Southeastern Pennsylvania Transportation Authority v. ABBVIE Inc. (10374-VCG) and James Rizzolo v. ABBVIE Inc. (10408-VCG)

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SOUTHEASTERN PENNSYLVANIA )
TRANSPORTATION AUTHORITY, )
)
Plaintiff, )
)
v. ) C.A. No. 10374-VCG
)
ABBVIE INC., )
)
Defendant. )
)
)
JAMES RIZZOLO, )
)
Plaintiff, )
)
)
v. ) C.A. No. 10408-VCG
)
ABBVIE INC., )
)
Defendant. )

MEMORANDUM OPINION

Date Submitted: February 11, 2015
Additional Submission: April 9, 2015
Date Decided: April 15, 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.

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

1
That is, a company incorporated under the laws of Jersey, an island in the Channel Islands
between England and France that is a semi-autonomous political entity.
1
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 FACTS2

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

2
Citations to exhibits in the stipulated joint trial record appear as “JX.” All pinpoint citations
refer to the document’s original pagination.
2
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
3
JX 12 at 12.
4
Id.
5
Id.
6
Id.
7
JX 1 at 1, Ex. A; JX 11, Ex. A.
3
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.

8
JX 12 at 48.
9
Id.
10
Id.
11
JX 13 at 4.
12
Id. at 1–2.
4
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 stock15 (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

13
Id. at 2. To avoid double taxation on foreign income, the U.S. tax code offers U.S. companies
a foreign tax credit, under which “tax due on repatriated income is reduced by the amount of
foreign taxes already paid.” Id.
14
See, e.g., JX 15.
15
Units of equity ownership in a Jersey entity are referred to as “ordinary shares,” but that term
is synonymous with “common stock.” For the sake of clarity, I refer to ordinary shares as
“common stock” and holders of ordinary shares as “stockholders.”
16
For a detailed overview of the mechanics of the Proposed Inversion, see JX 12 at 65–66.
AbbVie planned to use separate merger subsidiaries under New AbbVie to maintain Shire and
AbbVie as independent entities under New AbbVie. Id.
17
Id. at 65.
5
 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 Non-

Executive 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

18
Id. at 48.
19
Id.
20
Id.
21
Id.
6
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

22
Id.
23
Id. at 49.
24
Id.
25
Id.
26
Id. at 49–50.
27
Id. at 50.
7
 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

28
Id. at 51.
29
Id.
30
Id.
31
Id.
32
Id.
8
 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

33
Id. at 52 (emphasis added).
34
J.P. Morgan gave an oral fairness opinion at the July 17 special meeting; the following day, J.P
Morgan supplemented its oral opinion with a full written opinion, “which set[] forth the
assumptions made, matters considered[,] and limits on the review undertaken.” Id.
35
Id.
36
JX 6, Ex. 2.1, at 1–2.
9
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

37
JX 12 at 65.
38
JX 6, Ex. 2.1, at 1; see also JX 7, Annex A & Annex B (providing that the indicative value per
share of Shire is £53.20, the total number of shares issued is 598,420,949, and the exchange rate
is $1 to £0.5840). The parties use the $54 billion figure for the value of Shire, but by my own
calculation using the provided metrics (i.e., indicative value per share, the total number of shares,
and the exchange rate) the indicative value of Shire is closer to $54.5 billion.
39
JX 7 at 1. The same day, AbbVie and certain of its subsidiaries additionally executed an
agreement governing the Merger (the “Merger Agreement”). See JX 12 at 78–80. However, the
provisions of the Merger Agreement are not at issue in this litigation.
10
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 US 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

40
JX 7, § 7.1; see also id. Annex A & Annex B (providing that the indicative value per share of
Shire is £53.20, the total number of shares issued is 598,420,949, and the exchange rate is $1 to
£0.5840).
41
Id. § 7.2.1.
11
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

42
Id. § 10.3.
43
Id.; see also id. Annex A & Annex B (providing that the indicative value per share of Shire is
£53.20, the total number of shares issued is 598,420,949, and the exchange rate is $1 to
£0.5840).
44
See id. §§ 7, 10.
12
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 US tax law, or official
interpretations thereof, could cause New AbbVie to be treated as a US
domestic corporation for US 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 US Internal Revenue Service

. . . may not agree with the conclusion that New AbbVie is to be treated as a

45
JX 6, Ex. 2.1, at 9–11.
46
JX 12 at 53; see also id. at 4 (explaining the expected tax benefits of operating under the U.K.
tax code as opposed to the U.S. tax code, but cautioning that “New AbbVie’s ability to realize
these benefits is subject to certain risks. See ‘Risk Factors’ beginning on page 25.”).
47
Id. at 54.
13
foreign corporation for US federal income tax purposes following the [Proposed

Inversion],” and “[f]uture changes to US 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 US 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 US corporation for US 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

48
Id. at 30–31.
49
See id. at 31 (describing a provision in the Obama administration’s 2015 budget proposals and
certain legislative proposals, and explaining that “[t]hese proposals, if enacted in their present
form and if made retroactively effective to transactions completed during the period in which the
effective time of the transaction occurs, would cause New AbbVie to be treated as a US
corporation for US federal tax purposes”).
50
Id. at 94.
14
 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

51
Id. at 55.
52
JX 24.
15
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 Pfizer55—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

53
JX 13 at 3–5. In a naked inversion, a U.S. parent corporation could re-domicile in a foreign
country simply by exchanging stock with a foreign subsidiary, creating a foreign parent
corporation and a U.S. subsidiary. Id. at 2–3. The anti-inversion provision in the AJCA
“eliminated” naked inversions by eliminating the underlying tax benefit, amending Section 7874
of the Internal Revenue Code to “treat[] the inverted foreign parent company as a domestic
corporation if it is owned by at least 80% of the former parent’s stockholders,” with a safe harbor
exception for U.S. corporations that already had substantial business activities in the foreign
country. Id. at 5. Of course, a U.S. corporation could still re-domicile through a naked
inversion, but it would not receive the tax benefit.
54
Id. at 5.
55
See JX 18.
56
JX 13 at 2, 5–7.
57
See, e.g., id. at 7–11 (providing an overview of the policy options available to address the
problem of merger-based inversions, including both reforming the U.S. corporate income tax and
eliminating the tax benefits of merger-based inversions).
16
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

58
JX 12 at 31. AbbVie explains in the preliminary proxy statement that these proposals would
jeopardize the tax benefits of inversions, including the Proposed Inversion, by,
among other things, treat[ing] a foreign acquiring corporation as a US corporation
under Section 7874 of the [Internal Revenue] Code if the former shareholders of
the US corporation own more than 50% of the shares of the foreign acquiring
corporation after the transaction, or if the foreign corporation’s affiliated group
has substantial business activities in the United States and the foreign corporation
is primarily managed and controlled in the United States.
Id.; see also JX 13 at 10–11.
17
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

59
JX 34.
60
JX 21.
61
JX 35.
18
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

62
See JX 34 (“Although President Obama has proposed rules that would almost eliminate
inversions, his proposal stands little chance of becoming law.”); JX 21 (“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.” (emphasis added)).
63
JX 36.
64
JX 37.
19
 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

65
JX 44 (internal quotation marks omitted); see also Rizzolo Pre-Trial Stip. Ex. vv (Bloomberg
article dated August 7, 2014, by Richard Rubin, entitled, “Treasury’s Tax Powers Could Limit
Benefits of Inversions”) (“The policy landscape on inversions has shifted significantly since last
week, when lawmakers—deadlocked on tax policy—left Washington for a five-week break. The
lack of congressional action and the Obama administration’s reluctance to move on its own had
give companies and investors confidence that pending deals wouldn’t be affected by government
action. . . . With one statement this week, Treasury changed the market assumption that the
government wouldn’t act without Congress to stem inversion transactions. On Aug. 5, Treasury
said that it was examining regulatory changes that would amount to a ‘partial fix’ while the
administration keeps pushing Congress to curb inversions.”).
66
JX 45.
20
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

67
JX 46.
68
JX 8.
69
See JX 2 (“Treasury is taking action to reduce the tax benefits of—and when possible, stop—
corporate tax inversions. This action will significantly diminish the ability of inverted
companies to escape U.S. taxation. For some companies considering mergers, today’s action
will mean that inversions no longer make economic sense. Specifically, the [Treasury] Notice
eliminates certain techniques inverted companies currently use to access the overseas earnings of
foreign subsidiaries of the U.S. company that inverts without paying U.S. tax.”).
70
See JX 8, § 4.
21
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

71
Id. § 5.
72
JX 26, Ex. 99.1, at 1.
73
Id.
74
Id. Specifically, the regulations prevent AbbVie from accessing foreign earnings without
incurring a dividend tax through the use of loans from AbbVie’s foreign subsidiaries to New
AbbVie, known as “hopscotch loans.” JX 2. The Treasury regulations eliminated the tax benefit
of these hopscotch loans by treating the loans as U.S. property taxable as a dividend, id., not only
decreasing the overall tax benefit of the Proposed Inversion but also directly affecting AbbVie’s
plan to finance the Arrangement. See, e.g., JX 29.
22
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:

75
JX 26, Ex. 99.1, at 1. I note that the AbbVie board’s recommendation of July 18, 2014 was
limited to the stockholders’ adoption of the Merger Agreement, but that the board’s change in
recommendation of October 15, 2014 addressed the Proposed Inversion as a whole.
76
JX 9, Ex. 10.1, at Recital C.
77
Id., Ex. 10.1, § 2.
78
SEPTA Compl. ¶ 3.
79
See JX 1, Ex. C.
23
 (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]
80
Id. at 6–7.
81
Rizzolo Compl. ¶ 9.
82
See JX 11, Ex. A, at 10–12.
24
 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.

83
Id. at 12.
84
See JX 10; JX 40.
85
I note that Rizzolo filed a Motion to Consolidate, but that SEPTA resisted that Motion.
25
 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

86
Central Laborers Pension Fund v. News Corp., 45 A.3d 139, 143 (Del. 2012).
87
Id.
88
8 Del. C. § 220(b).
89
Id. § 220(c); Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).
26
 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 waste91 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.

90
Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).
91
For simplicity sake, I will use the shorthand “corporate wrongdoing.”
92
As SEPTA acknowledged at trial, see Trial Tr. 19:7–14, investigating demand futility is a
proper purpose only if the plaintiff has established a credible basis to investigate corporate
wrongdoing that ultimately could form the basis of a derivative suit. La. Mun. Police Emps.’ Ret.
Sys. v. Hershey Co., 2013 WL 6120439, at *7 n.58 (Del. Ch. Nov. 8, 2013); see also Norfolk
Cnty. Ret. Sys. v. Jos. A. Bank Clothiers, Inc., at *10 (Del. Ch. Feb. 12, 2009) (finding that
investigating demand futility does not state a purpose “beyond investigating the possibility of
bringing a derivative action”). Because I find below that SEPTA has failed to show a credible
basis supporting an investigation into corporate wrongdoing among AbbVie’s directors and
officers, its stated purpose to investigate demand futility is moot.
27
 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.

93
Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1031 (Del. 1996); see also Melzer
v. CNET Networks, Inc., 934 A.2d 912, 917 (Del. Ch. 2007) (“There is no shortage of proper
purposes under Delaware law, but perhaps the most common ‘proper purpose’ is the desire to
investigate potential corporate mismanagement, wrongdoing, or waste.” (internal citations
omitted)).
94
Graulich v. Dell Inc., 2011 WL 1843813, at *5 (Del. Ch. May 16, 2011) (quoting West Coast
Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 646 (Del. Ch. 2006)).
95
Id. (quoting West Coast Mgmt. & Capital LLC, 914 A.2d at 646).
96
Id. (quoting Saito, 806 A.2d at 117).
28
 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

97
Norfolk Cnty. Ret. Sys. v. Jos. A. Bank Clothiers, Inc., 2009 WL 353746, at *11 (Del. Ch. Feb.
12, 2009) (quoting Weisman v. W. Pac. Indus., Inc., 344 A.2d 267, 269 (Del Ch. 1975)) (citing
Northwest Indus., Inc. v. B.F. Goodrich Co., 260 A.2d 428, 429 (Del. 1969)).
98
West Coast Mgmt. & Capital LLC, 914 A.2d at 646 (emphasis added).
29
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,
99
See, e.g., Trial Tr. 7:19–24. In addition, I note that, aside from an investigation into corporate
wrongdoing, SEPTA also states a purpose to investigate the AbbVie board’s ability to “consider
a demand to initiate and maintain litigation related to any breaches of fiduciary duty prior to
commencing any derivative litigation,” indicating that it will use the results of its investigation to
pursue litigation against AbbVie’s directors. JX 1 at 7.
100
See Graulich v. Dell Inc., 2011 WL 1843813, at *7 (Del. Ch. May 16, 2011) (“[T]he
Amended Demand letter states that plaintiff’s purpose is to commence an ‘appropriate suit’ if it
is found that the directors breached their fiduciary duties; it does not say that plaintiff’s purpose
includes taking any other ‘appropriate action.’ Thus, plaintiff has no additional stated purposes
and none can be reasonably inferred—the only purpose that can be fairly read out of plaintiff’s
demand is that he seeks to investigate ‘whether there was a systematic failure by the Board to
supervise’ in order to determine whether there is a basis to file a derivative suit.” (citation
omitted)); cf. Norfolk Cnty. Ret. Sys., 2009 WL 353746, at *11 (noting that “Norfolk has not
stated anywhere that it intends to engage in a proxy contest, or communicate directly with the
board, or take some specific action other than evaluating the actions of the board for a potential
derivative suit,” but allowing an inference that such an alternate purpose exists on a motion for
summary judgment because plaintiff stated in its demand that it would take “appropriate action”
if the defendants did not properly discharge their fiduciary duties).
101
JX 41, art. IX.
30
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

102
AbbVie’s Consolidated Response to Pls.’ Opening Trial Brs. at 22.
103
See SEPTA’s Reply Trial Br. at 18–20; Rizzolo’s Reply Trial Br. at 7–9.
104
Norfolk Cnty. Ret. Sys., 2009 WL 353746, at *6 (citing Seinfeld v. Verizon Commc’ns, Inc.,
909 A.2d 117, 121 (Del. 2006), Saito v. McKesson, HBOC, Inc., 806 A.2d 113, 115 (Del. 2002),
and Sec. First Corp. v. U.S. Die Casting and Dev. Co., 687 A.2d 563, at 567–68 (Del. 1997));
31
stockholder the ability to inspect books and records solely to investigate bringing

litigation where the stockholder would lack standing in the underlying suit105 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

see also Fuchs Family Trust v. Parker Drilling Co., 2015 WL 1036106, at *5–7 (Del. Ch. Mar.
4, 2015).
105
See Graulich v. Dell Inc., 2011 WL 1843813, at *5 (Del. Ch. May 16, 2011) (“If plaintiff
would not have standing to bring suit, plaintiff does not have a proper purpose to investigate
wrongdoing because it stated purpose is not reasonably related to its role as a stockholder.”);
West Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 641 (Del. Ch. 2006)
(“If a books and records demand is to investigate wrongdoing and the plaintiff’s sole purpose is
to pursue a derivative suit, the plaintiff must have standing to pursue the underlying suit to have
a proper purpose.”); Polygon Global Opportunities Master Fund v. West Corp., 2006 WL
2947486, at *5 (Del. Ch. Oct. 12, 2006) (holding that the plaintiff’s purpose to investigate claims
of corporate wrongdoing solely to determine whether the board members had breached their
fiduciary duties was not proper because “[t]his purpose is not reasonably related to [the
plaintiff’s] interest as a stockholder as it would not have standing to pursue a derivative action
based on any potential breaches”).
106
See Graulich, 2011 WL 1843813, at *6 (“As this Court has held, in a factual setting, a time
bar defense or a claim or issue preclusion defense would eviscerate any showing that might
otherwise be made in an effort to establish a proper shareholder purpose.” (internal quotation
marks omitted)).
107
See La. Mun. Police Emps.’ Ret. Sys. v. Lennar Corp., 2012 WL 4760881, at *2 (Del. Ch.
Oct. 5, 2012) (“[S]tockholders are only permitted to investigate those issues that affect their
interests as stockholders. In other words, if a stockholder seeks to use Section 220 to investigate
corporate wrongdoing for which there is no remedy, or if the stockholder would not have
standing to seek a remedy, then that stockholder has not stated a proper purpose.” (citation
omitted)). But see Amalgamated Bank v. UICI, 2005 WL 1377432, at *2 (Del. Ch. June 2, 2005)
(stating that affirmative defenses “solely” may not “bar a plaintiff under Section 220”).
Rizzolo relies on this Court’s recent decision in In re Rural Metro Corp. Stockholders
Litigation to argue that an exculpatory provision should not affect the proper purpose analysis,
32
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,

because such a provision “does not eliminate the underlying duty of care or the potential for
fiduciaries to breach that duty.” 88 A.3d 54, 85 (Del. Ch. 2014). Rizzolo’s argument is
misplaced: He seeks records solely in aid of derivative litigation; when the sole purpose is
litigation-driven, the appropriate focus is whether the underlying litigation is justiciable;
otherwise, the stockholder’s purpose is eviscerated, and the stockholder has failed to meet its
statutory burden to show a purpose reasonably related to its interest as a stockholder. However,
nothing in this Memorandum Opinion should be read to hold that directors’ breaches of
exculpated duties can never be a basis to support a Section 220 request on grounds other than
pursuit of derivative litigation.
108
I note that both SEPTA and Rizzolo state that they wish to investigate corporate wrongdoing
among AbbVie’s directors and officers. Since an exculpatory provision pursuant to Section
102(b)(7) only applies to directors, the limitation on Section 220 demands imposed by an
exculpatory provision described in this section would not apply to officers. Cf. Gantler v.
Stephens, 965 A.2d 695, 708–09 & n.37 (Del. 2009) (holding that “officers of Delaware
corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties
of officers are the same as those of directors,” but noting: “That does not mean, however, that the
consequences of a fiduciary breach by directors or officers, respectively, would necessarily be
the same. Under 8 Del. C. § 102(b)(7), a corporation may adopt a provision in its certificate of
incorporation exculpating its directors from monetary liability for an adjudicated breach of their
duty of care. Although legislatively possible, there currently is no statutory provision
authorizing comparable exculpation of corporate officers.”). In other words, a stockholder could
state a proper purpose to investigate breaches of the fiduciary duty of care by a corporation’s
officers solely for the purpose of pursuing derivative litigation, despite the existence of an
exculpatory provision in the corporation’s articles of incorporation. Here, however, officers are
included in the Plaintiffs’ stated proper purposes in name only; SEPTA and Rizzolo have failed
to meet their burden to show a credible basis from which the Court can infer any corporate
wrongdoing on the part of AbbVie’s non-exculpated officers. Both Plaintiffs’ briefs are almost
entirely directed towards the actions taken by AbbVie’s board in connection with the Proposed
Inversion and Break Fee. The only officer specifically mentioned by either Plaintiff is AbbVie’s
33
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 evidence109 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

CEO Richard Gonzalez, who also serves as the Chairman of AbbVie’s board, under the
protection of AbbVie’s exculpatory provision for acts in his capacity as a director. The
Plaintiffs’ focus is on the actions of the board in entering the Proposed Inversion, then
withdrawing, not on the actions of the officers in developing the deal or negotiating its terms.
Therefore, I proceed by considering only whether there is a credible basis to infer that AbbVie’s
directors have breached their fiduciary duty of loyalty.
109
Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 568 (Del. 1997).
110
Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 118 (Del. 2006).
34
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 Plaintiffs112 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

111
Id. at 122.
112
Although Rizzolo forewent making any argument in its briefing that there exists a credible
basis to infer that AbbVie’s directors engaged in non-exculpated corporate wrongdoing, instead
arguing that the Court should consider corporate wrongdoing amounting to a breach of the duty
of care, see Rizzolo’s Reply Trial Br. at 7–10, 12–21, I assume for the purposes of this
Memorandum Opinion that Rizzolo adopted SEPTA’s arguments in this regard at the
coordinated oral argument.
113
In re Goldman Sachs Grp., In. S’holder Litig., 2011 WL 4826104, at *12 (Del. Ch. Oct. 12,
2011) (quoting In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 755 (Del. Ch. 2005)).
114
This Court has found that, doctrinally, waste is a subset of good faith under the umbrella of
the duty of loyalty (and thus is not protected by a Section 102(b)(7) exculpation provision). See,
e.g., In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 749 (Del. Ch. 2005) (“The Delaware
Supreme Court has implicitly held that committing waste is an act of bad faith.” (citing White v.
Panic, 783 A.2d 543, 553–55 (Del. 2001))). While that seems to me the appropriate theoretical
framework, I note the existence of an academic debate as to whether that issue is truly settled.
See, e.g., Jamie L. Kastler, Note, The Problem with Waste: Delaware’s Lenient Treatment of
Waste Claims at the Demand Stage of Derivative Litigation, 95 Minn. L. Rev. 1899, 1911–14
(2011) (arguing that this Court has not “officially rule[d] on whether waste falls under the duty
of care (exculpable) or the duty of loyalty (nonexculpable),” but summarizing recent cases
indicating that “waste falls under the duty of loyalty through the duty of good faith”); Joseph K.
35
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

Leahy, Are Corporate Super PAC Contributions Waste or Self-Dealing? A Closer Look, 79 Mo.
L. Rev. 283, 308–09 (2014) (noting that the issue may not be settled, but arguing that the
doctrinal underpinnings of waste illustrate that “waste apparently constitutes a breach of a
director’s duty of loyalty”). I assume for the purposes of this Memorandum Opinion that waste
constitutes non-exculpated corporate wrongdoing that could form the basis for a proper Section
220 inspection under these circumstances.
115
711 A.2d 1220 (Del. Ch. 1996), aff’d in part, rev’d in part, 687 A.2d 563 (Del. 1997),
116
Rizzolo’s Opening Trial Br. at 18.
117
See, e.g., Trial Tr. 13:6–18:16; Rizzolo’s Opening Trial Br. at 17 (“Plaintiff’s Demand
expressly stated a proper purpose. Specifically, Plaintiff requested from AbbVie books and
records to further Plaintiff’s investigation into possible breaches of fiduciary duty in connection
with the Board’s reckless decision to enter into the Proposed Inversion resulting in the
Company’s obligation to pay the $1.635 billion Termination Fee absent of any meaningful
attempt by the Board to negotiate a fiduciary-out or lower fee.”).
36
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

118
SEPTA’s Reply Trial Br. at 3–9.
119
Id. at 7–9.
37
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

120
See, e.g., In re Pennaco Energy, Inc., 787 A.2d 691, 702 (Del. Ch. 2001) (noting that the
defendant corporation “resisted [the buyer’s] request for a termination fee equal to 5% of the
value placed on [the defendant’s] equity in the transaction, and had settled on a termination fee at
the more traditional level of 3%”); La. Mun. Police Empls.’ Ret. Sys. v. Crawford, 918 A.2d
1172, 1181 n.10 (Del. Ch. 2007) (listing cases involving termination fees at or above 3%).
121
See supra Part I.E. Although it is not necessary to my determination here, I also note that,
despite the government’s anti-inversion posture, the record illustrates that through the date
AbbVie executed the Co-Operation Agreement the opinion of a number of commentators,
analysts, and even government officials themselves was that the legislative branch would not,
and the administrative branch could not, act to deter inversions in the short term. See supra Part
I.F.2; note 65.
38
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:

122
The Plaintiffs conceded at trial that misapprehension of risk alone is not actionable conduct,
but attempted to distinguish these facts based on the Company’s public disclosures. Trial Tr.
16:7–18:16, 30:15–33:7. Specifically, SEPTA argued that the Company’s failure to identify the
tax benefit as a “deal breaker” in the preliminary proxy statement indicates that the Company
ignored or was not cognizant of the repercussions of the tax benefit on the deal as a whole, see
id. 17:3–18:16, and Rizzolo argued that, because AbbVie identified several reasons for pursuing
the Proposed Inversion outside the tax benefit in the preliminary proxy statement and in public
statements, yet abandoned the deal when the Treasury Notice was announced, the board either
intentionally misled stockholders or acted against stockholder interest in terminating the deal.
See id. 31:5–33:7. I do not find either argument persuasive. To the extent I understand SETPA’s
argument, the most I can reasonably infer from the lack of disclosure regarding the “deal
breaker” status of the tax benefit is that the directors negligently failed to take into account the
effect of a single risk (the loss of the tax benefit) on the viability of the deal as a whole; if so, to
my mind, this fails to prove a credible basis to demonstrate a breach of care, let alone loyalty.
As to Rizzolo’s argument, it is entirely possible that a corporation could want to pursue a
transaction for several reasons, the loss of any of which would make the transaction no longer
financially or strategically tenable.
123
See supra notes 31–33 and accompanying text.
39
 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.

124
Brehm v. Eisner, 746 A.2d 244, 265 (Del. 2000).
125
Id.
40
 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

126
Rizzolo’s Reply Trial Br. at 10 n.20 (internal quotations omitted).
127
711 A.2d 1220, 1223 (Del. Ch. 1996).
128
Id. at 1223–24.
41
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,

129
Id. at 1225.
130
See Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 568–69 (Del. 1997).
42
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.

43
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

131
2001 WL 818173, at *6 (Del. Ch. July 10, 2001), aff’d in relevant part, 806 A.2d 113 (Del.
2002).
132
Saito, 806 A.2d at 118.
44
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.

133
See In re Rural Metro Corp. S’holder Litig., 88 A.3d 54, 86 (Del. Ch. 2014) (rejecting the
argument of the defendant’s financial advisor that the defendant company’s exculpatory
provision should apply equally to a party charged with aiding and abetting a breach of fiduciary
duty, finding: “That is not what Section 102(b)(7) authorizes. The literal language of Section
102(b)(7) only covers directors; it does not extend to aiders and abettors.”).
134
Nothing prevents Rizzolo from making a demand on the Company’s board to consider an
action against J.P. Morgan. Rizzolo has not sought documents in this action to determine
whether such a demand would be futile.
45
 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.

135
Because I find that the Plaintiffs have failed to show a proper purpose for their inspections, I
do not address the scope of the documents sought.
46