On February 2, 2016, Vice Chancellor Laster of the Delaware Chancery Court ordered a tailored production of the electronic and other documents identified by the plaintiff, Amalgamated Bank, in its demand for inspection of Yahoo’s books and records pursuant to Section 220 of the DGCL for the purpose of investigating the hiring and firing of Yahoo’s Chief Operating Officer, Henrique de Castro (Amalgamated Bank v. Yahoo Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016)).  VC Laster made the production subject, however, to the condition that the produced documents be deemed incorporated by reference in any derivative complaint that Amalgamated Bank may file relating to the subject matter of the demand in order to avoid “cherry-picking” of discovered facts by the plaintiff.

VC Laster found that, on a preponderance of the evidence, Amalgamated Bank established a credible basis to suspect wrongdoing in connection with Mr. de Castro’s hiring and firing, either as breach of fiduciary duty or waste. The Vice Chancellor drew several parallels to the Disney actions, which similarly involved a CEO hiring a number-two executive for ‘munificent’ compensation, followed by a no-fault firing of that executive for poor performance, which conferred ‘dynastic’ wealth, in a situation in which a for-cause firing may be justified.  Based on publicly available materials and certain information provided by Yahoo, VC Laster found that the record failed to answer questions about the conduct of Marissa Mayer (Yahoo’s CEO), Yahoo Board’s compensation committee (the “Committee”) and Yahoo’s Board itself in the hiring and firing of Mr. de Castro. This, therefore, provided a credible basis from which the Court could infer possible mismanagement that would warrant further investigation into the hiring and firing processes.

1. Hiring Process

VC Laster found that the negotiations with Mr. de Castro were conducted by Ms. Mayer directly and that there was a credible basis to suspect she both failed to provide material information and provided inaccurate information to the Committee during the hiring process.  Specifically, VC Laster concluded that Ms. Mayer appears to have:

  1. withheld Mr. de Castro’s name, position and qualifications while seeking the Committee’s blessing for a large compensation package that the Committee’s compensation consultant regarded was generally more than the data supported;
  2. provided inaccurate information regarding the terms of Mr. de Castro’s original offer letter, when the Committee was asked to approve a change to that letter that effectively doubled the payout on the incentive RSUs and options awarded to Mr. de Castro; and
  3. made several changes to Mr. de Castro’s final offer letter that materially increased Mr. de Castro’s potential compensation, without informing the Committee of those changes.

He also noted that there were grounds for an investigation into the role played by the Board.  VC Laster noted that, in the Disney actions, similar allegations were sufficient to support an inference that the directors had acted in an ‘ostrich-like’ manner that fell outside of the protection of the business judgment rule.  He found that “[t]he directors’ involvement appears to have been tangential and episodic, and they seem to have accepted Mayer’s statements uncritically.  A Board cannot mindlessly swallow information, particularly in the area of executive compensation …”  

2. Firing Process

Similarly, VC Laster found that there was a credible basis to support the possibility of wrongdoing by Ms. Mayer, the Committee and the Board in connection with the without-cause termination of Mr. de Castro when a for-cause termination was potentially available.  Specifically, Ms. Mayer made the decision to terminate Mr. de Castro without-cause and, despite the financial implications, the Committee did not question that decision.  In fact, the record reflected that the Committee did not ask any questions at all, but simply confirmed the decision through a quick email exchange of written consents.  Moreover, the Committee did not engage until three weeks later and then only to determine to what degree Yahoo had met the performance criteria for option vesting.  Furthermore, VC Laster found that the Committee did not receive a report about the reasons for Mr. de Castro’s termination until six weeks after his termination.  Based on this record, VC Laster concluded “[a]s in Disney III, this suggests ostrich-like conduct warranting further investigation.”

Key Takeaways

1. Books and Records

Although some prior inspection cases provided for the production of certain emails, this opinion comprehensively analyzes the term “books and records” in Section 220 and, with detailed reasoning, broadly interprets that term as explicitly including emails and other electronic documents.  Moreover, if a personal email account was used by a director or officer to conduct corporate business, those emails may also be subject to production.  Thus, directors and officers should be advised that even their private emails may be subject to disclosure if they concern corporate business.  This extends as well to texts, tweets and social media postings.

2. Directors and Executive Compensation

This decision serves as yet another reminder to directors that they must exercise their own independent judgment in approving executive compensation and in terminating executive officers.  While there are certain matters as to which a board may act with deference to officers’ judgments, executive compensation is not one of those matters.

3. Incorporation Condition

In an “issue of first impression” before the Court, VC Laster imposed an “incorporation condition” on Amalgamated Bank’s inspection. This means that, as a condition to the inspection, the plaintiff must agree that all of the documents it inspects will be deemed to be incorporated by reference into any later-filed derivative complaint.  VC Laster noted that the incorporation condition is intended to protect the interests of both Yahoo and the judiciary by ensuring that Amalgamated Bank does not file a future complaint based on “cherry-picked” documents that ignore exculpatory facts. As a practical matter, this means that corporate defendants will have the ability to base any motion to dismiss not merely on the complaint itself, but on all of the produced documents.  This is a significant advantage for corporate defendants who believe that they have properly documented a sound process.


Not only is this a precedent-setting decision in the matters discussed above, it also provides a very good and thorough review of stockholder inspection rights under Section 220.  It addresses matters such as what is adequate evidence of stock ownership (i.e., the statute does not require a continuing showing, which would be impractical and overly burdensome to both parties) and that an exculpation clause in the corporate charter does not necessarily preclude inspection rights to investigate wrongdoing.  This decision is a must-read for practitioners considering a Section 220 books and records inspection claim.