Corporate Law, Retooled: How Books and Records Revamped Judicial Oversight

Abstract

In a string of landmark corporate law rulings in the mid-2010s (most notably, Corwin), Delaware’s Supreme Court relaxed the standards of judicial review across a wide range of business transactions. Commentators predicted that this development would render corporate law irrelevant to the regulation of business behavior, thereby insulating managers from accountability and leading to a deterioration in corporate governance. Yet recent empirical studies have refuted the predictions: directors operating under the revamped decisional law still try as hard and get as good results as they did prior to Corwin. This Article examines why Delaware’s corporate law still matters, even after the relaxation of substantive standards of judicial scrutiny.

Coming on the heels of Corwin was another, equally important yet less studied development, namely, the expansion of shareholders’ rights to information from the company. Delaware courts have been constantly relaxing their interpretation of a statutory rule (section 220) that grants shareholders a qualified right to inspect the company’s books and records. The courts now order in section 220 actions the provision of not just formal documents such as board protocols, but also informal electronic communications such as private emails or LinkedIn messages between directors. Armed with such newfound pre-filing discovery powers, shareholders and their attorneys can use the internal documents to plead with particularity facts about disclosure deficiencies and conflicts of interests, thereby overcoming what once seemed insuperable pleading hurdles.

The “Books and Records” expansion has thus reshaped corporate litigation and revamped deterrence, with important implications for deal negotiations, oversight duties, and much more. By allowing plaintiffs and their attorneys to effectively monitor corporate decision-makers, the expansion of section 220 has mitigated much of the presumed problematic effects of Delaware’s dilution of the substantive standards of review.

Corporate law largely operates through section 220 these days. Yet the legal literature has thus far lagged behind in appreciating section 220’s impact. This Article makes three contributions in this regard: First, explaining how section 220 rose to prominence. The Article synthesizes seemingly disparate doctrinal developments, whose interactions led to a new, front-loaded version of corporate litigation, where most of the action happens pre-filing. Second, evaluating the desirability of section 220’s expansion. The Article assesses the costs and benefits of the new, front-loaded equilibrium, concluding that Delaware courts have been striking the right balance between keeping the costs of discovery in check and facilitating monitoring of potential corporate wrongdoing. Third, identifying current trends that may reverse the newfound emphasis on pre-filing investigations. The Article shows that under certain conditions both defendants and plaintiffs may prefer to avoid pre-filing investigations, and offers ways to mitigate this troubling trend. In the process, we revisit longstanding policy debates, such as how to designate the “lead plaintiff” and whether to allow mandatory arbitration clauses.

Keywords: Corporate Law, Shareholder Litigation, Inspection Rights, Section 220, Pleading, Discovery, Pre-Filing Investigations, Delaware Courts, Corwin, Caremark, Corporate Governance

JEL Classification: D82, K22, K41