Recently, Vice Chancellor Slights refused to grant Carl Icahn and affiliates’ novel request for a company’s books and records in order to mount a proxy contest against Occidental for agreeing to an allegedly bad deal with Anadarko. The Vice Chancellor ruled that furthering a proxy contest was not a “proper purpose” to support the activist investors’ demand to inspect the corporation’s books and records under section 220 of the DGCL.

Icahn’s potential proxy fight comes after Occidental snatched Anadarko away from Chevron with a $76 per share topping bid. To finance the merger, Occidental engaged in two transactions that have since come under attack by Icahn: (1) a $10 billion raise through preferred stock to Berkshire at an allegedly high cost to Occidental shareholders and (2) the sale of Anadarko’s Africa assets at an allegedly fire sale price. After the Occidental-Anadarko merger was announced, Icahn made a $1.5 billion investment in Occidental stock and unveiled plans to replace the Occidental board of directors and change the company’s bylaws. The Icahn parties submitted a 220 demand for documents related to the Anadarko-Occidental merger in an attempt to secure consent from 20 percent of Occidental stockholders–the threshold required for an election challenge.

Investors have an important inspection right to obtain information under the control of the company. Under Section 220 of the DGCL, stockholders can inspect a company’s books and records provided they show a “proper purpose,” such as investigating corporate wrongdoing. The Icahn parties asked the Court to recognize a new “proper purpose” that would allow stockholders to communicate with other stockholders in furtherance of a bona fide proxy contest. The Court determined that a fishing expedition into the boardroom was not “necessary and essential” to advance the proxy contest here, because Occidental shareholders were already aware of the transactions Icahn called into question. However, the Court left open the door for stockholders to receive books and records from the company in aid of a proxy contest in the “right case.”

In the alternative to their novel argument, the Icahn parties proffered a need to investigate corporate wrongdoing. The Court did not find that alternative argument persuasive because the Icahn group did not meet its low burden in showing a “credible basis” of wrongdoing. According to Vice Chancellor Slights, the plaintiffs’ demand amounted to nothing more than a disagreement with the board’s exercise of its business judgment, which alone, without any allegation of conflict, disloyalty, or interest in the transaction, is not enough to provide a credible basis to infer mismanagement.

Inspection rights are one of many critical rights, including appraisal rights, speaking rights, and shareholder proposals, available to shareholders to influence corporate behavior. Investors have to state a proper purpose to exercise their inspection rights under section 220, and may not be allowed to view the documents requested in certain circumstances, such as possibly amid a proxy contest. On the other hand, investors can exercise their appraisal rights and obtain documents from the company and third parties through discovery without articulating a “proper purpose.”

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