Business Litigation

Delaware Supreme Court Clarifies Use of Inadmissible Hearsay Evidence in Section 220 Summary Proceedings

NVIDIA Corporation v. City of Westland Police and Fire Retirement System, et al., No. 259, 2021

By Rebecca L. Butcher, Landis Rath & Cobb LLP

In a unanimous en banc decision, the Delaware Supreme Court clarified the use of hearsay evidence in meeting a stockholder’s evidentiary burden under 8 Del. C. §220 (“Section 220”). Stockholders of NVIDIA Corporation (“NVIDIA”) made a demand for certain books and records of the corporation for the purpose of investigating an alleged insider trading scheme executed by two executives with regard to misleading public statements about NVIDIA’s expected demand for its graphic processing units. To establish a right to inspect books and records, a stockholder must show that its request follows the proper format, that it has a proper purpose, and that the documents it seeks to inspect are essential to accomplishing that purpose. If the purpose is investigating alleged wrongdoing, then the stockholder plaintiff is charged with establishing a credible basis from which the Court can infer that wrongdoing exists. At trial the Court of Chancery ruled that the stockholder plaintiffs had met this standard and ordered the production of two categories of documents. NVIDIA challenged the Court of Chancery’s ruling on multiple grounds. Most of NVIDIA’s objections were overruled, with the Supreme Court affirming all aspects of the Court of Chancery’s opinion except one. The Supreme Court remanded the decision for further proceeding on one point, that the stockholder plaintiffs’ reliance on hearsay, the notarized demand, verified complaint, and verified interrogatory responses, was not sufficient to prove that the stockholder plaintiffs had a proper purpose.

In the proceedings below the stockholder plaintiffs had initially indicated they would have live witnesses on their proper purpose at the hearing on the merits. NVIDIA identified no witnesses of its own, choosing instead to cross-examine the stockholder plaintiffs’ witnesses. Plaintiffs then indicated that they would proceed instead on witness affidavits; NVIDIA reserved its right to depose any affiant prior to a hearing on the merits after reviewing any affidavits submitted. Ultimately, the stockholder plaintiffs chose to rely solely on their notarized demand, verified complaint, and verified interrogatory responses as evidence sufficient to establish their proper purpose, presenting no witnesses or affidavits on that issue. On appeal, NVIDIA challenged the stockholder plaintiffs’ ability to rely on such inadmissible hearsay as the sole evidence of their proper purpose. The Supreme Court in addressing this argument noted that there is a long line of cases extending back at least eighteen years that allow hearsay evidence to demonstrate a credible basis to infer wrongdoing exists provided the hearsay is sufficiently reliable. That hearsay exception was extended to proper purpose in Skoglund v. Ormund Indus. Inc., 372 A.2d 204 (Del. Ch. 1976), and the Supreme Court found no reason to limit that hearsay exception solely to proving credible basis. Therefore, the Court extended the hearsay exception recognized in Section 220 actions to establish credible basis to also establish proper purpose. However, the Supreme Court still remanded on the issue of proper purpose because NVIDIA was not given the opportunity to test the stockholder plaintiffs’ purpose through cross-examination. By failing to provide a witness or deponent, the stockholder plaintiffs abused the process and hearsay exception afforded to them under Section 220 precedent. The decision was remanded for further proceedings to allow NVIDIA to test the stockholder plaintiffs’ proper purpose.

In a brief concurrence, Justice Traynor agreed with the remand decision reached by the en banc court but disagreed with the extension of the hearsay exception to proper purpose. Justice Traynor articulated that a stockholder plaintiff was unlikely to have firsthand knowledge of a credible basis to investigate wrongdoing, but would always have firsthand knowledge of their proper purpose, and therefore the hearsay exception should not be extended to prove proper purpose.

Dispute Resolution

Petition for Rehearing on Supreme Court’s Ruling in Viking River Cruises

By Leslie A. Berkoff, Partner at Moritt Hock & Hamroff LLP, Chair of Dispute Resolution Department

On July 6, 2022, the named plaintiff-employee at the center of Viking River Cruises filed a petition for rehearing with the United States Supreme Court. The question presented to the Court by the plaintiff-employee was whether the Court’s opinion should be modified to avoid “unwarranted and incorrect resolution of the unbriefed issues of contract construction and state law statutory standing[.]” Id.

Previously the Court had ruled in Viking River Cruises, Inc. v. Moriana, No. 20-1573 (June 15, 2022), that bilateral arbitration agreements governed by the Federal Arbitration Act (FAA) may require arbitration of California’s Private Attorneys General Act (“PAGA”) claims on an individual basis only. In that case, the Court held that the FAA does not preempt what has been termed the Iskanian rule, derived from the case of Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), prohibiting the use of an arbitration agreement to waive an employee’s entitlement to pursue representative claims on behalf of the state for PAGA civil penalties.

The petitioner makes it clear that she is not asking the Court to revisit its prior decision that the FAA does not preempt the Iskanian rule; but rather, is asking the Court to find that the FAA does preempt Iskanian to the extent that it incorporates a rule of “claim joinder” precluding enforcement of an arbitration agreement that separates a plaintiff’s “individual” PAGA representative claim from her “non-individual” PAGA representative claim.

In support of her request, Petitioner argues that the Court’s opinion went beyond the federal question presented and included the un-briefed issue of state-law contract interpretation and statutory construction, thereby exceeding the Court’s authority. Moreover, petitioner argues that the opinion was contrary to the contract language and applicable California law and contends that the opinion conflicts with prior rulings by the California Supreme Court pertaining to standing for PAGA actions.

If the proposed modification to the Court’s decision were to be adopted, the result would be significant. The Court’s analysis of the severability language in Viking River Cruise’s arbitration agreement, as well as its analysis of statutory standing under PAGA, is what led the Court to conclude—for the benefit of the employer—that the correct course was to dismiss the non-individual PAGA claims of other allegedly aggrieved employees when the named plaintiff must arbitrate their individual PAGA claims pursuant to an arbitration agreement.

However, it is important to note that in order for a rehearing to be granted, a majority of the justices must agree, and it is extremely uncommon for this to occur.



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