On Formally Documenting Corporate Action: KT4 v. Palantir.

The Delaware Supreme Court has provided us with another reason why family businesses should observe formal governance procedures when the owners or the directors are making decisions or taking action.  In a case called KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738 (Del. 2019), the Court held that a corporation may be required to disclose confidential email messages in order to satisfy a stockholder’s “books and records request” if the corporation has no formal records of its activities.

Palantir Technologies Inc. (the “Corporation”) was a privately held Delaware corporation doing business in California.  KT4 Partners LLC (“KT4”) was a stockholder of the Corporation.  It was alleged that after a principal of the Corporation and a principal of KT4 had a falling out, the Corporation amended its Investors’ Rights Agreement (“Rights Agreement”) in a way that substantially diminished KT4’s rights as a stockholder.  KT4 responded by making a statutory books and records request under section 220 of Delaware’s General Corporation Law (“DGCL”), seeking disclosure of the Corporation’s records of how and why the Rights Agreement was amended.  The Delaware Supreme Court held that if the Corporation had no formal records of the amendment process, it could be required to disclose emails that contained that information.

Under DGCL section 220, a stockholder may inspect all of a corporation’s books and records that are proper to the stockholder’s proper purpose. In this case the court held that KT4 had a proper purpose in determining whether the Rights Agreement had been amended in a way that was procedurally valid.  The Corporation did not hold stockholders’ meetings, chronically failed to provided stockholders with notice of their rights, and did not maintain formal records of its governance activity.  Under these circumstances, the court held that the Corporation could be required to disclose emails relating to the Rights Agreement amendment because they were the only records that the Corporation could produce regarding the matter.

In the Court’s opinion, written by Chief Justice Strine, the Court explained, “If the only documentary evidence of the board’s and company’s involvement in the amendments comes in the form of emails, then those emails must be produced.…If a [company] conducts formal corporate business without documenting its actions in minutes and board resolutions or other formal means, but maintains its records of the key communications only in emails, the {company] has no one to blame but itself for making production of those emails necessary.”  Although this case did not involve a family business, the Court’s logic would apply in the family business context just as well.

Many family businesses fail to be diligent in keeping formal records of their corporate governance activity and engagement with their stockholders. There are many reasons why formal recordkeeping is recommended.  The KT4 case illustrates one such reason.  If a corporation has formal records that can satisfy a books and records request, it is likely that those records will be precise and tend to allay suspicions of corporate wrongdoing. In contrast, if a corporation does not have formal records and instead must disclose emails and other informal documentation, it is possible that such materials will contain imprecise, unrelated, or unintentionally inflammatory comments that may fan the flames of a smoldering shareholder dispute.