On April 17, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ruled, in a post-trial decision, that defendant Cypress Semiconductor Corporation (“Cypress”) must allow plaintiff and former Cypress CEO, T.J. Rodgers, to inspect certain books and records of Cypress pursuant to Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220. Rodgers v. Cypress Semiconductor Corp., C.A. No. 0070-AGB (Del. Ch. Apr. 17, 2017). Chancellor Bouchard found that Rodgers, who made the demand in his capacity as a stockholder, sufficiently established a valid primary purpose for seeking inspection of the materials: to investigate potential wrongdoing by Ray Bingham, the Executive Chairman of the Board.
Bingham was appointed Executive Chairman, a newly created role, by the Cypress board in April 2016. Bingham was to assist in the transition of the company’s new president and CEO, who assumed those roles following Rodgers’ resignation that same month. Bingham concurrently served as the founding partner of Canyon Bridge Capital Partners, Inc. (“Canyon”), which Rodgers alleged was competing with Cypress.
Rodgers’ Section 220 demand detailed seven purposes for the request, including to investigate potential mismanagement by Bingham, and sought stocklist materials as well as documents provided to the board and senior management relating to, among other things, Bingham’s affiliation with Canyon or any other competitor of Cypress, Bingham’s compliance with Cypress’ Code of Business Conduct and Ethics, and Canyon’s acquisition of, or intent to acquire, any other semiconductor-related entity. Cypress agreed to provide Rodgers only with stocklist materials and otherwise denied the demand on grounds that Rodgers did not set forth a credible basis to infer that a non-exculpated breach of fiduciary duty by a majority of Cypress’ directors had occurred. Cypress contended that, under Southeastern Pennsylvania Transportation Authority v. AbbVie, 2015 WL 1753033 (Del. Ch. Apr. 15, 2015), such a showing was required because Cypress had an exculpatory provision in its certificate of incorporation. Rodgers filed this complaint January 30, 2017, and on February 17, 2017, he publicly announced a proxy contest for purposes of placing two individuals on the board.
The Court’s post-trial decision found that Rodgers’ evidence established “a credible basis to infer” that Bingham “may have violated” Cypress’ code of ethics by working for a competitor and failing to disclose to Cypress the position and the resulting potential conflict. Indeed, Cypress did not dispute Bingham’s employment by Canyon or that it first became aware of Bingham’s role only in November 2016. Rodgers also demonstrated Canyon was a competitor of Cypress in semi-conductor industry M&A by presenting documents showing that Canyon describes itself as a “‘global private equity buyout firm’ that seeks ‘control investments’ in technology companies” and that Canyon recently agreed to acquire a company that Cypress had tried to acquire twice in the past five years. In response to Cypress’ argument under AbbVie, Chancellor Bouchard ruled that Rodgers did not need to “establish a credible basis to infer a non-exculpated breach of fiduciary duty by any of the other” board members, because “Rodgers has demonstrated credible bases to infer wrongdoing by Bingham and a genuine desire to pursue corrective actions outside of derivative litigation.”
The Court also rejected Cypress’ argument that Rodgers’ true purposes for making the demand were to exact revenge against Bingham and further Rodgers’ proxy contest. With respect to the first contention, Chancellor Bouchard stated that Delaware courts “have given credence to such [personal animosity] defenses only where it is evident . . . that the plaintiff’s actual, predominating, purpose is something unrelated to the plaintiff’s purpose as a stockholder,” which the evidence did not support. With respect to the second contention, Chancellor Bouchard found that Rodgers’ demand and the proxy contest were “parallel efforts to address the same perceived misconduct” but that “Cypress has not sustained its burden to prove that Rodgers’ actual purpose for making the Demand was to aid his proxy contest in an improper manner.”
The ruling reiterates the principle that documents obtained through Section 220 demands can only be used in connection with the purpose(s) specified in the demand. For companies who receive such demands, the decision makes clear that even where a non-exculpated breach of duty by the board is not established, a demand is valid if it establishes another credible basis for obtaining the requested documents and meets the other requirements of Section 220.
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