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Southeastern Pennsylvania Transportation Authority v. AbbVie Inc.

Court of Chancery of Delaware

April 15, 2015

SOUTHEASTERN PENNSYLVANIA TRANSPORTATION AUTHORITY, Plaintiff,
v.
ABBVIE INC., Defendant. JAMES RIZZOLO, Plaintiff,
v.
ABBVIE INC., Defendant.

Submitted: February 11, 2015

Additional Submission: April 9, 2015

Pamela S. Tikellis, Robert J. Kriner, Jr., Scott M. Tucker, and Matthew T. Arvizu, of CHIMICLES & TIKELLIS LLP, Wilmington, Delaware; Attorneys for Southeastern Pennsylvania Transportation Authority.

Craig J. Springer and Peter B. Andrews, of ANDREWS & SPRINGER, LLC, Wilmington, Delaware; Attorneys for James Rizzolo.

Lisa A. Schmidt, A. Jacob Werrett, and J. Scott Pritchard, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware; OF COUNSEL: Robert J. Kopecky, Sallie G. Smylie, P.C., and Christa C. Cottrell, of KIRKLAND & ELLIS LLP, Chicago, Illinois; Attorneys for AbbVie Inc.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor

The board of AbbVie, Inc. ("AbbVie" or the "Company") decided to pursue a merger with a Jersey entity, [1] Shire plc ("Shire"), in part to take advantage of favorable tax treatment of income that would result under the then-current interpretation of U.S. tax law as enforced by the Treasury Department. Like practically all decisions taken by corporate boards, that action involved risk. Here the risk-which proved substantial-was that the law, or its interpretation by regulators, would change before sufficient tax advantages could be realized to offset the costs to stockholders of the transaction. As it turned out, the Treasury's interpretation of applicable tax law changed in a way that eliminated the tax advantages of the merger before its consummation, and the board concluded that the Company would be better off withdrawing from the merger-and paying a substantial breakup fee-than proceeding.

The Plaintiffs here are AbbVie stockholders. They contend that the risk of loss of the tax advantages inherent in the merger with Shire was so substantial, and so obvious, that the directors must have breached their fiduciary duties to the stockholders by entering the deal. In these actions under Section 220, they seek to obtain records from the Company that will allow them to demonstrate this liability sufficiently to allow them to pursue a derivative action on behalf of AbbVie against the directors. Under the statute, they need only produce evidence demonstrating a credible basis that actionable corporate wrongdoing on the part of the directors has occurred, a notably low standard of proof designed to ensure that the costs and effort required to answer the demand for documents does not outweigh the potential advantage to the corporation and its stockholders of production. Notwithstanding this low standard, however, the Plaintiffs have failed to meet it here: They have shown only that the directors took a risky decision that failed at substantial cost to the stockholders. Evaluating risk is the raison d'être of a corporate director. These directors are insulated from liability for breaches of a duty of care, and the Plaintiffs have failed to establish a credible basis to believe that the directors have acted disloyally here-that is, were interested in the transaction, not independent, or were acting in bad faith. If the stockholders believe that the directors acted unwisely, they have a remedy in the corporate franchise, but these stockholders have failed to establish a credible basis on which to imply actionable corporate wrongdoing sufficient to confer a right to the records they seek.

I. BACKGROUND FACTS[2]

A. The Parties and Relevant Non-Parties

Defendant AbbVie is a "global, research-based biopharmaceutical company, " which since its spin-off from Abbott Laboratories in 2013 "has grown to become an approximately $86 billion market capitalization company with approximately 25, 000 employees worldwide across over 170 countries and sales of nearly $19 billion in 2013."[3] AbbVie is a publicly-traded Delaware corporation with its principal place of business in North Chicago, Illinois.[4]

Non-party Shire is a "leading global specialty biopharmaceutical company that focuses on developing and marketing innovative specialty medicines."[5] Shire is a public limited company registered in the island of Jersey, a Crown Dependency of the United Kingdom, with its principal place of business in Dublin, Republic of Ireland.[6]

Plaintiffs Southeastern Pennsylvania Transportation Authority ("SEPTA") and James Rizzolo ("Rizzolo") were the beneficial owners of shares of AbbVie common stock at all times relevant to this dispute.[7]

B. AbbVie Draws Up a Tax Inversion

These coordinated actions to inspect certain corporate books and records of AbbVie pursuant to Section 220 of the Delaware General Corporation Law both arise from the highly publicized failed merger of AbbVie with Shire in late 2014 (the "Proposed Inversion"). The concept for the Proposed Inversion was born among AbbVie's senior management in 2013 as part of its ongoing and periodic review of the Company's business, which included "evaluation of potential opportunities for business combinations, acquisitions, and other financial and strategic alternatives."[8] In October 2013, AbbVie's senior management identified several companies, including Shire, as potential partners in a strategic transaction.[9]With the help of J.P. Morgan, AbbVie's senior management continued to internally evaluate potential transactions through the spring of 2014, with an increasing focus on a "significant strategic transaction" with Shire known as an "inversion."[10]

A corporate inversion is a corporate reorganization in which a company changes its country of residence by resituating its parent element in a foreign country.[11] Inversions are-or were-attractive as a strategic business maneuver because they allow a corporation to adopt a foreign country's more favorable tax or corporate governance regime.[12] In the past few decades, inversions have become especially popular among corporations domiciled in the United States, due to the United States' onerous-relative to that of many other countries-corporate tax code, under which a U.S. corporation must pay a relatively high tax (up to 35%) both on all income earned within U.S. borders and on income earned outside U.S. borders when that foreign income is repatriated to the domestic corporation.[13]Inversions' role in helping U.S. corporations avoid federal tax obligations has earned these transactions the moniker in this country of "tax inversions."[14]

Due to regulatory restrictions, which will be addressed below, the Proposed Inversion envisioned by AbbVie's senior management in late 2013 and early 2014 necessitated a partner like Shire, and would require a series of transactions and merger subsidiaries to take effect. In simplified terms, AbbVie was to form a wholly owned subsidiary under the laws of Jersey ("New AbbVie"), acquire Shire for mixed consideration of cash and New AbbVie common stock[15] (referred to by the parties as the "Arrangement"), and convert AbbVie common stock into New AbbVie common stock (referred to by the parties as the "Merger").[16] At the culmination of these transactions, AbbVie and Shire would each be indirect, wholly owned subsidiaries of New AbbVie-effectively expatriating AbbVie.[17]

C. AbbVie Successfully Woos Shire, the Reluctant Bride

AbbVie's senior management first brought the Proposed Inversion to the Company's board of directors at a regular board meeting on February 20, 2014.[18]In the following weeks, the Company engaged with J.P. Morgan and AbbVie's U.S. and U.K. legal advisors to further analyze the transaction's strategic business and legal considerations.[19] On April 7, 2014, AbbVie formally retained J.P. Morgan to serve as its financial advisor, in which capacity J.P. Morgan met with AbbVie's officers the next day to discuss "financial analyses, transaction considerations[, ] and tactical considerations relating to a potential strategic transaction with Shire."[20] On April 30, 2014, at a special board meeting, senior management communicated the "legal, financial, and other considerations" of the Proposed Inversion to AbbVie's board, which then granted senior management authorization to reach out to Shire with a non-binding, preliminary proposal for the transaction.[21]

With the board's blessing, in May 2014 AbbVie's Chief Executive Officer, Richard Gonzalez, began a lengthy back-and-forth courtship of Shire via its NonExecutive Chairman, Susan Kilsby. At Gonzalez's request, the pair first met in Switzerland on May 5, where Gonzalez informed Kilsby of AbbVie's interest in a strategic transaction and floated AbbVie's first proposal, valuing Shire at £39.50 per share.[22] On May 9, Kilsby notified Gonzalez that Shire's board had rejected the offer.[23] Gonzalez regrouped with AbbVie's board, senior management, and financial and legal advisors and submitted AbbVie's second bid days later on May 13, valuing Shire at £40.97 per share.[24] Following the second offer, J.P. Morgan reached out to Shire's financial advisors directly to discuss the terms, but to no avail; Shire's board rejected the second proposal on May 20.[25] Gonzalez floated a third proposal on May 30, valuing Shire at £46.26 per share, this time meeting in person with Kilsby and Shire's Chief Executive Officer in France to discuss the transaction, but on June 16 Shire's board rejected this proposal as well, indicating that AbbVie was still undervaluing Shire and that "continuing discussions at such an offer level would be a distraction for Shire['s] management team."[26] Shortly thereafter, the U.K. Panel on Takeovers and Mergers forced AbbVie and Shire to acknowledge press rumors of a potential transaction and reveal the details of AbbVie's overtures, requiring the parties to continue their previously private negotiations in the public light.[27]

Undeterred by the publicity or Shire's rebuffing, AbbVie rebounded with an additional series of proposals in July 2014. On July 8, AbbVie issued a press release announcing a fourth proposal, valuing Shire at £51.15 per share.[28] This proposal was sufficient to land the Company a private meeting with Shire executives to better evaluate the value of the transaction.[29] Following the meeting, Gonzalez submitted a fifth proposal to Kilsby on July 12, valuing Shire at £52.25 per share.[30] On July 13, Gonzalez and Kilsby met to discuss "the Fifth Proposal and closing conditions, break fees[, ] and arrangements for Shire employees in a potential recommended transaction."[31] In light of that conversation, AbbVie's board authorized and extended a sixth proposal later that day, valuing Shire at £53.20 per share, which Kilsby indicated to Gonzalez "the Shire Board would be willing to recommend . . . subject to satisfactory resolution of the other terms" of the proposal.[32]

Representatives of both companies met in the following days to negotiate the transaction's "other terms, " which included

the conditions to the transaction, the process and timing of obtaining antitrust and competition clearances, whether a break fee or other compensation payment would apply if the [Proposed Inversion] were not to be completed under various scenarios (including the AbbVie Board changing its recommendation or the AbbVie shareholders failing to approve the [Proposed Inversion]) and arrangements for Shire employees.[33]

On July 17, AbbVie's board held a special meeting to consider the final terms reached by the parties. After hearing from the Company's senior management and advisors, including J.P. Morgan, which rendered a fairness opinion in favor of the transaction on the agreed-upon terms, [34] AbbVie's board approved the Proposed Inversion and authorized Company officials to enter into a formal agreement with Shire.[35]

D. Terms of the AbbVie-Shire Union

1. Price and Structure

On July 18, 2014, AbbVie and Shire publicly announced the Proposed Inversion in a press release detailing the basic terms agreed upon by the parties (the "Announcement"): Shire's stockholders were to receive £24.44 in cash and be issued 0.8960 share of New AbbVie common stock per share of Shire common stock in the Arrangement, and shares of AbbVie common stock would be converted into shares of New AbbVie common stock at a one-to-one ratio in the Merger.[36] On these terms, the parties expected that, after the culmination of the Proposed Inversion, AbbVie's former stockholders would own approximately 75% of the New AbbVie common stock, and Shire stockholders would have received approximately £14.6 billion in the aggregate and own approximately 25% of the New AbbVie common stock.[37] The combined cash and stock consideration that AbbVie was to pay Shire's stockholders in the Arrangement priced Shire at approximately £32 billion, approximately $54 billion at the time the transaction was announced.[38]

2. The Pre-Nup: The Co-Operation Agreement and Reverse Termination Fees

The same day as the they released the Announcement, AbbVie and Shire executed an agreement "set[ting] out certain mutual commitments to regulate the basis on which [the parties were] willing to implement the [Proposed Inversion]" (the "Co-Operation Agreement").[39] The Co-Operation Agreement contains the parties' covenants and conditions in connection with the transactions necessary to effect the Proposed Inversion (i.e., the Arrangement and Merger), as well as establishes a two-tiered scheme of reverse termination fees payable to Shire by AbbVie if the deal were to fall apart under certain enumerated circumstances.

First, Section 7.1 provides that "on the occurrence of a Break Fee Payment Event . . . AbbVie will pay to Shire an amount in cash in U.S. Dollars equal to three per cent . . . of the indicative value of the cash and shares" that AbbVie was to deliver to Shire's stockholders in the Arrangement, calculated to be approximately $1.635 billion (the "Break Fee").[40] Section 7.2 enumerates the circumstances constituting a "Break Fee Payment Event;" relevant here, Section 7.2.1 states such an Event will occur if (1) the AbbVie board withdraws or modifies in a manner adverse to the Proposed Inversion its recommendation of the Merger; and (2) either (a) the AbbVie stockholders vote and do not adopt the Merger Agreement at a stockholder meeting following the board's change in recommendation, or (b) no stockholder meeting takes place within 60 days after the board's change in recommendation.[41]

Second, Section 10.3 of the Co-Operation Agreement further provides that if AbbVie stockholders vote to not adopt the Merger Agreement in circumstances that do not trigger the Break Fee-for example, where AbbVie's board has not withdrawn or modified its recommendation of the Merger-AbbVie must still pay Shire to reimburse and compensate it for costs incurred in connection with the Proposed Inversion (the "Cost Reimbursement Payment").[42] The Cost Reimbursement Payment is calculated based on actual costs incurred by Shire, but in any event can be no less than $500 million or no more than "one per cent . . . of the indicative value of the cash and shares" that AbbVie was to deliver to Shire's stockholders in the Arrangement-approximately $545 million.[43]

The Co-Operation Agreement does not include a clause permitting AbbVie to abandon the Proposed Inversion without paying the Break Fee or Cost Reimbursement Payment if the U.S. government acted to deter inversions.[44]

E. The Posting of the Banns: AbbVie Touts the Benefits and Explains the Risks of the AbbVie-Shire Union

In addition to detailing the deal's terms, the Announcement provided the Company's rationale for pursuing the Proposed Inversion. In the section entitled, "Background to and reasons for the Transaction, " the Company listed several strategic and financial benefits that it expected to capture, including that "AbbVie expects the [Proposed Inversion] to reduce the effective tax rate for New AbbVie to approximately 13 per cent. by 2016, " and that "[t]he new tax structure will provide AbbVie with flexible access to its global cash flows."[45] The Company repeated and elaborated on its rationales in the preliminary proxy statement, including "the potential realization of tax and operational synergies by New AbbVie" and "the opportunity for New AbbVie to have an enhanced financial profile and greater strategic and financial flexibility."[46]

Also in the preliminary proxy statement, the Company explained that it weighed the Proposed Inversion's potential benefits "against a number of uncertainties, risks and potentially negative factors, " including the possibility of having "to pay the Break Fee and [Cost Reimbursement Payment] under certain circumstances specified in the Co-Operation Agreement" and

the risk that a change in applicable law with respect to Section 7874 of the [Internal Revenue] Code or any other U.S. tax law, or official interpretations thereof, could cause New AbbVie to be treated as a U.S. domestic corporation for U.S. federal income tax purposes following the consummation of the [Proposed Inversion].[47]

AbbVie provided more robust discussion of the latter tax-based risk in the "Risk Factors" section of the preliminary proxy statement, including specific multi-paragraph subsections explaining how "[t]he U.S. Internal Revenue Service . . . may not agree with the conclusion that New AbbVie is to be treated as a foreign corporation for U.S. federal income tax purposes following the [Proposed Inversion], " and "[f]uture changes to U.S. or international tax laws could adversely affect New AbbVie."[48] In the latter subsection, the Company discussed specific then-pending legislative proposals that, if enacted, could have the effect of eliminating the tax benefits of the Proposed Inversion.[49] In addition, the Company reiterated the risk of an adverse change in U.S. tax law in the section of the preliminary proxy statement addressing U.S. federal income tax consequences, explaining, in a multi-page discussion, that

a subsequent change in the facts or in law might cause New AbbVie to be treated as a domestic corporation for U.S. federal income tax purposes, including with retroactive effect. In addition, by the time of the completion of the [Proposed Inversion], there could be a change in law under Section 7874 of the [Internal Revenue] Code, in the regulations promulgated thereunder, or other changes in law that, if enacted, could (possibly retroactively) cause New AbbVie to be treated as a U.S. corporation for U.S. federal income tax purposes.[50]

In laying out the totality of expected benefits and risks of the Proposed Inversion in the preliminary proxy statement, AbbVie clarified that it could not, and did not attempt to, weigh the importance of any one benefit or risk:

In view of the wide variety of factors considered by the AbbVie Board in connection with its evaluation of the [Proposed Inversion], the AbbVie Board did not consider it practical to, and did not, quantify, rank or otherwise assign specific weights to the factors that it considered in reaching its determination and recommendation. . . . The AbbVie Board considered this information as a whole, and overall considered the information and factors to be favorable to, and in support of, its determinations and recommendations.[51]

However, when pressed by investors and analysts in a follow-up conference call to reveal just how important the tax benefits were to AbbVie in pursuing the Proposed Inversion, Gonzalez downplayed the tax implications, stating that "[t]ax is clearly a benefit, but it's not the primary rationale for [the Proposed Inversion];" that the deal "has excellent strategic fit and has compelling financial impact well beyond the tax impact;" and that AbbVie "would not be doing it if it was just for the tax impact."[52]

F. Shifting Regulatory Backdrop: "If Anyone Knows Just Cause Why These Two Should Not Be Wed, Let Him Speak Now . . ."

1. Closing the Inversion "Loophole"

Neither tax inversions nor political opposition to tax inversions is a novel development. A decade prior to the announcement of the Proposed Inversion, the U.S. government, in an effort to protect its tax base against tax inversions, included an anti-inversion provision in the American Jobs Creation Act of 2004 (the "AJCA") targeting and eliminating a straightforward inversion technique that had become popular in the preceding years known as a "naked inversion."[53] However, the AJCA left open other avenues to an inversion, notably mergers with foreign corporations: After the AJCA, a U.S. corporation could still re-organize in a foreign country and be treated as a non-U.S. corporation for federal income tax purposes if the U.S. corporation's former stockholders owned less than 80% of the resulting foreign entity.[54]

In the years leading up to the Proposed Inversion, several high-profile companies-most notably Pfizer[55]-had announced plans to pursue an inversion through a merger with a foreign company, reigniting "concerns about an erosion of the U.S. tax base" and cultivating a hostile political environment for these types of transactions.[56] In fact, as AbbVie planned and pursued the Proposed Inversion into 2014, the U.S. government was simultaneously openly exploring possible ways to deter inversions, through both legislative and administrative action.[57] As pointed out by AbbVie in its preliminary proxy statement, numerous concrete proposals to eliminate these transactions' tax benefits had surfaced by July 2014, including proposed legislation in both houses of Congress-The Corporate Inversion Prevention Act of 2014-which would be effective to any transaction completed after May 8, 2014, and a provision in the Obama administration's 2015 budget proposals that would be effective to any transaction completed after December 31, 2014.[58]

2. Skepticism that Government Would Act in the Short Term

Despite the heated anti-inversion rhetoric and development of specific anti-inversion proposals throughout the first half of 2014, whether, when, and to what effect the government would implement any particular anti-inversion proposal was uncertain. Some prominent commentators and analysts found it unlikely that any legislative action to curb inversions would occur before 2015 and were doubtful that such action, if taken, would have retroactive effect. On April 29, 2014, the day before AbbVie's board approved approaching Shire regarding the Proposed Inversion, The New York Times reported that "Congress is . . . unlikely to act [to eliminate inversions] during this election year."[59] Likewise, on July 16, 2014, the day before AbbVie's board voted to approve the terms of the Proposed Inversion, the Times reported:

Lawmakers say they want to stop United States companies from reincorporating overseas to lower their tax bills, but the Obama administration and Congress appear unlikely to take any action to stem the tide of such deals anytime soon.
On Tuesday, Treasury Secretary Jacob J. Lew sent letters to the top members of the House Ways and Means Committee and Senate Finance Committee, urging Congress to take immediate action to halt the rush of companies abroad. Yet the wave of so-called inversions looks set to continue unabated as a partisan Congress remains gridlocked, and Wall Street advisors continue encouraging companies to strike such deals while they still can.[60]

The Times's view on Wall Street's then-encouraging short-term outlook on inversions is supported by a July 25, 2014 analyst report on AbbVie by BMO Capital Markets, which opined:

Despite the heated rhetoric coming out of Washington, we continue to believe that legislation targeting tax inversions remains unlikely in the near term, given the current political landscape. Tax inversion is more likely to be addressed as part of comprehensive tax reform rather than a piecemeal provision, and the earliest that could likely happen is 2015. AbbVie expects to close the deal in 4Q14, and the consensus seems to be that such legislation would not be retroactive.[61]

These same commentators expressed skepticism that the Obama administration would step in to address inversions in the interim while legislative progress lagged, [62] a skepticism that was shared by key officials within the administration. An April 30, 2014 Bloomberg BNA Daily Tax Report article, released the same day the AbbVie board approved approaching Shire about the Proposed Inversion, quotes the Commissioner of the IRS, John Koskinen, as saying, "We've done, I think, probably all we can [to stop inversions] within the statute"; the article interprets these remarks to "show the limits of the government's ability to respond without Congress and suggest that the Obama administration won't make a regulatory move to stop or limit so-called corporate inversions."[63] Similarly, in an interview given on July 16, 2014-the day before the AbbVie board voted to approve the terms of the Proposed Inversion-Secretary of the Treasury Jack Lew, commenting on his letter to Congress alluded to in the July 16 Times article, stated:

We have looked at the tax code. There are a lot of obscure provisions that we do not believe we have the authority to address this inversion question through administrative action. If we did, we would be doing more.
That's why legislation is needed. That's why we proposed it in our budget. That's why I wrote the letter last night. There are limits to what we can do without legislative action.[64]

3. Treasury Implements an Administrative Fix

Whatever confidence existed in the summer of 2014 that the U.S. government could not or would not act in the short term to deter inversions was shattered on August 5, 2014, less than a month after AbbVie's board approved the Proposed Inversion, when the Treasury Department announced it was "reviewing a broad range of authorities for possible administrative actions to limit inversions as well as approaches that could meaningfully reduce the tax benefits after inversions took place."[65] Secretary Lew confirmed the Treasury's anti-inversion initiative a month later in a speech at a Washington think tank, stating that, while he still believed only Congress could permanently solve the inversion problem, given lawmakers' inability to move quickly, "the Treasury Department is completing an evaluation of what we can do to make these deals less economically appealing, and we plan to make a decision in the very near future."[66] On September 21, 2014, Secretary Lew removed all doubt that the Treasury Department would imminently act, revealing in a press conference that "Treasury is completing its work on administrative action to use our existing authority to limit the economic benefits of inversion."[67]

G. Stranded at the Alter: The Treasury Notice and the Termination Agreement

On September 22, 2014, the Treasury Department and IRS announced their intent to issue regulatory guidance under various sections of the Internal Revenue Code to eliminate certain tax advantages of merger-based inversions (the "Treasury Notice").[68] The new regulations described in the Treasury Notice would prevent U.S. corporations from utilizing several types of transactions and calculations that were necessary to realize the tax benefits of a merger-based inversion.[69] The Treasury Notice provided that these regulations, when passed, would apply retroactively to any transaction completed on or after the date of the Treasury Notice, [70] and further indicated that "[t]he Treasury Department and the IRS expect to issue additional guidance to further limit inversion transactions that are contrary to the purpose of section 7874 and the benefits of post-inversion tax avoidance transactions."[71]

In the weeks following the Treasury Notice, AbbVie engaged in a "detailed consideration of the U.S. Department of Treasury's unilateral changes to the tax rules."[72] Ultimately, after this review, the board determined:

The breadth and scope of the changes, including the unexpected nature of the exercise of administrative authority to impact longstanding tax principles, and to target specifically a subset of companies that would be treated differently than either other inverted companies or foreign domiciled entities, introduced an unacceptable level of uncertainty to the [Proposed Inversion].[73]

Further, AbbVie's board indicated that the Treasury's forthcoming anti-inversion regulations had found their mark with regard to the tax benefits of the Proposed Inversion:

[T]he changes eliminated certain of the financial benefits of the [Proposed Inversion], most notably the ability to access current and future global cash flows in a tax efficient manner as originally contemplated in the [Proposed Inversion]. This fundamentally changed the implied value of Shire to AbbVie in a significant manner.[74]

Consequently, on October 15, 2014, the AbbVie board withdrew its favorable recommendation of July 18, 2014 and replaced it with a recommendation that the AbbVie stockholders vote against the Proposed Inversion.[75]

The AbbVie board's change of recommendation triggered the first prong of the Break Fee. A few days later, on October 20, 2014, the Company triggered the second prong when, acknowledging "that there is little prospect of the Proposed [Inversion] being consummated" following the board's change in recommendation, it entered into an agreement with Shire to terminate the Co-Operation Agreement (the "Termination Agreement").[76] In the Termination Agreement, AbbVie agreed to pay Shire the Break Fee of approximately $1.635 billion.[77]

H. The Section 220 Demands

1. The SEPTA Demand

Plaintiff SEPTA made a written demand on AbbVie for inspection of certain books and records pursuant to Section 220 on November 3, 2014 (the "SEPTA Demand").[78] In it, SEPTA demands inspection of ten categories, including thirty sub-categories, of documents, [79] the stated purposes for which are:

(1) to investigate possible breaches of fiduciary duties and mismanagement by the Board and officers of AbbVie in connection with approving the Break Fee;
(2) to investigate possible breaches of fiduciary duties and mismanagement by the Board and officers of AbbVie in connection with the Board's Change in Recommendation announced on October 15, 2014;
(3) to investigate possible breaches of fiduciary duties and mismanagement by the Board and officers of AbbVie in connection with AbbVie's entry into the Termination Agreement;
(4) to investigate possible waste of corporate assets and breaches of fiduciary duties by the Board and officers of AbbVie in connection with AbbVie's payment of the $1.64 billion Break Fee; and
(5) to investigate the ability of the Board to consider a demand to initiate and maintain litigation related to any breaches of fiduciary duty prior to commencing any derivative litigation.[80]

2. The Rizzolo Demand

Plaintiff Rizzolo made a written demand on AbbVie for inspection of certain books and records pursuant to Section 220 on November 17, 2014 (the "Rizzolo Demand").[81] In it, Rizzolo demands inspection of five categories, including twelve sub-categories, of documents, [82] for purposes of:

(i) investigating possible wrongdoing, self-dealing and breaches of fiduciary duties by the directors and officers of the Company in connection with the termination of the [Proposed Inversion] and the Company's obligation to pay the [Break Fee] to Shire and (ii) investigating possible aiding and abetting by [J.P. Morgan] concerning the breaches of fiduciary duty of AbbVie's Board and senior management.[83]

I. Procedural History

AbbVie countered each of the SEPTA and Rizzolo demands with a letter rejecting the demand for failure to state a proper purpose.[84] In response, SEPTA filed its Section 220 Complaint on November 19, 2014, and Rizzolo filed its Section 220 Complaint on December 1, 2014. Since the two actions stem from the same event, the parties in both actions agreed to coordinate their briefing and argument. However, because the stated purposes and documents sought are not identical between the two actions, the cases were not consolidated.[85]

A coordinated, one-day trial on the papers in both actions was held on February 11, 2015. On April 7, 2015, for the sake of efficiency and clarity, the parties in both actions stipulated to a comprehensive, joint record to be entered in both actions, as well as consented to the Court utilizing this single Memorandum Opinion to deliver its decisions.

II. ANALYSIS

A. Inspection Right

"Stockholders of Delaware corporations enjoy a qualified right to inspect the corporation's books and records."[86] Originally a creature of common law, the inspection right is now codified in Section 220 of the Delaware General Corporation Law.[87] The right to inspection is qualified out of considerations that are practical, rather than equitable; if a stockholder were permitted to inspect records out of a sense of mere curiosity, or to satisfy a desire to oversee matters properly within the province of corporate management or the corporate board, a considerable expense and distraction would be foisted upon the company and its (less curious) stockholders, with likely little value in return. A stockholder is entitled to inspect books and records under Section 220, therefore, only for a proper purpose, defined in the statute as "a purpose reasonably related to such person's interest as a stockholder."[88] In an action to enforce the Section 220 inspection right, the plaintiff stockholder has the burden to demonstrate a proper purpose by a preponderance of the evidence.[89]

Even if a stockholder establishes a proper purpose under Section 220, "the scope of the stockholder's inspection is limited to those books and records that are necessary and essential to accomplish the stated, proper purpose."[90]

B. Proper Purpose

Both SEPTA and Rizzolo seek books and records for the purpose of investigating potential breaches of fiduciary duties, mismanagement, wrongdoing, and waste[91] by AbbVie's directors and officers in connection with AbbVie's obligation to pay the $1.635 billion Break Fee contained in the Co-operation Agreement. In addition, SEPTA separately seeks books and records for the purpose of investigating demand futility, [92] and Rizzolo separately seeks books and records to investigate aiding and abetting by J.P. Morgan.

1. Investigating Potential Corporate Wrongdoing by AbbVie's Directors and Officers

a. Reason for Investigation

It is well established that investigation of potential corporate wrongdoing is a proper purpose for a Section 220 books and records inspection.[93] However, it is also well established that "a stockholder 'must do more than state, in a conclusory manner, a generally acceptable proper purpose'-the investigation of corporate mismanagement 'must be to some end.'"[94] "In other words, [the] plaintiff 'must state a reason for the purpose, i.e., what it will do with the information or an end to which that investigation will lead.'"[95] There are a number of acceptable reasons why stockholders may seek to investigate corporate wrongdoing-"they may seek to institute possible derivative litigation, or 'they may seek an audience with the board to discuss reforms or, failing in that, they may prepare a stockholder resolution for the next annual meeting, or mount a proxy fight to elect new directors.'"[96] Here, however, neither SEPTA nor Rizzolo expressly state in its demand letter why it is investigating corporate wrongdoing at AbbVie.

This Court has cautioned stockholders in the past of the importance of specificity in stating the purpose for their demands:

[T]o warrant relief, a demand for books and records must be sufficiently specific to permit the court (and the corporation) to evaluate its propriety. . . . "[U]nless a demand in itself unspecific as to purpose can in some way successfully be given an expanded reading viewed in the light of surrounding circumstances[, ] a vague demand without more must a fortiori be deemed insufficient."[97]

More pointedly, the Court has explicitly warned that a plaintiff who states a purpose to investigate corporate wrongdoing, without elaboration as to why that investigation is relevant to its interest as a stockholder, has not stated a proper purpose at all:

[T]he nature of section 220 as an independent right does not eliminate the proper purpose requirement. The plaintiff states its purpose is ". . . to investigate potential breaches of fiduciary duty by the Company's officers and directors." This demand states no purpose. Although investigating wrongdoing is a proper purpose, it must be to some end. Delaware law does not permit section 220 actions based on an ephemeral purpose, nor will this court impute a purpose absent the plaintiff stating one.[98]

Although the failure of both SEPTA and Rizzolo to specify the "end" to which their investigations will lead could be read as a failure to state a purpose at all, I find it apparent enough from the Plaintiffs' statements at oral argument to infer that both Plaintiffs seek an investigation to aid in future derivative litigation.[99]However, as neither Plaintiff has mentioned-in briefing or at argument-an intention to take any other proper action with the books and records sought, I find that litigation is the sole motivation for the Plaintiffs' investigations into corporate wrongdoing among AbbVie's directors and officers.[100]

b. Effect of Exculpatory Provision

SEPTA and Rizzolo's claim of a proper purpose to investigate corporate wrongdoing by AbbVie's directors and officers must be evaluated in light of the fact that AbbVie's Certificate of Incorporation exculpates AbbVie directors from liability for breach of the duty of care pursuant to Section 102(b)(7) of the DGCL.[101] According to the Company: "Because plaintiffs have no potential remedy against the directors in a derivative claim for breach of the duty of care, investigating any such breach is futile and not a proper purpose for a Section 220 demand."[102] SEPTA and Rizzolo disagree, arguing that consideration of an exculpatory provision is improper in the context of a Section 220 action, because Section 220 is meant only to be a preliminary fact-finding tool to unearth corporate wrongdoing and an exculpatory provision does not actually eliminate the duty of care of a breach thereof, only a director's ultimate liability in a plenary action.[103]

This Court has not squarely addressed the issue of whether, when a stockholder seeks to investigate corporate wrongdoing solely for the purpose of evaluating whether to bring a derivative action, the "proper purpose" requirement under Section 220 is limited to investigating non-exculpated corporate wrongdoing. However, analogous decisions interpreting Section 220 support the conclusion that such a limitation should exist. Specifically, this Court has found that, although "investigating the possibility of pursuing a derivative action based on perceived wrongdoing by a corporation's officers or directors represents a proper purpose for a Section 220 demand, " "[i]f the filing of such a future derivative action would be barred by claim or issue preclusion, . . . a [Section] 220 demand may be denied as a matter of law."[104] Likewise, the Court has denied a stockholder the ability to inspect books and records solely to investigate bringing litigation where the stockholder would lack standing in the underlying suit[105] or the underlying suit would be time-barred.[106] These holdings, and the necessity of proper balance of the benefits and burdens of production under Section 220, illustrate that the proper purpose requirement under that statute requires that, if a stockholder seeks inspection solely to evaluate whether to bring derivative litigation, the corporate wrongdoing which he seeks to investigate must necessarily be justiciable.[107] Because a Section 102(b)(7) exculpatory provision serves as a bar to stockholders recovering for certain director liability in litigation, a stockholder seeking to use Section 220 to investigate corporate wrongdoing solely to evaluate whether to bring derivative litigation has stated a proper purpose only insofar as the investigation targets non-exculpated corporate wrongdoing. Here, that means that SEPTA and Rizzolo's stated purpose to investigate corporate wrongdoing is proper only to investigate whether AbbVie's directors breached their fiduciary duty of loyalty.[108] I stress that this burden, as explained below, remains among the lightest burdens recognized in our jurisprudence; the plaintiff need only develop a "credible basis" from which I may infer actionable corporate wrongdoing, and "documents, logic, testimony, " or other evidence[109] from which I may infer both potentially exculpated and actionable wrongdoing, obviously, are sufficient for that purpose under Section 220. While, with regard to Plaintiffs' demands here, the focus must be on actionable corporate wrongdoing, the hurdle is still a low one to clear.

c. Credible Basis

SEPTA and Rizzolo have stated a proper purpose in investigating non-exculpated corporate wrongdoing in aid of potential litigation, but merely stating this purpose is not sufficient; a stockholder seeking inspection to investigate corporate wrongdoing must demonstrate "a 'credible basis' from which a court can infer that mismanagement, waste or wrongdoing may have occurred."[110] The "credible basis" standard "reflects judicial efforts to maintain a proper balance between the rights of stockholders to obtain information based upon credible allegations of corporate wrongdoing and the rights of directors to manage the business of the corporation without undue interference from stockholders."[111] As addressed above, the Plaintiffs here must show a credible basis from which I can infer that the Company's directors engaged in justiciable corporate wrongdoing, specifically-in light of the applicable exculpation provision-whether they breached their fiduciary duty of loyalty. Neither Plaintiff bases its investigation into corporate wrongdoing at AbbVie on allegations that AbbVie's directors were interested or lacked independence from interested parties in the Proposed Inversion; rather, the Plaintiffs[112] allege that the directors breached their duty of loyalty by acting in bad faith-that is, "acted with scienter . . . 'an 'intentional dereliction of duty' or a 'conscious disregard' for their responsibilities"[113]-or by committing corporate waste.[114] In addition, Rizzolo argues, based on this Court's ruling in U.S. Die Casting and Development Company v. Security First Corporation, [115] that "investigation of potential mismanagement relating to a failed merger is a proper purpose for a Section 220 books and records inspection."[116]

I first consider whether there is a credible basis to infer that the directors acted in bad faith. The Plaintiffs argue that, in approving and eventually triggering a 3% reverse termination fee that did not carve out a contingency for the U.S government taking action to deter merger-based inversions, the directors either failed to consider or ignored what the Plaintiffs describe as the near-certainty that such government action would occur and would have a deal-breaking impact on the Proposed Inversion.[117] To support the credibility of these allegations, the Plaintiffs point out that "[t]he AbbVie Board approved and recommended an inversion transaction with Shire with knowledge that the federal government was focused on retroactively eliminating the tax benefits of inversion deals;" that the Co-Operation Agreement included an "enormous" Break Fee lacking any contingency permitting the board to change its recommendation in case the government acted to curb inversions; that the Company's preliminary proxy statement did not identify the tax benefit as the only or key benefit of the Proposed Inversion; and that, following the Treasury Notice, the board nonetheless changed its recommendation, triggering the Break Fee.[118] According to SEPTA:

The fact that the AbbVie Board determined that it could no longer recommend the [Proposed Inversion] after the [Treasury Notice] raises a credible basis under the circumstances to infer that the AbbVie Board may have breached its fiduciary duties in originally approving and recommending the [Proposed Inversion] on the terms provided. . . .
Further, the numerous benefits touted by the AbbVie Board in support of its approval and recommendation of the [Proposed Inversion] casts question on the Board's decision to make the Change in Recommendation and enter into the Termination Agreement when only one of the numerous benefits was eliminated pursuant to the fruition of a known and palpable risk.…
Moreover, the enormous magnitude of the Break Fee supports SEPTA's credible basis under the circumstances.[119]

Contrary to the Plaintiffs' position, I do not find that the record establishes a credible basis to doubt that AbbVie's directors acted in good faith in connection with the approval or subsequent termination of the Proposed Inversion. I first note that the Break Fee is "enormous, " to use SEPTA's phrasing, in the abstract, but not in the context of the equally enormous value of the transaction itself: Agreeing to a 3% termination fee is not intrinsically unusual, [120] let alone a credible indication of bad faith. Rather, if AbbVie's agreement to the Break Fee is evidence of bad faith, it must be because the risk of termination was so clear that agreeing to the Break Fee entailed a willful and wrongful decision to disregard the corporate interest; it cannot rest simply on the amount of the Break Fee.

Turning to that issue, while the record does reflect that there was a hostile political environment for inversions during the time the Company pursued the Proposed Inversion, it also reflects that the board was informed of this risk and had factored it into their decision to approve the deal. Specifically, the preliminary proxy statement explicitly states that the tax savings would be a benefit of the deal, but that the Company had weighed that benefit against the risk that the U.S government could change or reinterpret applicable tax law to eliminate that benefit, even explaining to stockholders in detail the concrete anti-inversion measures Congress and the Obama administration had already proposed.[121] The record lacks any indication that the directors consciously chose to disregard that risk. Simply because the risk accepted by AbbVie's directors to secure a deal with Shire came to fruition does not raise a credible basis to infer that AbbVie's directors intended that adverse event to happen, or knew but were indifferent to that fact, to the Company's detriment, so as to demonstrate a lack of good faith.[122] Moreover, the record suggests that the $1.635 billion Break Fee was an actively negotiated provision by a reluctant merger target.[123] Again, while a large dollar amount, it was a commonplace 3% of total value of that target.

Having not found a credible basis to infer that the directors acted in bad faith, I next turn to considering whether SEPTA has shown a credible basis to infer that AbbVie's board committed corporate waste by paying the Break Fee. Our Supreme Court restated the well-developed judicial standard for corporate waste in Brehm v. Eisner:

Roughly, . . . waste entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. Most often the claim is associated with a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received. Such a transfer is in effect a gift. If, however, there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste, even if the fact finder would conclude ex post that the transaction was unreasonably risky.[124]

The Brehm Court's guidance is of particular relevance to these facts. The record illustrates that the AbbVie board entered into a deal that, if not for the change in tax law, would have created value for AbbVie's stockholders. The Break Fee was one of the cogs in the Co-Operation Agreement that helped bring Shire into that deal. It is inappropriate for this Court to attempt, in retrospect and under the guise of the waste standard, to judge whether including the Break Fee was appropriate given the risk that government action might sink the deal, or to judge whether paying the Break Fee was better for the Company than forging ahead with the deal without the tax benefit: "Any other rule would deter corporate boards from the optimal rational acceptance of risk . . . . Courts are ill-fitted to attempt to weigh the 'adequacy' of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk."[125] On the record created here, there is no credible basis from which I may infer waste.

Finally, I consider Rizzolo's argument that, according to this Court's ruling in U.S. Die Casting & Development Company v. Security First Corporation, "a plaintiff's 220 demand to investigate the possibility of corporate mismanagement[] related to the circumstances of a defunct merger is a proper purpose under Delaware law."[126] In U.S. Die Casting, the defendant corporation, Security First Corp., entered into a merger agreement with Mid Am Inc. that required Security First Corp. to "pay a termination fee of $2 million, plus third party expenses not to exceed $250, 000 contingent on the occurrence of certain events within one year after termination."[127] Prior to the merger closing, Security First Corp. terminated the agreement claiming there was a clash in "management philosophy and direction" and, despite that none of the events enumerated in the termination fee provision had been triggered, agreed to pay Mid Am Inc. $275, 000 for expenses and an additional $2 million contingent on certain events occurring within one and a half years.[128] In considering the plaintiff's request to inspect books and records to investigate corporate wrongdoing, the U.S. Die Casting Court found a credible basis to infer wrongdoing because, despite having not breached the merger agreement, Security First Corp. had paid Mid Am Inc.'s expenses-$25, 000 more than was even required by the merger agreement had a breach occurred-and agreed to extend the period covered by the termination fee by six additional months; the Court found that the company's rationale for termination was "patent sophistry, " considering fundamental differences in management philosophy should have been apparent to the company upon reasonable investigation prior to entering the merger agreement, and that the termination could be reasonably interpreted, "[i]n the absence of full and open dissemination of information to shareholders, " as a "thinly veiled attempt at entrenchment."[129] On appeal, the Supreme Court upheld this Court's finding of a credible basis to investigate mismanagement based on these facts.[130]

I do not read U.S. Die Casting, as does Rizzolo, to hold that a failed merger in itself constitutes a credible basis from which I may infer corporate wrongdoing. U.S. Die Casting involved specific facts explicable as supporting improper entrenchment on the part of the directors in breach of their fiduciary duties. Unlike in U.S. Die Casting, here there was a material change in circumstances following AbbVie entering the Co-Operation Agreement-the loss of the tax benefits attending the Treasury Notice-that led the Company's board to terminate the Proposed Inversion. Rizzolo does not suggest that AbbVie's board was motivated by self-preservation, and the board's legitimate business reason for terminating the Proposed Inversion, which the Company disclosed at length to its stockholders, further belies any specter of entrenchment. In addition, the U.S. Die Casting Court's suspicions surrounding Security First Corp.'s seemingly gratuitous agreement to extend the termination fee period and to pay expenses, including excessive expenses, are not present here, as the Plaintiffs do not dispute that AbbVie was obligated under the Co-Operation Agreement to pay the Break Fee. Therefore, U.S. Die Casting is not controlling here.

In sum, the Plaintiffs have shown, at most, that AbbVie's directors were aware of the risk that the government would act to eliminate the tax benefits of inversions; that the directors intentionally took that risk and bet a tremendous amount of the stockholders' money on the chance that the risk would not come to pass; and that the risk ultimately did come to pass, leading to a spectacular failure of the Proposed Inversion and a huge loss to the stockholders. These facts fail to show a credible basis that the Company's directors have breached their duty of loyalty, and are not sufficient to sustain a Section 220 inspection under the circumstances.

2. Investigating Aiding and Abetting by J.P. Morgan

Rizzolo also seeks certain books and records to investigate J.P. Morgan for aiding and abetting breaches of fiduciary duties by AbbVie's directors. The parties dispute whether an investigation of a corporation's third-party advisor for aiding and abetting breaches of fiduciary duties is a proper purpose under Section 220.

This Court has previously considered such a request on at least one occasion and found that the purpose was improper. In Saito v. McKesson HBOC, Inc. then-Chancellor Chandler held that the plaintiff "failed to persuade the Court that using a § 220 action against a company in which he owns shares is a proper vehicle for examining the conduct of third-party advisors to the company with the ultimate view of filing separate actions against the third-party advisors."[131] On appeal, the Supreme Court remanded the case with the clarification that "[t]he source of the documents and the manner in which they were obtained by the corporation have little or no bearing on a stockholder's inspection right" if the stockholder has shown that the documents are necessary and essential to satisfy the stockholder's proper purpose; the Supreme Court acknowledged and left unmolested, however, Chancellor Chandler's ruling that the plaintiff's "interest in pursuing claims against [the defendant's] advisors was not a proper purpose."[132]

I see no reason to depart from this Court's holding in Saito. Rizzolo has failed to show that investigating J.P. Morgan for aiding and abetting is reasonably related to his interest as a stockholder of AbbVie. Above, I have found that no credible basis exists to infer that AbbVie's directors engaged in non-exculpated corporate wrongdoing, meaning that any aiding and abetting claim would have to be based on a breach of the AbbVie directors' duty of care. Assuming for purposes of this analysis that Rizzolo has demonstrated a credible basis to find that such an underlying breach occurred, an aiding-and-abetting claim would have to exist as an independent action, as AbbVie's directors are exculpated from liability pursuant to Section 102(b)(7). While it is true that J.P. Morgan could still be found liable to AbbVie's stockholders for aiding and abetting exculpated corporate wrongdoing of AbbVie's directors, [133] that potential litigation is an asset of the Company. Rizzolo has failed to demonstrate a credible basis from which I may infer that AbbVie's directors could not make a decision on behalf of the Company as to whether the Company should pursue an action against J.P. Morgan, given that the directors themselves would be exculpated from personal liability for the underlying breach.[134] Without categorically finding that investigation of third-party liability may never represent a proper purpose, under these facts I do not find that Rizzolo has shown a proper purpose to inspect the Company's books and records to investigate J.P. Morgan for aiding and abetting breaches of fiduciary duties by AbbVie's directors and officers.

III. CONCLUSION

The Plaintiffs point out that AbbVie's directors assumed a very substantial risk on behalf of the Company in connection with the Proposed Inversion with Shire, a risk that proved a very bad bet for the Company, indeed. Assessing such risk is a core directorial function; fulfilling that function poorly, without more, is not actionable under our law. For the foregoing reasons, I deny SEPTA's and Rizzolo's demands for inspection of books and records pursuant to Section 220.[135]The parties in each action should submit an appropriate form of order.


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