Lebanon County Employees' Retirement Fund v. AmerisourceBergen Corporation
2020 WL 208447 (Del. Ch. Jan. 13, 2020) (2020)
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Rule of Law:
Under Delaware law, a stockholder seeking to inspect corporate books and records under Section 220 for the proper purpose of investigating corporate wrongdoing need only establish a 'credible basis' to infer possible mismanagement or wrongdoing, and is not required to prove an actionable claim, commit to specific litigation, or overcome exculpatory provisions at the demand stage.
Facts:
- AmerisourceBergen Corporation, one of the world's largest wholesale distributors of opioid pain medication, is required by the Controlled Substances Act to maintain effective controls against diversion of opioids and report suspicious orders to the DEA.
- In April 2007, the DEA suspended AmerisourceBergen’s license for its Orlando distribution center due to its involvement with rogue pharmacies, leading to a 2007 settlement where AmerisourceBergen committed to a new compliance program.
- The West Virginia Attorney General sued AmerisourceBergen in 2012 for failing to implement effective controls against opioid diversion, which AmerisourceBergen settled for $16 million in 2017.
- Congressional investigations (West Virginia Report and Missouri Report) in 2018 found that AmerisourceBergen significantly reduced its reporting of suspicious opioid orders after 2013 (from 792 in 2013 to 3 in 2016 in West Virginia alone) and continued to supply pharmacies exhibiting red flags.
- In 2019, the New York Attorney General filed a complaint alleging AmerisourceBergen’s policies facilitated opioid diversion and that it was consistently unwilling to identify suspicious orders compared to competitors.
- AmerisourceBergen is a defendant in multidistrict litigation encompassing 1,548 lawsuits alleging failures to report or halt suspicious opioid orders, and has offered to pay $10 billion to settle claims by state attorneys general, which was rejected, with analysts estimating global settlements could reach $100 billion.
- Since September 2017, AmerisourceBergen has incurred over $1 billion in opioid-related litigation and investigation costs.
- The Lebanon County Employees’ Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan (stockholders) sought to inspect AmerisourceBergen’s books and records to investigate potential mismanagement and breaches of fiduciary duty related to opioid distribution.
Procedural Posture:
- Plaintiffs Lebanon County Employees’ Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan (stockholders of AmerisourceBergen Corporation) served a demand on AmerisourceBergen for inspection of its books and records pursuant to Section 220 of the Delaware General Corporation Law on May 21, 2019, seeking to investigate possible mismanagement and breaches of fiduciary duty related to opioid distribution.
- AmerisourceBergen rejected the plaintiffs' demand in its entirety on June 7, 2019, arguing that the plaintiffs lacked a proper purpose and that the requested scope was overly broad.
- On July 8, 2019, the plaintiffs filed this action in the Delaware Court of Chancery to enforce their statutory inspection rights.
- The parties negotiated a schedule, conducted limited discovery, and the case was tried on a paper record on October 15, 2019.
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Issue:
Does a stockholder establish a proper purpose and scope for a Section 220 books and records inspection by showing a credible basis to infer possible corporate wrongdoing or mismanagement, even if they do not prove an actionable claim, commit to specific litigation, or overcome exculpatory provisions or timeliness defenses at the demand stage?
Opinions:
Majority - Laster, V.C.
Yes, a stockholder establishes a proper purpose and scope for a Section 220 inspection by demonstrating a credible basis to infer possible corporate wrongdoing or mismanagement, without needing to prove an actionable claim or specify future litigation strategies. The Court found that the plaintiffs established a proper purpose to investigate possible breaches of fiduciary duty, mismanagement, and other violations of law by AmerisourceBergen’s directors and management regarding opioid distribution. This purpose was supported by a "credible basis" derived from the numerous government investigations, lawsuits (including settlements and active multidistrict litigation), and congressional reports detailing AmerisourceBergen's alleged failures in compliance with the Controlled Substances Act, such as a drastic decline in suspicious order reporting and continued supply to rogue pharmacies. The court rejected AmerisourceBergen's arguments that the plaintiffs' purpose was solely to pursue a 'Caremark claim' or that it was limited to actionable wrongdoing, emphasizing that Section 220 is a pre-suit investigative tool. It also dismissed the company's reliance on its Section 102(b)(7) exculpatory provision and time-bar defenses as premature, stating that these issues relate to the merits of potential future claims, not the right to investigate. The court initially ordered the production of Formal Board Materials and director independence questionnaires, and allowed for a subsequent Rule 30(b)(6) deposition to determine the existence and location of other documents before potentially ordering additional Informal Board Materials or Officer-Level Documents, covering a period from May 1, 2010, to the present.
Analysis:
This decision significantly reinforces the broad investigative rights of stockholders under Section 220 of Delaware law, clarifying that the 'credible basis' standard does not require pleading an actionable claim or committing to a specific litigation strategy. By rejecting common corporate defenses at the inspection stage, the court underscores Section 220's role as a vital pre-suit mechanism for stockholders to gather information to assess potential wrongdoing. This ruling makes it easier for stockholders to investigate corporate traumas stemming from regulatory non-compliance, particularly in highly regulated industries, potentially increasing derivative litigation following government investigations.
