Clifford Elow v. Express Scripts Holding Co. and Amitkumar Khandhar v. Express Scripts Holding Co.
12721-VCMR, 12734-VCMR
| Del. Ch. | May 31, 2017Background
- Express Scripts (Delaware corp.) provided PBM services to Anthem under a ten-year contract; Anthem accounted for ~12–18% of Express Scripts’ revenue and the contract had a periodic pricing-review mechanism.
- Anthem sued ESI (Express Scripts, Inc., a subsidiary) in March 2016 alleging breaches: refusal to negotiate pricing in good faith and operational failures; ESI answered and asserted counterclaims.
- A securities class action followed alleging Express Scripts misled investors about the Anthem relationship.
- Two stockholders (Elow and Khandhar) served §220 books-and-records demands in 2016 seeking documents to investigate possible managerial wrongdoing related to Anthem, certain products (C360, Foundation 14, Super PA), and CMS submissions.
- Delaware Chancery Court consolidated the actions for pretrial, held a one-day trial, and considered: (1) whether each demand met §220 form/manner requirements, (2) whether each stated a proper purpose/credible basis to infer mismanagement, and (3) the appropriate scope and conditions of any production.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Form and manner (proof of ownership) for Khandhar’s §220 demand | Khandhar submitted a stock purchase plan document as proof of beneficial ownership | Express Scripts argued the demand lacked required documentary proof accompanying the demand and thus failed §220 procedural rules | Denied: Khandhar’s demand failed the §220 form-and-manner requirement because the submitted document did not evidence his beneficial ownership at the time of demand |
| Proper purpose / credible basis for inspection (Elow) | Elow sought documents to investigate fiduciary breaches, reliance on pleadings in the Anthem and securities actions plus public statements to show a credible basis of possible mismanagement | Express Scripts argued allegations/complaints alone are insufficient, purpose is sham, and there is no credible basis to infer wrongdoing | Granted: Elow satisfied §220 — pleadings, ESI’s answer/counterclaims, and management’s public statements provided a sufficient credible basis to infer possible mismanagement and support inspection |
| Scope of documents and tailoring of requests | Elow sought broad categories (board/committee records and communications about Anthem, C360, Foundation 14, Super PA, CMS submissions) | Express Scripts sought narrower limits and asked that production be subject to conditions (e.g., incorporation in any future derivative complaint) | Limited grant: production limited to board/committee packages and related documents from Jan 1, 2015 onward that relate to the Anthem relationship (including related materials re: C360/Foundation 14/Super PA/CMS only as they pertain to Anthem); code of ethics produced; confidentiality order required and incorporation-by-reference condition applied |
Key Cases Cited
- Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139 (Del. 2012) (§220 requires strict compliance with form-and-manner proof of beneficial ownership)
- Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117 (Del. 2006) (stockholder bears burden to show proper purpose; credible-basis standard articulated)
- Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016) (tailoring production, confidentiality orders, and incorporation-by-reference doctrine in §220 productions)
- Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026 (Del. 1996) (§220 plaintiff must show requested records are essential and sufficient to stated purpose; hearsay may be considered for credible-basis inquiry)
- United Techs. Corp. v. Treppel, 109 A.3d 553 (Del. 2014) (permitting conditional limits on §220 production, e.g., forum or other restrictions)