockholders' request was essential and sufficient, the Court of Chancery first detailed the Five Requests demanded by the Stockholders.^[182] The court then identified the three types of records the Stockholders sought to cover: "formal board materials, informal board materials and officer-level materials, and electronic communications that might cross those categories...."^[183]

The court next noted that even though NVIDIA produced all formal board materials relating to the covered topics, informal board materials and officer-level materials relating to Huang's communications with Fisher were necessary because of specific and concrete allegations in the Amended Securities Complaint that Huang and Fisher communicated about cryptocurrency and its impact on NVIDIA—the subject matter of the Stockholders' request.^[184] Thus, the court found that any documents reflecting these communications, as alleged in the Amended Securities Complaint, were "necessary and essential because they address the crux of the [Stockholders'] purposes and they are unavailable from any other source."^[185] The court next held that the production of certain emails, the Top 5 emails, was necessary and essential because the Stockholders presented evidence suggesting that Huang and Kress received and responded to emails that covered the requested topics.^[186] In particular, the court noted that the Top 5 emails detailed in the Amended Securities Complaint covered the impact of crypto-related demand on NVIDIA's sales in various markets, which is encompassed by the topics from the Five Requests:

In particular, the Amended Securities Complaint lists the "Top 5" emails sent to NVIDIA executives that detailed NVIDIA's performance in various markets, as well as weekly Gaming GPU sales reports sent to NVIDIA executives.... I view this as a discrete category, these emails that Huang and Kress supposedly sent, the Top 5 emails sent to NVIDIA executives, that would be easily gathered, cover the topics, and seem, to me, necessary and essential to meet the [Stockholders'] stated purposes.^[187]

Thus, because both categories of the ordered documents derive from the evidence presented by the Stockholders and directly relate to the topics detailed in the Five Requests, the record does not support NVIDIA's assertion that the production order fails to satisfy the "essential and sufficient" standard. "Whether any Informal Board Materials or Officer-Level Materials [or emails] are necessary and essential awaits the Court of Chancery's `fact specific' determination, which is committed to the court's sound discretion."^[188] As such, we cannot hold that the court erred in ordering the production of those records.

Thus, we affirm the judgment of the Court of Chancery on this issue.

IV. CONCLUSION

For the foregoing reasons, we AFFIRM in part, REVERSE in part, and REMAND for further proceedings consistent with this opinion.

TRAYNOR, Justice, concurring:

I concur in the Majority's conclusion that the Court of Chancery erred by allowing the Stockholders to prove that their purpose was proper relying exclusively on the hearsay statements in the Original Demand. I write separately nevertheless because I harbor serious misgivings about the Majority's statement, grounded in our Thomas & Betts opinion, that "hearsay is admissible in a Section 220 proceeding when that hearsay is sufficiently reliable."

In the first place, this rule statement seems to run counter to—if not, around in circles with—the underlying purpose of the rule against hearsay, which is the exclusion of inherently unreliable evidence.^[1] It seems questionable to me that the rule against hearsay, premised as it is on hearsay's perceived unreliability, should give way—absent a rule-based hearsay exception —to ad hoc reliability determinations.

I also believe that Thomas & Betts's hearsay analysis rests on a shaky foundation.^[2] A crucial aspect of that analysis was that the challenged testimony was offered to show that there was a credible basis to suspect waste or mismanagement, i.e., wrongdoing. In my view, the analysis took a wrong turn when it observed that "various Thomas & Betts insiders sought to prove that waste and mismanagement had occurred at Leviton by testifying to the substance of statements made by Blumberg during his negotiations with Thomas & Betts."^[3] But a Section 220 petitioner who has made an investigative demand is not required "to prove that waste and mismanagement ha[s] occurred." If she could do that, her need to inspect the corporation's books and records would be diminished, if not eliminated.

Similar to when a court evaluates a police officer's probable cause to search, the issue to be decided in a Section 220 proceeding, the purpose of which is to seek books and records in furtherance of an investigation of wrongdoing, is not whether the wrongdoing has in fact occurred but whether sufficient evidence exists to justify the investigation. The fact to be proved is not the suspected wrongdoing but rather the reasonableness of the suspicion. Seen in this light, the out-of-court statements typically offered to satisfy the "credible basis" prong are not offered to prove their truth. Thus, they are not hearsay.

Of course, saying that an out-of-court statement might be admissible to show that there is a credible basis to infer wrongdoing that warrants further investigation does not mean that the court cannot reject it—as the Court of Chancery did in Thomas & Betts—as unreliable. But evidence of the stockholder's purpose—the context with which we are dealing here (unlike in Thomas & Betts)—stands on a different footing. The issue to be decided in the "proper purpose" inquiry is frequently whether the stockholder's stated purpose is her actual purpose. As such, the truth of the stockholder's statement of purpose is squarely at issue.

Another distinction between the "credible basis" analysis and the "proper purpose" inquiry is worth noting. A stockholder who is not an officer or employee of the corporation will rarely have first-hand knowledge of wrongdoing. Whatever knowledge the stockholder might have will have been derived, in many cases, from information communicated to him by others (e.g., analyst reports, newspaper accounts, investigative reports from regulatory/law enforcement agencies, whistleblowers). By contrast, the stockholder will always have knowledge of her purpose because it is, after all, her purpose.

For these reasons, I would hold that hearsay evidence is inadmissible to show a stockholder's purpose for an inspection of books and records under Section 220. Such a rule would not, in my view, limit a stockholder's ability to use out-of-court statements to prove that there is a credible basis for her suspicion of wrongdoing.

[1] App. to the Opening Br. 35 (hereinafter "A___"); Opening Br. Ex. A, at 4 (hereinafter, "Ex. A at ___").

[2] A35.

[3] Opening Br. 7.

[4] A35.

[5] Id.

[6] Id.

[7] Opening Br. 8; A389.

[8] A36.

[9] Opening Br. 7.

[10] Id.

[11] Id.

[12] Id.; A403.

[13] Opening Br. 7.

[14] A530.

[15] Id.

[16] Ex. A at 6.

[17] Id.

[18] Id.

[19] App. to the Answering Br. 59 (hereinafter "B___").

[20] A398.

[21] Id.

[22] A530, 539; Ex. A at 7.

[23] Ex. A at 7-8.

[24] A43.

[25] A42.

[26] A49.

[27] See id.

[28] A568.

[29] Id.

[30] A37.

[31] A48.

[32] B102.

[33] Ex. A at 9.

[34] Id.

[35] B110.

[36] B110-74

[37] Ex. A at 10.

[38] B229-54.

[39] Id.

[40] A692-778.

[41] A767.

[42] A706.

[43] A724-26.

[44] A904-25.

[45] A50.

[46] A663.

[47] A676.

[48] Ex. A at 12.

[49] A686.

[50] A690.

[51] A33-65.

[52] A35.

[53] A44-46.

[54] A48-50.

[55] A219.

[56] See id.; A788.

[57] A219-20, 788; Ex. A at 15.

[58] A220.

[59] See generally Ex. A.

[60] Id. at 16.

[61] Id. at 16-17.

[62] Id. at 17.

[63] Id. at 28.

[64] Opening Br. Ex. B, at 3 (hereinafter, "Ex. B at ___").

[65] KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 749 (Del. 2019).

[66] Pipher v. Parsell, 930 A.2d 890, 892 (Del. 2007).

[67] AmerisourceBergen Corp. v. Lebanon Cnty. Emps.' Ret. Fund, 243 A.3d 417, 424-25 (Del. 2020) (citing City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 287 (Del. 2010)).

[68] AmerisourceBergen, 243 A.3d at 425 (citing Wal-Mart Stores, Inc. v. Ind. Elec. Workers Tr. Fund IBEW, 95 A.3d 1264, 1272 (Del. 2014)).

[69] 8 Del. C. § 220.

[70] Id. at 220(b).

[71] Id.

[72] Id.

[73] Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 121 (Del. 2006).

[74] Id.

[75] Id. at 123.

[76] Thomas & Betts Corp. v. Leviton Mfg. Co. Inc., 681 A.2d 1026, 1035 (Del.1996)).

[77] Opening Br. at 19.

[78] Id. at 20-24.

[79] Id. at 25-30.

[80] Id. at 31-42.

[81] Id. at 18-20.

[82] Id.

[83] Opening Br. at 20-24.

[84] 8 Del. C. § 220(b).

[85] Id.

[86] Id.

[87] Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 144 (Del. 2012) (quoting 8 Del. C. § 220(c)).

[88] 906 A.2d 156 (Del. Ch. 2006).

[89] Opening Br. 19.

[90] Highland Select, 906 A.2d at 157.

[91] Id. at 165.

[92] Id. at 168.

[93] Opening Br. 18-19.

[94] Id. at 20-24.

[95] Fuchs Fam. Tr. v. Parker Drilling Co., 2015 WL 1036106, at *4 (Del. Ch. Mar. 4, 2015).

[96] In re Facebook, Inc. Section 220 Litig., 2019 WL 2320842, at *18 (Del. Ch. May 30, 2019).

[97] A663.

[98] A675-76.

[99] A686.

[100] A38.

[101] A791-92 (emphasis added).

[102] A881-82.

[103] We note that the Company faults the Stockholders for not identifying these specific records from the outset. But the information that allowed the Stockholders to narrow its requests was not available at the time of the Original Demand or the Consolidated Demand. The Stockholders created their Five Requests based on information alleged in the Amended Securities Complaint about (1) communications between Fisher and Huang regarding the effect of cryptocurrency on the channel, as alleged by a former NVIDIA employee, and (2) the Top 5 emails. The Amended Securities Complaint was not filed until May 2020, which occurred after the Original and Consolidated Demands. In other words, the Company asks us to rule that the Stockholders should have identified a specific set of records it did not know existed until after it made its Original Demand. We decline to do so.

[104] See In re Facebook, Inc. Section 220 Litig., 2019 WL 2320842, at *18.

[105] Opening Br. 21-23.

[106] A706.

[107] A767.

[108] Id.

[109] A767-68.

[110] Ex. B at 3.

[111] The Company also alleges that the Court of Chancery erred in ordering the production of documents that the Stockholders did not request in their complaint or pre-litigation demands. Given our holding that the Five Requests are encompassed within the pre-litigation demands, we need not address this argument.

[112] Ex. A at 20.

[113] Id.

[114] Ex. A at 23-24.

[115] Id. at 24-25.

[116] Opening Br. 25-30.

[117] Id. at 26.

[118] Id. at 28.

[119] Id. at 30.

[120] Answering Br. 27-30.

[121] Id. at 28.

[122] Id. at 30-31.

[123] Id. at 31-32.

[124] D.R.E. 801(c).

[125] Opening Br. 25-28; Answering Br. 27-30; see Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 778 (Del. Ch. 2016); accord Gross v. Biogen Inc., 2021 WL 1399282, at *9 (Del. Ch. Apr. 14, 2021); Jacob v. Bloom Energy Corp., 2021 WL 733438, at *1 n.10 (Del. Ch. Feb. 25, 2021); Georgia Notes 18, LLC v. Net Element, Inc., No. 2021-0246-JRS, at *7-8 (Del. Ch. Aug. 31, 2021); Pettry v. Gilead Sciences, Inc., 2020 WL 6870461, at *11 (Del. Ch. Nov. 24, 2020); Woods Tr. of Avery L. Woods Tr. v. Sahara Enters., Inc., 238 A.3d 879, 894 (Del. Ch. 2020); Brown v. Empire Resorts, No. 2019-0908-KSJM, at *35 (Del. Ch. Feb. 20, 2020); Lapetus Cap. II LLC v. Verso Corp., No. 2019-1040-KSJM, at *21 (Del. Ch. Jan. 17, 2020); Lebanon County Employees' Retirement Fund v. AmerisourceBergen Corp., 2020 WL 132752, at *8 (Del. Ch. Jan. 13, 2020), aff'd, 243 A.3d 417 (Del. 2020); Bucks Cnty. Emps. Ret. Fund v. CBS Corp., 2019 WL 6311106, at *2 n.14 (Del. Ch. Nov. 25, 2019); Southeastern Pa. Transp. Auth. v. Facebook, Inc., 2019 WL 5579488, at *2 n.7 (Del. Ch. Oct. 29, 2019); In re Facebook, Inc. Section 220 Litig., 2019 WL 2320842, at *2 n.10; In re UnitedHealth Grp., Inc. Section 220 Litig., 2018 WL 1110849, at *6 (Del. Ch. Feb. 28, 2018), aff'd, 196 A.3d 885 (Table) (Del. 2018); In re Plains All Am. Pipeline, L.P., 2017 WL 6016570, at *2 (Del. Ch. Aug. 8, 2017); Elow v. Express Scripts Holding Co., 2017 WL 2352151, at *5 (Del. Ch. May 31, 2017); Walther v. ITT Educ. Servs., Inc., 2015 WL 545331, at *6 (Del. Ch. Feb. 10, 2015); Paul v. China MediaExpress Holdings, Inc., 2012 WL 28818, at *5 (Del. Ch. Jan. 5, 2012); Troy Corp. v. Schoon, 959 A.2d 1130, 1135 (Del. Ch. 2008); Marmon v. Arbinet-Thexchange, Inc., 2004 WL 936512, at *4 (Del. Ch. Apr. 28, 2004).

[126] 681 A.2d 1026 (Del. 1996).

[127] Yahoo! Inc., 132 A.3d at 778.

[128] Thomas & Betts, 681 A.2d at 1028.

[129] Id. at 1028-29.

[130] Id. at 1029.

[131] Id.

[132] Id.

[133] Id.

[134] Id.

[135] Id. at 1031.

[136] Id.

[137] Id. at 1030-31.

[138] Id. at 1031.

[139] Id.

[140] Id. at 1032 (emphasis added).

[141] Id. at 1032 (citing Skoglund v. Ormand Indus., Inc., 372 A.2d 204 (Del. Ch. 1976).

[142] See e.g. Yahoo! Inc., 132 A.3d at 778; accord Biogen Inc., 2021 WL 1399282, at *9; Bloom Energy Corp., 2021 WL 733438, at *1 n.10; Georgia Notes 18, LLC, No. 2021-0246-JRS, at *7-8; Gilead Sciences, Inc., 2020 WL 6870461, at *11; Woods Tr. of Avery L. Woods Tr., 238 A.3d at 894; Empire Resorts, No. 2019-0908-KSJM, at *35; Lapetus Cap. II LLC, No. 2019-1040-KSJM, at *21; AmerisourceBergen Corp., 2020 WL 132752, at *8, aff'd, 243 A.3d 417 (Del. 2020); Bucks Cnty. Emps. Ret. Fund, 2019 WL 6311106, at *2 n.14; Southeastern Pa. Transp. Auth., 2019 WL 5579488, at *2 n.7; In re Facebook, Inc. Section 220 Litig., 2019 WL 2320842, at *2 n.10; In re UnitedHealth Grp., Inc. Section 220 Litig., 2018 WL 1110849, at *6, aff'd, 196 A.3d 885 (Table) (Del. 2018); In re Plains All Am. Pipeline, L.P., 2017 WL 6016570, at *2; Elow v. Express Scripts Holding Co., 2017 WL 2352151, at *5; ITT Educ. Servs., Inc., 2015 WL 545331, at *6; China MediaExpress Holdings, Inc., 2012 WL 28818, at *5; Schoon, 959 A.2d at 1135; Arbinet-Thexchange, Inc., 2004 WL 936512, at *4.

[143] See Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1278 (Del. 2021) (laying out the factors that should be considered when re-examining a question of law in a prior case).

[144] Opening Br. 29-30.

[145] McCarthy v. Cablevision Sys. Corp., 2007 WL 1309399, at *1 (Del. Ch. Apr. 24, 2007) ("Defendant is entitled to depose the plaintiff in a § 220 proceeding, unless there is evidence of abuse of process, alternative means of equivalent discovery, or improper delay."); see Arbitrium Handels AG v. Technicorp Int'l II, Inc., 1994 WL 89017, at *1 (Del. Ch. Feb. 4, 1994).

[146] See Meltzer v. CNET Networks, Inc., 2007 WL 2593065, at *2 (Del. Ch. Sept. 6, 2007) ("For similar reasons, CNET must also be permitted to ask plaintiffs questions about their purpose for bringing this action.").

[147] A787.

[148] A788.

[149] A788-93.

[150] A788.

[151] A801.

[152] A801-02.

[153] Opening Br. at 30.

[154] Ex. A at 28.

[155] Id.

[156] Opening Br. 31-32.

[157] Id. at 33-35.

[158] Id. at 36-38.

[159] Id. at 39-42.

[160] Answering Br. 36-37.

[161] Id. at 37.

[162] Id. at 39-41; Ex. A at 32-34.

[163] Answering Br. at 41-43; Ex. A at 28-30.

[164] Answering Br. at 43-45; Ex. A at 30-32.

[165] Ex. A at 34 (citing Barnes v. Sprouts Farmers Mkt., Inc., 2018 WL 3471351 (Del. Ch. Jul. 18, 2018).

[166] A114.

[167] Beatrice Corwin Living Irrevocable Tr. v. Pfizer, Inc., 2016 WL 4548101, at *4 (Del. Ch. Aug. 31, 2016).

[168] Id. (quoting Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 118 (Del. 2006)).

[169] Seinfeld, 909 A.2d at 123.

[170] Id.

[171] Id. (quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 568 (Del. 1997)).

[172] Id.

[173] AmerisourceBergen, 243 A.3d at 421.

[174] Ex. A at 23. The Company also avers that it was error for the Court of Chancery to order NVIDIA to produce documents that the Stockholders did not request prior to litigation. In other words, the Company believes that the scope of relief granted by the Court of Chancery exceeds the Original Demands. Given our holding that the Stockholders did not reformulate their requests throughout litigation, we need not address this argument.

[175] KT4 Partners LLC, 203 A.3d at 752 (Del. 2019) (quoting Thomas & Betts Corp. v. Leviton Mfg. Co., Inc., 681 A.2d 1026, 1034 (Del. 1996)).

[176] Id. at 751 (quoting Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 372 (Del. 2011)).

[177] Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 569 (Del. 1997).

[178] Espinoza, 32 A.3d at 371-72 (Del. 2011).

[179] KT4 Partners, 203 A.3d at 751-52.

[180] AmerisourceBergen, 243 A.3d at 425 (citing Wal-Mart Stores, Inc. v. Ind. Elec. Workers Trust Fund IBEW, 95 A.3d 1264, 1272 (Del. 2014)).

[181] AmerisourceBergen, 243 A.3d at 439.

[182] Ex. A at 35-36.

[183] Id.

[184] Id. at 38-40.

[185] Id. at 40.

[186] Id. at 42.

[187] Id. at 43 (emphasis added). We also note that even though the Stockholders did not request the Top 5 emails by name until the settlement demand, it was not abuse of discretion for the court to determine that the Top 5 emails fit the description of one or more categories of records from the Five Requests. Thus, the Court of Chancery did not abuse its discretion in ordering the Company to produce these documents.

[188] AmerisourceBergen, 243 A.3d at 439.

[1] Admittedly, and as one learned treatise puts it, "the unreliability of hearsay can be easily overstated." 10 McCormick on Evidence § 245 (8th ed. Jan. 2020). But it remains the case that out-of-court statements offered to prove the truth of the matter asserted are not subject to cross-examination—"the greatest legal engine ever invented for the discovery of truth," according to Wigmore—and, for this reason, their reliability is suspect. 5 Wigmore on Evidence § 1367, at 32.

[2] Despite my questions concerning the soundness of Thomas & Betts's hearsay analysis, which I believe are worth asking in this concurring opinion, I cannot take serious issue with the Majority's forbearance from reconsidering that opinion given that neither party has asked us to do so.

[3] 681 A.2d at 1032.

Books and records requests are among the most commonly litigated issues in the Delaware Chancery Court. Here is a brief run-down of some permissible and impermissible purposes.

General Notes

• Improper secondary motives are fine if the true primary purpose is proper
• Often conditioned on a confidentiality agreement (923 A.2d 810)

Permissible Purposes

• Any purpose reasonably related to their interest as a stockholder, whether or not actionable
  • Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 817 (Del. Ch. 2007)
• Investigate waste or mismanagement (123 A.2d 243) or director suitability
  • Shareholder must first show a “credible basis” to “infer that waste or mismanagement” occurred (681 A.2d 1026) or that the directors may not be suitable (923 A.2d 810)
• Find other stockholders to join in possible litigation against corp. (631 A.2d 1)
• Encourage stockholders to dissent in a merger (1986 WL 5970)

Impermissible Purposes

• Can’t just be fishing for trouble or curiosity
• Adverse to the interests of the corporation (631 A.2d 1)
  • This seems limited to the corporation's commercial interests; beating the shareholders in a lawsuit, for example, would not be a permissible corporate interest
• Pursuing the claim under false pretenses (923 A.2d 810)
• Idle curiosity or fishing for trouble (5 A.2d 519) or harassment (101 A. 433)
• Leverage to acquire the company (681 A.2d 1026)
• Leverage against another company (1985 WL 11548)
• Issues specific to the shareholder (681 A.2d 1026)
• Selling stockholder’s names (240 A.2d 755)

Here's a rough guide to analyzing the questions below.

1. First, determine what the true, primary purpose of the books & records request is.
2. Second, determine whether that purpose is related to the requestor’s role as a stockholder.
3. Third, if the requestor is alleging waste or mismanagement, determine whether the requestor has put forward credible evidence to infer waste or mismanagement.
4. Fourth, determine whether complying with the request would harm the company’s commercial prospects.

Problem Set

Problem 1: Steven is angry that he is not CEO. So he teams up with an activist shareholder Brooke Adams to replace the board and appoint him CEO. Steven tells the activist of an embarrassing letter that could be helpful in ousting the board. The activist buys a bunch of shares and asks for the letter in a books and records request to use in a public campaign to replace the board. How do you rule? (See 923 A.2d 810)

Problem 2: Genius & Innovation Corp. wants to acquire Luminary, Inc., a closely held corporation. Thomas acquires shares from a VP and then makes a records request with the stated purpose to investigate possible waste. When asked what evidence there is of waste, Thomas argues that “is exactly why we need to see the corporate records!” Is a court likely to allow it? (See 681 A.2d 1026)

Problem 3: A former executive and now terminated franchisee of the corporation is asking for records to investigate waste and to assess the propriety of management decisions. His “credible basis” to infer wrongdoing is that when he was a manager a decade ago, there were accounting mix-ups and inventory recorded at the wrong store. He would like to see detailed accounting of the entire enterprise because he is “curious” to see if these issues are wide-spread. (See 2001 WL 337865) 

Problem 4: A shareholder requests records to investigate diversion of corporate assets and failure to seize corporate opportunities. The corporation has not provided regular financial statements to the shareholder, and the shareholder has heard from others that corporate funds have been used for personal travel, personal assets and personal legal defense. The corporation alleges the records demand is to gain leverage in a separate negotiation with the shareholder, noting that the demand was made the day after an executive rejected the shareholder’s offer. The shareholder believes the personal expenses are “the tip of the iceberg” and seeks all corporate expense records. (See 791 A.2d 794)

Problem 5: A state legislature proposes legislation relating to sexual orientation and gender identity in schools. Executives from MegaEntertainment, Inc. criticize the legislation, and as a result of the political buzz MegaEntertainment's stock drops sharply. Donald is a lawyer at a public interest law firm whose ideology opposes MegaEntertainment's. Donald contacts Mickey, a MegaEntertainment shareholder, and suggests Mickey file a books and records request to figure out who was responsible for making the political decision. Mickey files the request, and the company refuses. How is the court likely to rule? (See 2023 WL 4208481)

Problem 6: A member of an LLC brought a books and records request against an LLC that he formed with a long time friend. The LLC refused, and the member sued. At trial, the LLC presented secretly recorded audio of the plaintiff saying that he was going to use this books and records request to make the LLC officers' lives miserable unless the LLC paid an unrelated judgment. How is the court likely to rule? (See Barry Leistner v. Red Mud Enterprises, LLC, C.A. No. 2023-0503-SEM (Del. Ch.))

Overview

Where the investor is directly harmed, the investor may bring suit himself in a direct suit against the company and other applicable parties (e.g., directors, controlling shareholders, and officers). However, where the company itself is harmed the investor has seemingly has no standing to bring a direct suit, as there is no particularized harm. Because of this, business law has created what may be seen as a novelty in other areas of the law. A derivative suit allows the investor to bring a suit against third parties on behalf of the company, so that the company may recover its own damages.

Generally the law does not allow Random Joe to sue Corporate Jim, on behalf of Corporate Jim, if Corporate Jim negligently cuts a tree that falls on Corporate Jim's car (such a suit would result in Corporate Jim paying himself for his own damages). As you continue to dive into corporate law, think about why investors are different than Random Joe, and why derivative suits are necessary to protect them from poorly behaving companies.

Delaware Law

The key question in determining whether a claim is direct or derivative is whether the alleged injury was to the individual directly or to the entity. Delaware common law asks: “does the plaintiff seek to bring a claim belonging to her personally or one belonging to the corporation itself?” Citigroup, Inc. v. AHW Investment Partnership, 140 A.3d 1125, 1127 (Del.Supr., 2016). However, if the claim is a breach of fiduciary duties, the question is: “Looking at the body of the complaint and considering the nature of the wrong alleged and the relief requested, has the plaintiff demonstrated that he or she can prevail without showing an injury to the corporation?” Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del.Supr., 2004). If the answer is yes, then the claim is direct. If not, the claim is derivative. These rules seem similar, but The Delaware Supreme Court felt that they were different enough to make a distinction.

Direct Actions

Direct actions allow investors to enforce, via lawsuit, duties owed directly to them by the company or its directors, officers or controlling shareholders. This allows investors to seek relief for the harm they have individually suffered. Where many shareholders are similarly situated, one investor may bring a class action on behalf of all similarly situated investors. Common direct actions include, inter alia, securities fraud (e.g., § 8.4.2.3 Gun Jumping), and actions to inspect books and records (§ 9.2).

Derivative Actions

Derivative suits allow shareholders to bring, on behalf of the company, suits against third parties. These suites are typically brought against corporate insiders such as officers, directors, or controlling shareholders, who have allegedly harmed the corporation. In these actions, the shareholder is not suing for personal damages but rather for damages sustained by the corporation, which indirectly affects some (e.g., only a certain class of stock) or all shareholders . Common derivative actions include breaches of fiduciary duties (§ 11), corporate waste (§ 11.9), and insider trading (§ 8.5).

Complaint

The primary hurdle in derivative suits is arguing that the cause of action in the complaint is in accord with Delaware Rules of Court § 23.1: Simply put, the complaint must make a “demand” of the board and explain why the plaintiff feels the officers of the corporation failed to act in the desired manner. This typically manifests as an accusation of a conflict of interest. The court will dismiss the case if the demand is futile (e.g. only 1/4 of the board has a conflict). The cases in this chapter highlight this plaintiff burden and the Demand Futility test.

Damages

Because the shareholders themselves are not harmed directly, any damages in a derivative suit are paid to the company, either by the company itself or by the wrongful actor (however, in most cases the directors and officers will be indemnified by the company, by exculpating the duty of care (not duty of loyalty). DGCL § 102(b)(7). Thus, why are derivative claims worth an investor's effort and often millions of dollars in attorneys' fees and court costs? 

The Plaintiff's Lawyer

In Delaware, DGCL Sections 102(f) and 109(b) prohibit a corporation's certificate of incorporation and bylaws, respectively, from imposing liability on a stockholder for the attorneys' fees or expenses of the corporation in a derivative claim. Further, Delaware common law has created the corporate benefit doctrine, as opposed to the general American rule, whereby the plaintiff's lawyers may be reimbursed for their efforts in prevailing claims (including cases settled outside of court). The purpose of these laws are to balance the interests between the corporation and its stockholders, by providing fee awards as an incentive to bring meritorious claims, whereas many stockholders, especially less wealthy minority stockholders, would not normally bother or even be able to bring claims which may take multiple years and millions of dollars to litigate. The law allows a holder of just 1 share to bring a derivative claim, and fees and costs together may range from 15% - 35% of the total damages. A derivative suit may be brought even if a majority of shareholder's disagree with the court's ruling.

An example of this incentive to litigate is Richard J. Tornetta et al. v. Elon Musk et al. [Tesla], No. 2018-0408-KSJM (Del. Ch. May. 28, 2024), in which the stockholders were successful in their demand to invalidate CEO Elon Musk's pay package valued over $50 billion dollars (an appeal is expected at the time of this writing). In that case, the plaintiff's lawyers requested as compensation 11% of the value of the money that would have gone to Musk, or over $5 billion dollars, equating to more than $250,000 per hour of legal work (including partners, associates, and paralegals). Tesla has argued a $13.6 million fee is more appropriate (less than $1,000 per hour, on aggregate). The largest plaintiff's lawyer payout so far is $688 million on a $7.3 billion settlement, at just under 10% of the settlement value (In re Enron Corp. Sec. Litig. No. H-01-3624 (S.D. Tex.)).

As you read the following cases, try to think of the larger context and the impact of litigation not only on a corporation, but also its shareholders (e.g., does a successful claim actually drive investor benefit or just cause corporate harm) and other external impacts (e.g., potentially increased consumer prices, less efficient economies of scale, etc.).

Opinion

MEMORANDUM OPINION 1

WILL, Vice Chancellor 2

This stockholder derivative action arises from 3G Capital, Inc's sale of 7% of its then-24% stake in The Kraft Heinz Company. The sale was followed by Kraft Heinz disclosing disappointing financial results and its stock price dropping significantly. 3G's proceeds from the sale exceeded $1.2 billion.

In this litigation, the plaintiffs contend that defendants 3G, entities affiliated with it, and certain dual fiduciaries of 3G and Kraft Heinz breached their fiduciary duties to Kraft Heinz stockholders. The plaintiffs' claims are based on allegations that the defendants either approved 3G's stock sale based on adverse material nonpublic information or allowed 3G to effectuate the sale to the detriment of Kraft Heinz and its non-3G stockholders.

As with every stockholder derivative action, the plaintiffs must adhere to Court of Chancery Rule 23.1 by making a demand on the board of directors or demonstrating that a demand would have been futile. The plaintiffs did not make a demand on the Kraft Heinz board and maintain that demand should be excused because a majority of the board is not independent of 3G. For the reasons explained below, the plaintiffs have failed to establish demand futility. As such, the action is dismissed in its entirety. 3

I. BACKGROUND

The following facts are drawn from the Consolidated Amended Verified Stockholder Derivative Complaint (the "Complaint") and the documents it incorporates by reference.

A. The Kraft Heinz Company Is Formed.

The Kraft Heinz Company is a publicly traded Delaware corporation that describes itself as "one of the largest global food and beverage companies." Kraft Heinz was formed in 2015 when Kraft Food Groups, Inc. ("Kraft") merged with The H.J. Heinz Company ("Heinz").

Heinz was jointly purchased by global investment firm 3G Capital, Inc. and Berkshire Hathaway Inc. in 2013. 3G and Berkshire each took a 50% stake in the 4 company and contributed $4 billion in capital as part of the deal. 3G was charged with managing the day-to-day operations of Heinz. 3G partners (and defendants) Bernando Hees and Paulo Basilio were named CEO and CFO, respectively.

3G-founded by defendants Jorge Paulo Lemann, Alexandre Behring, and Marcel Herrmann Telles, among others-had previously and successfully rolled up brand-name companies in the food and beverage and hospitality sectors. For example, 3G was involved in the creation of Anheuser-Busch InBev ("AB InBev"), in which Berkshire once held a large stake. Berkshire also invested alongside 3G in Burger King's 2014 acquisition of Canadian fast food chain Tim Hortons.

On March 24, 2015, Heinz entered into an Agreement and Plan of Merger with Kraft to form Kraft Heinz. Kraft stockholders approved the merger agreement on July 1, 2015 and the merger closed the next day. Post-closing, 3G and Berkshire together owned roughly 51% of Kraft Heinz, with 3G holding 24.2% and Berkshire 5 holding 26.8%. Legacy Kraft stockholders owned the remaining 49% of the company.

Under the Merger Agreement, Kraft Heinz's eleven-member board of directors (the "Board") was composed of five former Kraft directors, three 3G designees, and three Berkshire designees. 3G appointed Behring, Lemann, and Telles to the Board. Berkshire appointed Gregory Abel, Warren Buffett, and Tracy Britt Cool. John T. Cahill, the former CEO and chairman of Kraft, was among the five former Kraft directors who completed the original Board. 3G's Hees and Basilio became the CEO and CFO of Kraft Heinz. Basilio was later replaced by another 3G partner, defendant David Knopf.

The day the merger closed, 3G and Berkshire entered into a Shareholders' Agreement. The Shareholders' Agreement required Berkshire and 3G to vote their 6 shares in favor of each other's Board nominees. 3G and Berkshire also agreed not to take any action "to effect, encourage, or facilitate" the removal of the other's director designees. Kraft Heinz's March 3, 2016 proxy statement explained that "Berkshire Hathaway, Mr. Buffett and the 3G Funds may be deemed to be a group for purposes of Section 13(d) of the Exchange Act."

B. 3G Sells $1.2 Billion of Kraft Heinz Stock.

On August 2, 2018, Hees, Knopf, and Kraft Heinz's then-Executive Vice President (and defendant) Eduardo Pelleissone informed the Board that Kraft Heinz was unlikely to achieve its EBITDA target for the first half of 2018 and was expected to miss its 2018 full year target by over $700 million. The news came after Kraft Heinz had already missed its 2017 EBITDA target of $8.5 billion by $440 million, missed its target for the first quarter of 2018, and reduced its 2018 full year EBITDA projections from $8.4 billion to $8 billion. Behring, Lemann, Telles, and Basilio 7 (in addition to Hees and Knopf) were present at the meeting. The Audit Committee and Knopf had previously been informed that Kraft Heinz's goodwill and intangible asset valuations were largely driven by Kraft Heinz management's revenue and cash flow forecasts.

Four days after the Board meeting, on August 7, 2018, 3G sold 7% of its stake in Kraft Heinz for proceeds of over $1.2 billion. The trade was made possible by Kraft Heinz removing the shares' restrictive legends. Before their removal, a 3G partner had provided Kraft Heinz's counsel with a statement that 3G "is not in possession of any material, non-public information." Pelleissone personally sold about $2.3 million of his Kraft Heinz shares on the same day.

C. Kraft Heinz Announces Poor Financial Results and an Accounting Impairment.

A pair of financial announcements followed by significant one-day price drops came next. On November 1, 2018, Kraft Heinz reported its third quarter 2018 financial results-it had missed its EBITDA target for the quarter by $232 million. 8

Kraft Heinz's stock price fell nearly 10% from close on November 1 to close on November 2, 2018. On February 21, 2019, Kraft Heinz reported its fourth quarter and full year 2018 financial results, again missing internal targets by hundreds of millions of dollars. It also disclosed an adjustment to its goodwill and intangible assets resulting in a non-cash impairment charge of $15.4 billion. Kraft Heinz's stock price fell roughly 27.5% from close on February 21 to close on February 22, 2019.

Litigation followed. On February 24, 2019, a federal securities class action was filed in the United States District Court for the Northern District of Illinois (the "Federal Securities Action") against Kraft Heinz, various 3G entities, Hees, Basilio, Knopf, Behring, and certain non-parties to this action including Board member George Zoghbi, a former Kraft Heinz executive. A consolidated class action complaint was filed in that action on January 6, 2020. 9

D. This Litigation

Kraft Heinz stockholders began filing derivative complaints related to 3G's sale in this court on July 30, 2019. Those actions were consolidated on January 22, 2020. On March 13, 2020, the court designated the General Retirement System of the City of Detroit, the Police & Fire Retirement System of the City of Detroit, and Erste Asset Management GmbH as co-lead plaintiffs. On April 27, 2020, the plaintiffs filed the Complaint, which relied upon documents obtained pursuant to 8 Del. C. § 220.

The Complaint advances three counts on behalf of Kraft Heinz. Count I alleges breaches of fiduciary duty under Brophy v. Cities Service Company  for either approving 3G's August 7, 2018 block sale of Kraft Heinz stock based on adverse material nonpublic information or allowing the sale to the detriment of Kraft Heinz's non-3G stockholders. Count II seeks contribution and indemnification from the defendants for allegedly causing Kraft Heinz to issue false and misleading statements in violation of federal securities laws. Count III brings aiding and 10 abetting claims against several 3G entity defendants that were "the mechanisms through which 3G accomplished" the sale.

The defendants moved to dismiss the Complaint on June 12, 2020.Following the denial of two motions to dismiss in the Federal Securities Action, the parties were given an opportunity to submit supplemental briefing on any effect the Federal Securities Action decision might have on the issues presented here.

II. LEGAL ANALYSIS

The defendants have moved to dismiss the Complaint under Court of Chancery Rule 23.1 for failure to make a demand on the Kraft Heinz Board and under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. In the alternative, the individual defendants have moved to stay this action pending the resolution of the Federal Securities Action.

As with all derivative cases, demand excusal is a threshold issue. My analysis begins and ends there. After conducting a demand futility analysis on a director-by- 11 director basis, I conclude that a majority of the Board was disinterested and independent. Demand is therefore not excused, and the plaintiffs lack standing to press this derivative action.

A. The Demand Futility Standard

Under Court of Chancery Rule 23.1, a stockholder who seeks to displace the board's authority by asserting a derivative claim on behalf of a corporation must "allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff's failure to obtain the action or for not making the effort." This requirement is rooted in the "basic principle of the Delaware General Corporation Law . . . that the directors, and not the stockholders, manage the business and affairs of the corporation." "It is designed to give a corporation, on whose behalf a derivative suit is brought, the opportunity to rectify the alleged wrong without suit and to control any litigation brought for its benefit."

Stockholders who forego a demand must "comply with stringent requirements of factual particularity" when alleging why demand should be excused. "Rule 23.1 12 is not satisfied by conclusory statements or mere notice pleading." Instead, "[w]hat the pleader must set forth are particularized factual statements that are essential to the claim."

The court is confined to the well-pleaded allegations in the Complaint, the documents incorporated into the Complaint by reference, and facts subject to judicial notice while conducting a Rule 23.1 analysis. All reasonable inferences from the particularized allegations in the Complaint must be drawn in the plaintiffs' favor.Under the heightened pleading requirement of Rule 23.1, "conclus[ory] allegations of fact or law not supported by the allegations of specific fact may not be taken as true."

The Delaware Supreme Court recently established a three-part, "universal test" for assessing demand futility in United Food & Commercial Workers Union v. Zuckerberg. The test is "consistent with and enhances" the standards articulated 13 in Aronson, Rales, and their progeny, which "remain good law." Under Zuckerberg, this court must consider, director-by-director:

(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;

(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and

(iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

If "the answer to any of these three questions is 'yes' for at least half of the members of [a] demand board," demand is excused as futile.

B. The Demand Futility Analysis in This Case

"The court 'counts heads' of the members of a board to determine whether a majority of its members are disinterested and independent for demand futility purposes." The Board in place when this litigation was first filed on July 30, 2019 had eleven members: (1) defendant Lemann; (2) defendant Behring; (3) non-party Joao M. Castro-Neves, a 3G partner; (4) non-party Abel, a Berkshire designee; (5) non-party Cool, a Berkshire designee; (6) non-party Cahill, a former Kraft Heinz consultant and the former CEO of Kraft; (7) non-party Zoghbi, a former Kraft Heinz executive and current consultant; (8) non-party Alexandre Van Damme, a director of AB InBev; (9) non-party Feroz Dewan, who joined the Board in 2016; (10) non-party Jeanne P. Jackson, a former Kraft director; and (11) non-party John C. Pope, a former Kraft director. This decision refers to those eleven directors as the "Demand Board."

The defendants concede that the three 3G-affiliated directors-Lemann, Behring, and Castro-Neves-could not exercise impartial judgment regarding a demand. The plaintiffs, for their part, concede that Jackson and Pope are independent and disinterested for purposes of a demand futility analysis. 15

That leaves six directors for consideration: Dewan, Abel, Cool, Cahill, Zoghbi, and Van Damme. Only the third prong of the Zuckerberg test is relevant to that assessment. None of these directors are alleged to have sold Kraft Heinz stock during the relevant period or personally benefitted from 3G's sale. These non-party directors would not face a substantial likelihood of liability, even if were assumed that the court might find in the plaintiffs' favor after trial. The demand futility analysis hinges entirely on whether the directors had disabling connections to 3G. If four of these six directors could exercise their independent and disinterested judgment regarding a demand to sue 3G, Rule 23.1 mandates dismissal.

1. The Plaintiffs' Control Allegations

The plaintiffs contend that the "demand futility analysis is strengthened by 3G's status as a controlling stockholder." "[T]he presence and influence of a controller is an important factor that should be considered in the director-based focus 16 of the demand futility inquiry . . . particularly on the issue of independence." As Chancellor Chandler explained in Orman v. Cullman, an independence inquiry focuses on whether a director's decision would "result[] from that director being controlled by another," meaning that the director was dominated by or beholden to "the allegedly controlling entity."

3G is not Kraft Heinz's largest stockholder. At the filing of this litigation (post-sale), 3G owned approximately 22% of Kraft Heinz's stock. 3G had the right to appoint three of the Board's 11 members under the Shareholders' Agreement.Berkshire-which was disinterested in the stock sale-beneficially owned about 17 27% of Kraft Heinz and could also designate three directors under the Shareholders' Agreement.

The plaintiffs maintain that 3G and Berkshire should be viewed as a "control group" because they are bound together in a legally significant way based on the Shareholders' Agreement. The defendants disagree. Like the voting agreement in Sheldon v. Pinto Technology Ventures-which did not establish a control group- the Shareholders' Agreement "only govern[ed] the election of certain directors," did not require the stockholders "to vote 'together' on any transaction," and was not "implicated" in the transaction.

Whether 3G should be deemed a controlling stockholder (on its own or together with Berkshire) does not, however, "change[] the director-based focus of the demand futility inquiry." As the Delaware Supreme Court explained in Aronson, even "proof of majority ownership of a company does not strip the 18 directors of the presumption of independence" in the demand context. Instead, "[t]here must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person." Regardless of whether 3G controlled Kraft Heinz together with Berkshire, the plaintiffs cannot overcome the presumption of independence for a majority of the Demand Board.

2. The Demand Board's Independence from 3G

As discussed above, demand futility will be determined by whether at least four of Dewan, Abel, Cool, Cahill, Zoghbi, and Van Damme could have independently considered a demand to sue 3G. At the motion to dismiss stage, "a lack of independence turns on 'whether the plaintiffs have pled facts from which the director's ability to act impartially on a matter important to the interested party can be doubted because that director may feel either subject to the interested party's dominion or beholden to that interested party.'" 19

When assessing independence, "our law cannot ignore the social nature of humans or that they are motivated by things other than money, such as love, friendship, and collegiality." The court must "consider all the particularized facts pled by the plaintiffs about the relationships between the director and the interested party in their totality and not in isolation from each other, and draw all reasonable inferences from the totality of those facts in favor of the plaintiffs."

After doing so, I conclude that the plaintiffs have not pleaded particularized facts sufficient to create reasonable doubt about the independence of Dewan, Abel, Cool, and Cahill. Because they join the concededly independent and disinterested Jackson and Pope to form a majority of the Demand Board, demand is not excused under Rule 23.1.

a. Dewan

Feroz Dewan has served on the Board since October 2016. The plaintiffs assert that he is beholden to 3G but do not plead any particularized facts undermining his independence. The only grounds provided to question Dewan's independence are (1) that Dewan's private foundation held more than 12% of its investment 20 portfolio in a 3G fund as of 2016, and (2) that Dewan chairs a non-profit that receives donations from organizations including 3G-controlled Restaurant Brands International ("RBI"). No further context is provided, including whether Dewan's foundation remained invested in a 3G fund when this litigation was filed, whether 3G had a role in RBI's donation, and whether RBI's donation was material to the charity. Without that information, it is not possible to infer that Dewan lacks independence from 3G.

b. Abel and Cool

Gregory Abel previously served on the Heinz board and has served as a Berkshire designee on the Board since the merger. He is a member of Berkshire's 21 board of directors and its Vice Chairman of Non-Insurance Business Operations.The plaintiffs allege that he "lacks independence given Berkshire's close co-investing relationship with 3G and Buffett's close friendship with Lemann."

Tracy Britt Cool also served on the Heinz board and served as a Berkshire Board designee after the merger until January 2020. Cool joined Berkshire in 2009 as a financial assistant to Buffett and has served as a director of several Berkshire companies and as the CEO of a Berkshire subsidiary. She allegedly has a close relationship with Buffett, who "walked Cool down the aisle at her wedding in 2013." The plaintiffs aver that she lacks independence "by virtue of her personal relationship with Buffett and her career as a longtime Berkshire executive."

The parties' arguments with regard to the independence of Abel and Cool are substantively identical. Considered in their totality, the plaintiffs' allegations provide no reason to doubt that either director could not exercise disinterested and independent judgment regarding a demand. 22

i. Berkshire's Relationship with 3G

Neither Abel nor Cool has any direct relationships with 3G or its defendant partners. Rather, Abel and Cool are allegedly not independent of 3G because they are beholden to Berkshire and Buffett who, in turn, are beholden to 3G and its partners. This transitive theory of independence does not impugn Abel or Cool's independence for several reasons.

First, the plaintiffs assert that Abel and Cool's employment and potential for promotion at Berkshire "would be jeopardized by causing [Kraft Heinz] to sue 3G or Lemann." This argument ties back, in some respects, to the plaintiffs' allegation that Berkshire and 3G are a control group. Delaware courts have recognized that when a controller is interested in a transaction, directors may seek to "preserve their positions and align themselves with the controller" by declining to initiate litigation against it. That logic might apply if Abel and Cool were asked to consider 23 pursuing litigation against Berkshire. But Berkshire is not a defendant. It was uninvolved in the challenged stock sale and is not alleged to have received any benefit from it.

The plaintiffs argue that Abel and Cool could not impartially sue 3G because of Berkshire and 3G's history of co-investment, totaling $25 billion since 2013.The vast majority of those investments are Kraft Heinz related: $12.4 billion from the Heinz acquisition and $10 billion from the Kraft Heinz merger. The only other co-investment specified in the Complaint is Berkshire's 2014 $3 billion investment in Burger King's acquisition of Tim Horton's. It cannot be reasonably inferred from these allegations that Berkshire-which had nearly $447 billion in total assets as of December 31, 2019-relies on 3G to gain access to investments. Even if 24 it could, the necessary link to Abel and Cool is missing. There are no particularized allegations supporting a conclusion that Abel or Cool felt subject to 3G's dominion or beholden to 3G based on those investments.

The plaintiffs further allege that Abel and Cool's independence was compromised given Buffett's "close relationship" with 3G co-founder Lemann.According to the plaintiffs, Buffett has described Lemann as a friend, views him favorably as a business partner, attended one of his birthday parties, and joined him for three professional workshops. Those facts (if true) would hardly be sufficient 25 to show that Buffett lacks independence. His relationship with Lemann is not "suggestive of the type of very close personal relationship that, like family ties, one would expect to heavily influence a human's ability to exercise impartial judgment." Allegations that individuals "moved in the same social circles," "developed business relationships before joining the board," or described each other as "friends" are insufficient, without more, to rebut the presumption of independence. And one step removed from Abel and Cool, these allegations are of little consequence. 26

ii. Shareholder's Agreement

The plaintiffs also maintain that the Shareholders' Agreement would prevent Abel and Cool from exercising their independent judgment regarding a demand. According to the Complaint, the Shareholders' Agreement "prevents any of Berkshire's designees from voting to cause [Kraft Heinz] to sue 3G's designees."Section 2.1(c)(ii) of the Shareholders' Agreement provides that "Berkshire . . . agrees it will not vote its Shares or take any other action to effect, encourage or facilitate the removal of any 3G Designee elected to the Board therefrom . . . without the consent of . . . 3G." The plaintiffs' theory is that pursuing litigation against 3G on behalf of Kraft Heinz could "'effect, encourage or facilitate the removal' of the 3G-designated directors from the Board" under 8 Del. C. § 225(c).

The plaintiffs seemingly waived any argument about the effect of the Shareholders' Agreement on Abel and Cool's independence after failing to advance it in their briefing. In any event, the Shareholders' Agreement has little bearing on the demand futility analysis for several reasons. It did not bind Abel and Cool, 27 who are not parties to it. The plain language of Section 2(c)(ii) would only cause Berkshire to prevent an "Affiliate" that "hold[s] shares" from acting to facilitate the removal of a 3G Board designee. Neither Abel nor Cool fit that definition. And pursuing litigation against 3G is not equivalent to automatic removal from the Board under Section 225(c). More fundamentally, there are no particularized allegations indicating that Abel or Cool would have been guided by the Shareholders' Agreement in assessing a demand to sue 3G.

Taken together, the plaintiffs' allegations are insufficient. Even when viewed in the context of the Shareholders' Agreement, Berkshire's ties to 3G cannot support a reasonable inference that either Abel or Cool is personally beholden to 3G.

c. Cahill

John T. Cahill has served as Vice Chairman of the Board since the merger. He previously served as the CEO of Kraft and, after the merger, worked as a 28 consultant to Kraft Heinz. The plaintiffs assert that Cahill lacks independence from 3G because of (1) his consulting relationship and director compensation, (2) his status as not "independent" under Nasdaq listing standards in Kraft Heinz's 2019 proxy, and (3) his son's employment at AB InBev. Taken together, these allegations do not impugn Cahill's ability to impartially consider a demand.

First, the plaintiffs allege that Cahill lacks independence from 3G because his prior consulting compensation of $500,000 per year, coupled with his director compensation of about $235,000 per year, constituted more than half of Cahill's publicly reported income in 2018. Cahill's consulting agreement with Kraft Heinz terminated on July 1, 2019-before this action was filed. There are no facts alleged indicating that Cahill expected his consulting arrangement to resume.

At the time the Complaint was filed, Cahill's income from Kraft Heinz was limited to standard director compensation. That compensation accounted for 29 roughly 17% of his publicly reported income. "[D]irector compensation alone cannot create a reasonable basis to doubt a director's impartiality."

Even if the court were to infer that Cahill's past consulting and director fees were material to him at that time,  it is not clear why they would create a sense of "owingness" to 3G. Cahill had no relationship with 3G before Kraft was merged with Heinz. The Complaint lacks any particularized allegations supporting a pleading-stage inference that 3G was responsible for his directorship or consulting 30 arrangement with Kraft Heinz or had the power to strip him of potential future consulting fees or his Board position.

The fact that Kraft Heinz's 2019 proxy stated that the Board does not consider Cahill independent from Kraft Heinz for Nasdaq listing purposes does not change that conclusion. The Delaware Supreme Court has held that "the criteria NASDAQ has articulated as bearing on independence are relevant under Delaware law," but do not "perfectly marry with the standards" applicable under Rule 23.1.An independence determination under stock exchange rules "is qualitatively different from, and thus does not operate as a surrogate for, this Court's analysis of independence under Delaware law for demand futility purposes." Delaware courts recognize that exchange rules, such as the criteria Nasdaq has articulated as bearing on independence, should be considered as part of a holistic demand futility 31 analysis. But the determination of whether Cahill is independent under Nasdaq rules concerns his independence from Kraft Heinz-not from 3G. In my view, that determination carries little weight given the dearth of particularized allegations suggesting that Cahill is beholden to 3G.

The plaintiffs' final attempt to impugn Cahill's independence concerns his son's employment as a District Sales Manager at AB InBev following his completion of its "highly selective management trainee program." The plaintiffs assert that those who complete the program "can maintain a direct relationship with 3G founding partner Telles." That allegation is conclusory. There are no particularized allegations tying Cahill's son's employment to 3G or suggesting that he, in fact, had a "direct relationship" with Telles. Thus, there is no well-pleaded 32 basis from which to infer that Cahill's son's employment at AB InBev would bear on Cahill's ability to assess a demand.

The allegations regarding Cahill's son are insufficient to overcome his presumed independence, even when viewed holistically with the plaintiffs' other allegations. It would not be reasonable to infer that Cahill is so beholden to 3G that he would be motivated to cover up insider trading.

d. Zoghbi and Van Damme

George Zoghbi has served on the Board since April 2018. He was Kraft Heinz's Chief Operating Officer from the time of the merger until October 2017, when he became a Special Advisor. The plaintiffs' arguments about Zoghbi largely overlap with those about Cahill, except that he is alleged to have received a larger consulting fee, which was ongoing as of July 2019 and accounts for a comparatively greater percentage of his income. Whether Zoghbi is independent of 3G is therefore a closer call than Cahill. 33

Alexandre Van Damme has also served on the Board since April 2018. The Complaint describes Van Damme as immersed in an "intricate web of personal, professional and financial ties to 3G and its principals." The particularized allegations that make up that web, taken as true and in their totality, come closest to supporting a reasonable doubt about a non-3G director's ability to objectively consider a demand.

Because this decision has already found that six of the Demand Board's eleven directors were able to consider a demand impartially, I need not resolve whether Zoghbi or Van Damme are independent.

III. CONCLUSION

The plaintiffs have failed to plead particularized facts creating a reasonable doubt that six of the eleven Demand Board members lack independence from 3G or its defendant partners. The plaintiffs have conceded the independence of Jackson and Pope. Abel and Cool do not lack independence from 3G based on their ties to Berkshire. And the plaintiff's allegations about Cahill and Dewan do not, in totality, impugn their independence from 3G. Accordingly, demand is not excused.

The defendants' motions to dismiss the Complaint pursuant to Rule 23.1 are granted. The Complaint is dismissed with prejudice in its entirety. 34

224 A.3d 982