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Corporate Law

Court Rejects Disney Shareholder's Demand for Corporate Documents Related to Controversy over Florida Law


From Simeone v. Walt Disney Co., decided Tuesday:

This books and records action originates from The Walt Disney Company's response to Florida House Bill 1557. Disney initially took no public position on the bill, which limits instruction on sexual orientation or gender identity in Florida classrooms. After facing criticism from its employees, Disney reversed course and spoke out against the legislation. Florida's Governor took issue with Disney's stance and Florida's legislature voted to dissolve a special tax district encompassing the Walt Disney World Resort.

Afterwards, the plaintiff—a longtime Disney stockholder—was solicited by counsel to serve a books and records demand. The demand asserts that Disney's directors and officers may have breached their fiduciary duties to the company and its stockholders by opposing HB 1557. The plaintiff's theory of wrongdoing is that Disney's fiduciaries either put their own beliefs ahead of their obligations to stockholders or flouted the risk of losing rights associated with the special district.

Disney told the plaintiff that he lacked grounds to obtain books and records because its directors and officers had not engaged in mismanagement. Nevertheless, Disney produced certain board minutes and corporate policies to the plaintiff. The plaintiff was unsatisfied and filed litigation.

Weighty public policy questions surround the margins of this lawsuit. But when they are stripped away, the case becomes quite simple. The court must determine whether the plaintiff has demonstrated a proper purpose to inspect books and records. He decidedly has not.

Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues. Given the diversity of viewpoints held by directors, management, stockholders, and other stakeholders, corporate speech on external policy matters brings both risks and opportunities. The board is empowered to weigh these competing considerations and decide whether it is in the corporation's best interest to act (or not act).

This suit concerns such a business decision by the Disney board—a decision that cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome. There is no indication that the directors suffered from disabling conflicts. Nor is there any evidence that the directors were grossly negligent or acted in bad faith. Rather, the board held a special meeting to discuss Disney's approach to the legislation and the employees' negative response. Disney's public rebuke of HB 1557 followed.

The plaintiff and his counsel may disagree with Disney's position on HB 1557. But their disagreement is not evidence of wrongdoing. Regardless, the plaintiff has all necessary and essential documents relevant to his purpose. Judgment must be entered for Disney….

Section 220 of the Delaware General Corporation Law provides stockholders with a qualified right to inspect corporate books and records. To obtain inspection, a stockholder must satisfy the statute's form and manner requirements. The stockholder must also prove, "by a preponderance of the evidence, a proper purpose entitling the stockholder to an inspection of every item sought." The stockholder must further "demonstrate by a preponderance of the evidence that 'each category of books and records is essential to accomplishment of the stockholder's articulated purpose for the inspection.' "

The plaintiff does not meet the standard for a Section 220 inspection for three independent reasons. First, the purposes described in the demand are not the plaintiff's own purposes. Second, the plaintiff has not provided a credible basis from which to infer possible wrongdoing. Third, the defendant has provided the plaintiff with all necessary and essential documents….

[1.] The "propriety of the stockholder's purpose" is the "paramount factor in determining whether a stockholder is entitled to inspection of corporate books and records." Section 220 defines a proper purpose as one "reasonably related to such person's interest as a stockholder." In rare circumstances, a defendant can prove that a stockholder lacks a proper purpose where "the purposes for the inspection belong to [the stockholder's counsel]" rather than the stockholder himself. Disney has prevailed in making that showing here.

Simeone testified that he did not consider pursuing litigation or making an inspection demand after learning about HB 1557. His reaction to Disney's opposition to HB 1557 and the subsequent legislation rescinding the RCID was concern that his property tax bill would increase. Simeone was later "contacted by a lawyer" in his family—Brian McCall—who knew he was a Disney stockholder and solicited him to serve a demand. After speaking to McCall, Simeone was contacted by Paul Jonna. Jonna is Special Counsel to the Thomas More Society, a "public interest law firm championing Life, Family, and Freedom." The plaintiff's verified interrogatory response states that the Thomas More Society is advancing costs for this litigation.

The purposes stated in the demand are pretextual. Simeone testified that his only purpose for inspection was to "know the person or persons who were responsible for making th[e] political decision" at Disney to publicly oppose HB 1557. He said that he "hope[s] it becomes public and the other shareholders find out about" these identities. He confirmed that he has no other purpose. The only evidence indicating that the purposes listed in the demand might belong to Simeone is the testimony his counsel elicited through leading redirect questions.

The plaintiff's limited and non-substantive involvement in the demand and litigation further reveals the lawyer-driven nature of this action. Simeone testified that he could not recall reading a draft of the demand before it was sent to Disney. He reviewed but made no edits to the Complaint. He did not see the news articles proffered as evidence in support of his claim.

The plaintiff's counsel and the Thomas More Society are entitled to their beliefs. They are also entitled to pursue litigation in support of those beliefs. But a Section 220 suit, which is designed to address the plaintiff's interests as a stockholder, is not a vehicle to advance them. …

[The plaintiff's demand identifies four purposes; al2.] l center around the same desire to investigate wrongdoing. The second and fourth purposes—to determine whether Disney's opposition to HB 1557 was harmful to the company and to "explore possible remedial measures"—are derivative of and dependent upon whether there was mismanagement in the first place. The third purpose of assessing the impartiality of the Board if presented with a litigation demand—though proper in the abstract—similarly focuses on whether the Board is interested in the alleged underlying wrongdoing. Consequently, I focus on the first stated purpose: "[t]o investigate potential wrongdoing, mismanagement and breaches of fiduciary duties … in connection with the Company's decision to publicly oppose the Parental Rights Act."

"It is well established that a stockholder's desire to investigate wrongdoing or mismanagement is a 'proper purpose.' " But "a bare allegation of possible waste, mismanagement, or breach of fiduciary duty, without more, will not entitle a stockholder to a Section 220 inspection." "[A] stockholder seeking to investigate wrongdoing must show, by a preponderance of the evidence, a credible basis from which the court can infer there is 'possible mismanagement as would warrant further investigation.' " This burden, though the lowest standard of proof in our law, is neither "a formality" nor "inconsequential." A stockholder must present "some evidence to suggest a credible basis for wrongdoing." Simeone has failed to do so.

The plaintiff's theory is that Disney's "decision to express public opposition" to HB 1557 despite "the [G]overnor's warning" amounts to a possible breach of fiduciary duty by the Board and certain Disney officers. As a result of these actions, the plaintiff avers that Disney lost (or at least risked the loss of) rights and powers associated with the RCID. He alleges that Disney's stock price dropped and that Disney "continues to suffer" financial harm because of its "aggressive position" on HB 1557.

The plaintiff is not describing potential wrongdoing. He is critiquing a business decision. "A stockholder cannot obtain books and records simply because the stockholder disagrees with a board decision, even if the decision turned out poorly in hindsight."

Although choosing to speak (or not speak) on public policy issues is an ordinary business decision, this case exemplifies the challenges a corporation faces when addressing divisive topics—particularly ones external to its business. Individual investors have diverse interests—beyond their shared goal of corporate profitability—and viewpoints that may not align with the company's position on political, religious, or social matters. Yet stockholders invest with the understanding that the board is empowered to direct the corporation's affairs. The board may delegate implementation to management, but it alone bears the ultimate responsibility for establishing corporate policy.

Far from suggesting wrongdoing, the evidence here indicates that the Board actively engaged in setting the tone for Disney's response to HB 1557. The Board did not abdicate its duties or allow management's personal views to dictate Disney's response to the legislation. Rather, it held the sort of deliberations that a board should undertake when the corporation's voice is used on matters of social significance.

As Chapek told stockholders during Disney's 2022 annual meeting, the company's original approach to HB 1557 "didn't quite get the job done." The company, facing widespread backlash from its staff and creative talent, changed course after the full Board held a special meeting about "Political Engagement and Communications." The Board discussed "the communications plan, philosophy and approach regarding Florida legislation and employee response." Only then did Chapek announce that Disney opposed the bill.

The Board's consideration of employee concerns was not, as the plaintiff suggests, at the expense of stockholders. A board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders—such as the workforce that drives a company's profits—is "rationally related" to building long-term value. Indeed, the plaintiff acknowledges that maintaining a positive relationship with employees and creative partners is crucial to Disney's success. It is not for this court to "question rational judgments about how promoting nonstockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value."

The plaintiff has not put forth any legitimate basis to question the Board's impartiality in responding to the legislation. He argues that Disney's directors were motivated by personal beliefs because "several Board members are actively involved with 'political organizations such as the Human Rights Campaign' " that "adamantly opposed" HB 1557. That some directors may be involved with a non-profit organization does not itself create a conflict of interest—much less undermine the full Board's deliberative process. In any event, there are no facts in the record to infer that the directors' personal beliefs caused them to act contrary to the interests of Disney and its stockholders. The plaintiff cannot obtain books and records to search for hypothetical conflicts.

I also find deficient the plaintiff's argument that the Board "ignored a known risk" of negative consequences from opposing the legislation. Perhaps the Board could have avoided political blowback by remaining silent on HB 1557. At the same time, doing so could have damaged the company's corporate culture and employee morale. The weighing of these key risks by disinterested fiduciaries does not evidence a potential lack of due care, let alone bad faith.

Moreover, even if a board's defiance of a political threat could provide a credible basis to suspect wrongdoing, there is no factual support for that conclusion here. Neither the Complaint nor any of the sources relied on by the plaintiff demonstrate that Disney was warned of financial repercussions or dissolution of the RCID before Chapek's March 9 announcement. According to the Complaint, it was not until March 30—three weeks after Disney first publicly opposed HB 1557 and two days after its March 28 statement—that the specter of dissolving the RCID was explicitly raised.

At bottom, the plaintiff disagrees with Disney's opposition to HB 1557. He has every right to do so. But "disagreement with [a] business judgment" is not "evidence of wrongdoing" warranting a Section 220 inspection. Such an inspection would not be reasonably related to the plaintiff's interests as a Disney stockholder; it would intrude upon the "rights of directors to manage the business of the corporation without undue interference."

[3.] Even if the plaintiff had demonstrated a proper purpose, no further inspection would be warranted. The plaintiff has not met his "burden of proving that the information [in the records sought] is essential to that purpose, taking into account the books and records [the company] has previously furnished."

"Formal board-level documents are often the beginning and end of a Section 220 production where a plaintiff aims to investigate" potential mismanagement. Disney has repeatedly represented that it produced all Board-level materials related to HB 1557, Disney's response to the legislation, the potential loss or modification of the RCID, and Disney's policies on charitable and political giving. Still, the plaintiff maintains that he needs three years of email and correspondence "between and among Board members and CEO Chapek" about the same topics.

The Delaware Supreme Court has instructed that "the Court of Chancery should not order emails to be produced when other materials (e.g., traditional board-level materials, such as minutes) would accomplish the petitioner's proper purpose." A deviation from this typical approach is not merited here. The Board maintained formal records of its actions, and the relevant records were provided to the plaintiff.

The request for three years of documents is also "vastly overbroad." The plaintiff wishes to investigate Disney's response to one piece of legislation that was introduced and passed in 2022. That aside, the point is moot. Disney has confirmed that no other Board-level documents on these subjects exist.

The plaintiff also contends that Disney's production is incomplete because the Board minutes it produced were redacted. The parties agreed that Disney could redact portions of documents that were not responsive to the demand. Irrespective of this agreement, irrelevant information cannot be "essential" to the purpose of the demand.

Disney's redactions for responsiveness covered text that was also withheld as attorney-client privileged. At the plaintiff's request, Disney provided a log detailing its privilege redactions. This privilege log not only substantiates Disney's privilege assertions. It also reflects that the redacted entries concern irrelevant matters: discussions about stockholder correspondence, ongoing litigation or regulatory matters that predate the passage of HB 1557, or privileged discussions concerning the directors' duties and rules as a general matter.

The plaintiff therefore has all necessary and essential information. He would not be entitled to additional books and records had he prevailed on the other elements of his claim.

I can't speak to the merits of the decision (which turns on the underlying corporate law principles, and how they have been interpreted in the precedents), but I thought it was interesting enough to pass along.

Blake Rohrbacher & Morgan R. Harrison (Richards Layton & Finger, P.A.) and Kevin J. Orsini, Rory A. Leraris & Andrew D. Huynh (Cravath, Swaine & Moore LLP) represent Disney.