The Delaware Supreme Court recently articulated an important principle related to the use of hearsay to support a proper purpose in Section 220 books and records demands.
In NVIDIA Corporation v. City of Westland Police and Fire Retirement System, et al., C.A. No. 2020-0075 (Del. July 19, 2022), the Company’s executives were suspected of making false and misleading statements during earnings calls to artificially inflate the Company’s stock price. A federal securities class action followed. Included in the securities action complaint were hearsay statements about the Company. Separately, a Section 220 demand was made in Delaware. The proper purpose articulated in the demand was to investigate potential wrongdoing of the Company’s executives for inflating and selling their stock, and such purpose relied upon the hearsay statements in the securities class action. The Court of Chancery found in favor of the plaintiff-stockholders and ordered the Company to produce documents.
On appeal, the Delaware Supreme Court held, among other things, that plaintiffs in a Section 220 action may rely on hearsay to support a proper purpose so long as the hearsay is sufficiently reliable and the Company has the ability to test the plaintiff’s stated purpose through depositions or otherwise.