In case you think that corporate minutes and other corporate formalities are for sissies, think again. And read the opinion in the case of KT4 Partners vs. Palantir, decided by the Delaware Supreme Court in January 2019.
KT4 had submitted a demand under Section 220 of the Delaware General Corporation Law, seeking to inspect Palantir’s books and records. Because such an inspection must be for a “proper purpose,” KT4 noted that, among other things, Palantir had failed to hold stockholder meetings and to give proper notice under stockholder agreements.
The demand ended up in the Delaware Court of Chancery, which granted some of KT4’s demands but rejected demands for emails exchanged among directors and officers relating to an investor rights agreement. KT4 appealed to the Delaware Supreme Court, which reversed that rejection.
The Supreme Court opinion, authored by one of our favorite jurists, Delaware Supreme Court Chief Justice Leo Strine, had some choice words, including the following:
“KT4 discharged its evidentiary burden by presenting evidence that Palantir did not honor traditional corporate formalities… and had acted through email in connection with the same alleged wrongdoing that KT4 was seeking to investigate. Faced with that evidence, Palantir failed to present any evidence of its own that more traditional materials, such as board resolutions or minutes, even existed. And although the Court of Chancery may have credited Palantir’s implicit suggestion that more formal books and records would be adequate for KT4’s purposes, Palantir concedes on appeal that no such documents exist.” (Emphasis added)
Justice Strine continued:
“Ultimately, if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions, and official letters, it will likely be able to satisfy a § 220 petitioner’s needs solely by producing those books and records. But if a company instead decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which § 220 entitles them.” (Emphasis added)
Just to be clear, this decision means that emails exchanged among the directors and officers regarding the matters in question had to be provided under Delaware law.
I don’t know about you, but as someone who’s seen his share of emails exchanged among directors and officers on the implicit assumption that they would never be seen by third parties, this case created a bit of indigestion. And if you haven’t ever seen those sorts of emails, I can assure you that you don’t want to.
Every so often, people who do what I do wish they had a cautionary example of the trouble a company can get into if it ignores minutes and other formalities. Perhaps we should be careful what we wish for.
BTW — I’ll be writing more about minutes – admittedly one of the nerdiest, but most important, things we do – a bit more in the coming weeks.