Amalgamated Bank v. Yahoo! Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

AMALGAMATED BANK, Trustee for the )
LongView LargeCap 500 Index Fund and )
LongView LargeCap 500 Index VEBA )
Fund, )
)
Plaintiff, )
)
v. ) C.A. No. 10774-VCL
)
YAHOO! INC., )
)
Defendant. )

OPINION

Date Submitted: November 5, 2015
Date Decided: February 2, 2016

Christine S. Azar, Ryan T. Keating, LABATON SUCHAROW LLP, Wilmington,
Delaware; Thomas A. Dubbs, James W. Johnson, LABATON SUCHAROW LLP, New
York, New York; Counsel for Plaintiff Amalgamated Bank.

Kathaleen S. McCormick, Richard J. Thomas, YOUNG CONAWAY STARGATT &
TAYLOR, LLP, Wilmington, Delaware; Mark R.S. Foster, Su-Han Wang, MORRISON
& FOERSTER LLP, San Francisco, California; Counsel for Defendant Yahoo! Inc.

LASTER, Vice Chancellor.
 Plaintiff Amalgamated Bank (―Amalgamated‖) demanded to inspect the books and

records of respondent Yahoo! Inc. pursuant to Section 220 of the Delaware General

Corporation Law, 8 Del. C. § 220. Amalgamated‘s stated purpose was to investigate the

hiring and subsequent firing of Yahoo‘s Chief Operating Officer, Henrique de Castro.

This post-trial decision orders a tailored production of some of the documents identified

in the demand. The production is subject to a condition: The resulting documents will be

deemed incorporated by reference in any derivative complaint that Amalgamated may

file relating to the subject matter of the demand.

I. FACTUAL BACKGROUND

A trial on a paper record took place on September 29, 2015. The following facts

were proven by a preponderance of the evidence.

A. Change At Yahoo

2012 was a big year for Yahoo. Ten of the eleven members of the board of

directors (the ―Board‖) joined that year. The Board also reconstituted its Compensation

and Leadership Development Committee (the ―Committee‖), comprising directors

Maynard Webb, Sue James, Peter Ligouri, and Harry Wilson. Webb served as chair.

Change was afoot at the executive level as well. In July 2012, the Board hired

Marissa Mayer as Yahoo‘s new CEO. Mayer previously worked at Google, Inc. as Vice

President of Local, Maps, and Location Services.

Soon after taking over as CEO, Mayer received an email from Henrique de Castro.

He was serving at Google as President of Media, Mobile, and Platforms. de Castro

invited Mayer to dinner.

1
 During dinner, de Castro expressed interest in serving as Mayer‘s number two

executive at Yahoo. Mayer liked the idea, and she and de Castro began discussing his

compensation package.

On September 12, 2012, the Committee held a special meeting. According to the

minutes, Mayer raised the fact that she ―was in discussions with a person to take the

number two role.‖ JX 5 at 1. The purpose of the meeting was to give Mayer ―guidance on

potential compensation parameters‖ to determine whether ―it was feasible to have further

discussions with the candidate.‖ Id. She did not identify de Castro by name or state his

current job or title, citing confidentiality concerns. She did tell the Committee that the

candidate ―would require a significant compensation package‖ given his talents and the

money he would forfeit by leaving his existing employer. Id. Mayer described the

candidate‘s expected compensation package as ―$15 million per year (with $40 million as

part of that up front in a four-year grant) and a $16 million or more make-whole

payment.‖ Id.

George B. Paulin of Frederic W. Cook & Co. was the Committee‘s compensation

consultant. Paulin advised the Committee that the proposed compensation was ―generally

more than the data supported for a number two executive in peer companies.‖ Id. at 2. He

nevertheless opined that ―regardless of the data, the Compensation Committee could

justify this compensation,‖ even though he still did not know the candidate‘s name. Id.

The Committee authorized Mayer to continue negotiations ―subject to Committee review

of the actual contract.‖ Id.

2
 On September 23, 2012, the Committee met again. Mayer provided the Committee

members with a term sheet summarizing the candidate‘s compensation package. The

Committee still did not know the name of the candidate. Mayer emphasized the

candidate‘s expertise in the display-ad market, which Mayer identified as an important

area for Yahoo. The Committee authorized Mayer to continue negotiations. The

Committee did not receive any materials that illustrated how the different compensation

components in the term sheet interacted or how much compensation they would yield

under different scenarios.

On September 24, 2012, the Committee met for a total of thirty minutes. During

this meeting, the members finally learned that the candidate was de Castro. Mayer

presented the Committee members with a letter offering de Castro the positions of Chief

Operating Officer and Executive Vice President. JX 9 (the ―Original Offer Letter‖). The

terms of the Original Offer Letter tracked the term sheet that the Committee had reviewed

the previous day. The Committee again did not receive any materials that illustrated the

complex interrelationships among the various compensation components or the amount

of compensation they generate in particular scenarios.

The Committee approved the Original Offer Letter and gave Mayer authority to

continue negotiating with de Castro. The Committee authorized Webb to approve any

non-material changes to the Original Offer Letter. The Committee retained control over

any ―material changes,‖ specifying that they would be ―subject to approval by the full

Committee.‖ Id. at 3.

3
 The Original Offer Letter contemplated that de Castro would receive the following

forms of cash compensation:

 Base salary of $600,000.

 Annual bonus with a target value equal to 90% of base salary.

 Signing bonus of $1 million.

Id. at 1-2. In addition, the Original Offer Letter contemplated that de Castro would

receive three different types of equity compensation (collectively, the ―Equity Awards‖).

Each type of award had a target value and its own vesting schedule:

 The Incentive Restricted Stock Units (the ―Incentive RSUs‖) had a target value of
$20 million. The first 25% of the Incentive RSUs would vest on November 23,
2013. The remaining 75% would vest monthly in 36 equal installments over a
three-year period, with 1/36 vesting one month after November 23, 2013, and each
month thereafter.

 The Performance Stock Options (the ―Options‖) had a target value of $20 million
They were divided into four equal tranches with vesting dates of July 26, 2013,
January 26, 2014, January 26, 2015, and January 26, 2016. This meant the first
two tranches would vest in a little over a year, one approximately six months after
de Castro would start at Yahoo and another six months after that. The next tranche
would not vest for another year, after two years of service. The final tranche would
vest a year after that, after three years of service.

 The Make-Whole Restricted Stock Units (the ―Make-Whole RSUs‖) had a target
value of $16 million. Beginning on December 23, 2012, they would vest equally in
48 monthly installments over a four-year period, with 1/48th vesting one month
after the grant date and each month thereafter.

Id. at 3-6. The total target value of the Equity Awards was $56 million.

The Original Offer Letter contemplated two possible types of terminations: with

cause and without cause. It detailed what de Castro would receive in each scenario.

4
 If the termination was with cause, then de Castro would forfeit all of his unvested

Equity Awards. The Original Offer Letter defined ―Cause‖ as follows:

[T]ermination of your employment with the Company based upon the
occurrence of one or more of the following . . . .

(1) your refusal or material failure to perform your job duties and
responsibilities (other than by reason of your serious physical or mental
illness, injury, or medical condition),

(2) your failure or refusal to comply in any material respect with material
Company policies or lawful directives of the Company‘s Chief Executive
Officer,

(3) your material breach of any contract or agreement between you and the
Company (including but not limited to this letter agreement and any
Employee Confidentiality and Assignment of Inventions Agreement or
similar agreement between you and the Company), or your material breach
of any statutory duty, fiduciary duty or any other obligation that you owe to
the Company,

(4) your commission of an act of fraud, theft, embezzlement or other
unlawful act against the Company or involving its property or assets,

(5) your engaging in unprofessional, unethical or other intentional acts that
materially discredit the Company or are materially detrimental to the
reputation, character or standing of the Company . . . ,

(6) your indictment or conviction or plea of nolo contendere or guilty plea
with respect to any felony or crime of moral turpitude, or

(7) providing the Company with any knowingly false information regarding
your current health condition, work experience or educational
qualification . . . .

Id. at 19 (formatting into separate paragraphs added).

If the termination was without cause, then de Castro would keep all of the Equity

Awards that had vested through his termination date, plus a portion of his unvested

Equity Awards that would vest on an accelerated basis. The provisions of the Original

5
Offer Letter that governed the accelerated vesting were complex and differed for each

type of Equity Award, so they take some time to describe.1

At a conceptual level, the provisions established a total number of Equity Awards

that could vest, then cut back that amount based on a specified percentage. The terms for

the accelerated vesting of the Incentive RSUs and the Options were less favorable to de

Castro than the accelerated vesting for the Make-Whole RSUs, both in terms of the total

number of awards that potentially could vest and the calculation of the cutback.

For purposes of the Incentive RSUs and the Options, the total potential number of

awards that could vest on an accelerated basis was limited to the number ―which would

have vested in the six months following termination of employment‖ if the employee

1
Scholars have questioned whether the increasing complexity of management
compensation arrangements has contributed to the overall increase in management
compensation, noting that (i) it is difficult and time-consuming to understand the various
component parts and how they operate, and (ii) directors lack the time and arguably the expertise
to parse through the agreements and map out the different scenarios. See, e.g., Lucian Bebchuk
& Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation
37 (2004) (explaining that the complexity of compensation arrangements and the limited time
that directors have leads them to ―to rely on information and advice provided by the firm‘s
human resources department and by compensation consultants hired by the department‖); David
I. Walker, The Manager’s Share, 47 Wm. & Mary L. Rev. 587, 597 (2005) (―[T]he increasing
complexity and opacity of executive compensation over the last two decades has contributed
directly to the overall increase in managerial appropriation.‖); see also Bernice Grant,
Independent Yet Captured: Compensation Committee Independence After Dodd-Frank, 65
Hastings L.J. 761, 788-97 (2014) (recommending continuing professional education
requirements for compensation committee members to respond to complexity and sophistication
of compensation arrangements and related regulatory environment); David I. Walker, Evolving
Executive Equity Compensation and the Limits of Optimal Contracting, 64 Vand. L. Rev. 611,
655-56 (2011) (citing possible reasons for ―the trimodal distribution of equity mix in recent
years,‖ including the possibility that ―grants of multiple equity instruments could represent an
effort to reduce transparency and the salience of individual elements of executive pay,‖ and that
―perhaps consultants profit from proposing more complex arrangements‖).

6
remained employed and met all required criteria (the ―Six-Month Tail‖). JX 9 at 8.

Because the Incentive RSUs and the Options had different vesting schedules, the Six-

Month Tail operated differently for those types of awards.

For the Incentive RSUs, an initial slug of twenty-five percent of the awards vested

on November 23, 2013, one year and eleven days after the start of de Castro‘s

employment. The Six-Month Tail meant that the accelerated vesting of the Incentive

RSUs could result in either another 25% vesting or nothing, depending on de Castro‘s

termination date. If he was terminated more than six months before November 23, 2013,

then the Six-Month Tail would not pick up his initial 25% tranche. If he was terminated

less than six months before November 23, 2013, then it would. The Six-Month Tail only

had this binary effect for the initial 25% tranche. After the first slug, additional Incentive

RSUs vested monthly in equal installments. If de Castro was terminated without cause

after the first year, then the Six-Month Tail would sweep in another 12.5% of the total

Incentive RSUs.2

For the Options, the vesting schedule contemplated four equal tranches. The first

tranche vested a little more than six months after de Castro started working at Yahoo, and

the next would vest approximately six months after that. Then the remaining two tranches

would vest annually. Depending on when the termination took place, the Six-Month Tail

2
The description in the text ignores a termination during the last six months of the
employment period, when the number of units covered by the Six-Month Tail would decline
proportionately with the number of months of employment that de Castro had left.

7
(i) would sweep in another tranche, if another vesting date would have occurred in the

next six months, or (ii) produce nothing, if another vesting date was more than six

months away. This meant the Six-Month Tail had a binary effect for the first, third, and

fourth tranches.

The Six-Month Tail established the number of Incentive RSUs and Options that

were eligible for accelerated vesting (the ―Eligible Pool‖). To determine the number of

awards that actually vested, the Original Offer Letter called for multiplying the Incentive

RSUs and Options in the Eligible Pool by a ―Specified Percentage.‖ This figure varied

depending on how long de Castro had been with Yahoo: (i) 25% for a termination before

November 23, 2013, (ii) 50% for a termination after November 23, 2013, and before

November 23, 2014, (iii) 75% for a termination after November 23, 2014, and before

November 23, 2015, and (iv) 100% for a termination after that.

The Make-Whole RSUs worked differently. First, they were not subject to the Six-

Month Tail. All of the Make-Whole RSUs were part of the Eligible Pool. Second, the

cutback percentage for the Make-Whole RSUs increased at a rate more favorable to de

Castro than for the Incentive RSUs and Options: (i) 50% for a termination before

November 23, 2013, (ii) 75% for a termination after November 23, 2013, and before

November 23, 2014, (iii) 100% for a termination after that.

The compensation implications of the varying vesting schedules, the Six-Month

Tail, and the Specified Percentage were not self-evident. When Mayer furnished the

Original Offer Letter to the Committee, no one provided the directors with any materials

that illustrated their consequences for different departure scenarios. Table 1 attempts to

8
illustrate the implications by identifying the specified percentage of each type of Equity

Award that the Original Offer Letter stated would accelerate and vest. It then calculates

an effective percentage of the total Equity Awards that de Castro would receive if

terminated without cause on the specified date. The table illustrates the direction and

order of magnitude of the accelerated vesting and the differences among the Equity

Awards.

For an example of how Table 1 works, consider the Make-Whole RSUs. If Yahoo

terminated de Castro on November 24, 2012, twenty-nine days before his first monthly

grant, then none of his Make-Whole RSUs would have vested due to service, leaving

100% outstanding. The Original Offer Letter provided that 50% of the remaining amount

would accelerate, so de Castro would receive the equivalent of 50% of the total grant. If

de Castro was terminated on November 24, 2013, then he would have received 25% his

Make-Whole RSUs through service, leaving 75% outstanding. The Original Offer Letter

provided that 75% of the outstanding Make-Whole RSUs would accelerate, giving him

an additional 56.25%. In total, de Castro would receive 81.25% of the grant. If de Castro

was terminated on November 24, 2014, then he would have received 50% his Make-

Whole RSUs through service, leaving 50% outstanding. The Original Offer Letter

provided that 100% of those outstanding Make-Whole RSUs would accelerate, giving

him an additional 50% of the all-in award. In total, de Castro would receive 100% of the

grant. Footnotes to Table 1 explain the calculations for other cells.

9
 Table 1 Make-Whole RSUs Incentive RSUs and Options
Termination % Of Effective % Specified % Of Effective % Of Effective % Of
Date Remaining Of Total Remaining Total Incentive Total Options
Awards To Received Awards To RSUs Received Received
Accelerate Accelerate
November
24, 2012
50% 50% 25% 0%3 0%4
November
24, 2013
75% 81.25% 50% 31.25%5 37.5%6
November
24, 2014
100% 100% 75% 59.375%7 68.75%8
November
24, 2015
100% 100% 100% 87.5%9 100%10

3
0% already vested. Because the first tranche of Incentive RSUs would not vest until
November 23, 2013, the Six-Month Tail would not capture any Incentive RSUs.
4
0% already vested. Because the first tranche of Options would not vest until July 26,
2013, the Six-Month Tail would not capture any Options.
5
25% already vested (viz., the 25% that would vest on November 23, 2013). The Six-
Month Tail captures another six monthly grants, creating an Eligible Pool of 12.5%. The
Specified Percentage causes 50% of that to vest, or 6.25%.
6
25% already vested (viz., the 25% slug that would vest on July 26, 2013). The Six-
Month Tail captures the next 25% tranche of Options, which would vest on January 26, 2014.
The Specified Percentage causes 50% of that to vest, or 12.5%.
7
50% already vested. The Six-Month Tail captures six monthly grants, creating an
Eligible Pool of 12.5%. The Specified Percentage causes 75% of that to vest, or 9.375%.
8
50% already vested. The Six-Month Tail captures the next tranche of Options, which
would vest on January 26, 2015. The Specified Percentage causes 75% of that to vest, or
18.75%.
9
75% already vested. The Six-Month Tail captures six monthly grants, creating an
Eligible Pool of 12.5%. The Specified Percentage causes 100% of that to vest, or 12.5%.
10
75% already vested. The Six-Month Tail captures the final tranche of Options, which
would vest on January 26, 2016. The Specified Percentage causes 100% of that to vest, so de
Castro would get the full 25%.

10
 The Committee did not have anything like Table 1, much less a helpful graph that

would show the individual and aggregate effects of the Equity Awards over time. The

Committee members only received a copy of the Original Offer Letter, and they spent a

total of thirty minutes considering it.

After the Committee meeting, the full Board met ―to review and discuss the

appointment of Henrique de Castro as the Company‘s Chief Operating Officer.‖ JX 10 at

1. Like the Committee, the Board received a copy of the Original Offer Letter. The Board

did not receive any other materials. According to the minutes,

Ms. Mayer described Mr. de Castro‘s background, including his current
work role as President of worldwide business partnerships at Google, and
also described potential visa issues related to his Portuguese citizenship.
Mr. Mayer indicated that Mr. de Castro has a strong reputation for ethics
and integrity, and has deep insights into the display ad market. Questions
were asked and answered regarding, among other things, potential issues
with Mr. de Castro‘s non-solicitation agreement with his current employer.
A discussion followed.

Id. at 1-2.

Mayer then turned to Michael S. Sirkin of Proskauer Rose LLP, counsel to the

Committee, and Webb, the Chair of the Committee.

Mr. Sirkin summarized the major terms of the offer to Mr. de Castro, which
currently includes $1 million in annual salary, a $4 million ―makeup‖
equity grant, $5 million in time-based RSUs and $5 million in performance-
based options. He also noted that there were some outstanding issues
regarding the economics of the offer and certain restrictive covenants. Mr.
Webb reported that the [Committee] had approved the current terms of the
offer, and had delegated to him authorization [to] work with management
on finalizing certain outstanding issues in the offer.

Id. at 2. The description the Board received did not capture the implications of

accelerated vesting for various termination scenarios.

11
 At this point, Yahoo‘s general counsel ―reviewed the resolutions previously

distributed to the Board in advance of the meeting.‖ Id. The resolutions approved the

concept of hiring de Castro ―on substantially the terms presented to the Board.‖ Id. at 3.

They also authorized Yahoo‘s officers ―to execute and deliver the [Original] Offer Letter

substantially in the form attached hereto . . . with such administrative or non-material

changes to the [Original] Offer Letter as such officers, in conjunction with Maynard

Webb, chair of the Compensation Committee, may deem necessary or appropriate.‖ Id.

The Board approved the resolutions.

C. The Committee Eliminates The “Specified Percentage” Concept.

de Castro was not happy with the Original Offer Letter. He wanted accelerated

vesting for a larger number of Incentive RSUs and Options if he was terminated without

cause. The Original Offer Letter used the Six-Month Tail to determine the Eligible Pool.

de Castro wanted the tail period extended to twelve months (the ―Twelve-Month Tail‖),

and he did not want the number of additional awards that vested during the tail period to

be cut back by the Specified Percentage.

On October 13, 2012, the Committee met to receive a report on the status of the

negotiations with de Castro. Counsel noted that the Committee ―had previously approved

proposed terms of employment . . . and had delegated to Mr. Webb authority to approve

changes [to] such terms, with the understanding that any material changes would be

presented to the Committee for approval.‖ JX 12 at 1-2. At this point, Mayer described

what the Committee ostensibly had approved previously, but she incorrectly described

―[t]he terms previously approved by the Committee‖ as having ―provided for 12-months

12
acceleration of a ‗Specified Percentage.‘‖ Id. at 2. In other words, she represented to the

Committee that the Original Offer Letter already contained a Twelve-Month Tail.

Mayer framed the issue for the Committee to decide as whether the concept of the

Specified Percentage should be removed. Mayer represented to the Committee that ―the

Candidate had understood that he would receive 12 months acceleration of all equity,

regardless of when the termination event occurred.‖ Id. at 2.

The Committee discussed the issue as Mayer had framed it, viz., eliminating the

Specified Percentage based on the incorrect assumption that the Committee already had

approved a Twelve-Month Tail. During the discussion,

it was noted that the Candidate was a very important executive hire, as
reflected in his generous compensation package. Mr. Paulin described a
worst case scenario that might arise as a consequence of making the
requested changes to the employment terms: specifically, that an early
termination in the first year would trigger a very large payout to the
Candidate. Mr. Paulin noted that it is likely that the large potential payout
to the Candidate, as well as the general size of the contract, already would
attract negative reaction from proxy advisors, and that the increased amount
would just add to that unless the Company stock has significantly increased
in price by the time of the proxy vote.

Id. at 2-3.

The Committee did not receive any materials that attempted to quantify the effect

of the changes or illustrate how they altered the compensation payouts under different

scenarios. There is no evidence that anyone addressed the magnitude of the change,

whether based on the incorrect assumption that the baseline was a Twelve-Month Tail or

the actuality that the baseline was the Six-Month Tail.

13
 Mayer expressed her view that ―while she believed that the payout was already

significant and was concerned about the increase, her concerns was [sic] less in the

termination without cause scenario since that will be under her and the Board‘s control.‖

Id. at 3. There is no evidence that anyone examined the definition of cause in the context

of Mayer‘s comment.

After further discussion, Mayer asked that the Committee ―approve removing the

concept of ‗Specified Percentage‘ in the event of termination without cause.‖ Id. ―The

Committee approved the requested changes.‖ Id. At no point during the meeting did

anyone discuss changing the vesting schedule for the Make-Whole RSUs.

D. Mayer Makes More Changes To The Offer Letter.

After the Committee meeting, Mayer prepared a final version of the offer letter,

which she provided to de Castro. JX 13 (the ―Final Offer Letter‖). She made at least three

changes that materially increased de Castro‘s compensation package.

The first change increased the tail period from six months to twelve months, which

doubled the effective percentages of the Incentive RSUs and Options that de Castro

would receive if terminated without cause. The Twelve-Month Tail was not something

the Committee ever approved. Mayer incorrectly represented to the Committee that the

Original Offer Letter already had a Twelve-Month Tail, so the Committee never

evaluated it.

Second, Mayer eliminated the Specified Percentage for the Incentive RSUs and

Options. That was consistent with what the Committee had approved, albeit based on a

misunderstanding about the existing tail period.

14
 Third, Mayer eliminated the time-weighted schedule for accelerated vesting for

the Make-Whole RSUs. She provided instead that 100% of the grant would accelerate if

Yahoo terminated de Castro without cause. This last change was never discussed with the

Committee, much less approved.

Table 2 compares the effective percentages of Equity Awards that de Castro would

receive using the accelerated vesting as structured in the Original Offer Letter (as shown

in Table 1) with the effective percentages using the accelerated vesting as structured in

the Final Offer Letter. As with Table 1, it uses hypothetical termination dates to illustrate

the direction and magnitude of the changes.

15
 Table 2 Make-Whole RSUs Incentive RSUs Options
Termination Original Final Original Final11 Original Final
Date
November
24, 2012
50% 100% 0% 25% 0% 25%12
November
24, 2013
81.25% 100% 31.25% 50% 37.5% 50%13
November
24, 2014
100% 100% 59.375% 75% 68.75% 75%14
November
24, 2015
100% 100% 87.5% 100% 100% 100%15

As the table shows, Mayer‘s changes substantially increased the percentage of the Equity

Awards that de Castro would receive for an early termination.

Finally, Mayer reallocated the amount of target value conveyed through the

different types of Equity Awards. She increased the target value of the Make-Whole

RSUs from $16 million to $20 million. She simultaneously decreased the value of the

Incentive RSUs and Options from $20 million each ($40 million total) to $18 million

each ($36 million total). These changes were never discussed with the Committee, much

less approved.

Mayer‘s changes did not affect the target value of the aggregate grant, which

remained at $56 million, but they did affect de Castro‘s incentives and the size of his

11
The Twelve-Month Tail always captures another 25%. The percentages increase
because an additional 25% of de Castro‘s Incentive RSUs vest each year through service.
12
0% vested. Twelve-Month Tail captures the initial tranche of 25%. No cut-back.
13
25% vested. Twelve-Month Tail captures the next tranche of 25%. No cut-back.
14
50% vested. Twelve-Month Tail captures the third tranche of 25%. No cut-back.
15
75% vested. Twelve-Month Tail captures the final tranche of 25%. No cut-back.

16
payout if he was terminated without cause. Because of the other changes Mayer had

made, de Castro would receive 100% of his Make-Whole RSUs if he was terminated

without cause, but only an additional twelve months of Incentive RSUs and Options.

Shifting value from the Incentive RSUs and Options to the Make-Whole RSUs benefited

de Castro by moving value into a category of Equity Award that would accelerate fully. It

also benefited de Castro because the Options had performance-vesting metrics that had to

be met, while the Make-Whole RSUs did not. The shifts worked with Mayer‘s other

changes to increase substantially the value of the Equity Awards that de Castro would

receive for an early termination.

17
 Table 3 compares the different categories of value conveyed to de Castro under

the Original Offer Letter versus the Final Offer Letter. The figures reflect the total value

of the vested portion of the Equity Award that de Castro would receive if terminated

without cause, including both what de Castro would have received from prior service and

the additional amounts from accelerated vesting. The calculations use the target value of

the awards and the percentages calculated in Tables 1 and 2. Amounts are in millions.

Make-Whole
Table 3 Incentive RSUs Options Total
RSUs
Termina- Original Final Original Final Original Final Original Final
tion Date ($16) ($20) ($20) ($18) ($20) ($18M) ($56M) ($56M)
November
24, 2012
$8 $20 $0 $4.5 $0 $4.5 $8 $29
November
24, 2013
$13 $20 $6.25 $9 $7.5 $9 $26.75 $38
November
24, 2014
$16 $20 $11.875 $13.5 $13.75 $13.5 $41.625 $47
November
24, 2015
$16 $20 $17.50 $18 $20 $18 $53.5 $56

18
 Tables 4 compares the Original Offer Letter and the Final Offer Letter by focusing

on the amount of target compensation that de Castro would receive due to accelerated

vesting. Table 4 reflects the percentage of the Equity Awards that de Castro would

receive as severance. The calculation excludes Equity Awards that de Castro already

would have received through service as of the date of termination.

Table 4 Make-Whole RSUs Incentive RSUs Options
Termination Original Final16 Original Final17 Original Final18
Date
November
24, 2012
50% 100% 0% 25% 0% 25%
November
24, 2013
56.25% 75% 6.25% 25% 12.5% 25%
November
24, 2014
50% 50% 9.375% 25% 18.75% 25%
November
24, 2015
25% 25% 12.5% 25% 25% 25%

16
100% of the remaining percentage vests. The remaining percentage declines because
the balance has vested due to prior service as of the termination date.
17
The Twelve-Month Tail always captures another 25%.
18
For purposes of this table, the Twelve-Month Tail always captures another 25%. For a
termination between January 26, 2013, and July 26, 2013, however, the Twelve-Month Tail
would sweep in the first two tranches of options for 50% of the total grant.

19
 Table 5 reflects the total dollar amounts de Castro would receive as severance. The

calculations are based on the target value of the Equity Awards and the percentages from

Table 4.

Make-Whole
Table 5 Incentive RSUs Options Total
RSUs
Termina- Original Final Original Final Original Final Original Final
tion Date ($16) ($20) ($20) ($18) ($20) ($18M) ($56M) ($56M)
November
24, 2012
$8 $20 $0 $4.5 $0 $4.5 $8 $29
November
24, 2013
$9 $15 $1.25 $4.5 $2.5 $4.5 $12.75 $24
November
24, 2014
$8 $10 $1.875 $4.5 $3.75 $4.5 $13.625 $19
November
24, 2015
$4 $5 $2.5 $4.5 $5 $4.5 $11.5 $14

Mayer‘s changes thus resulted in payouts that made earlier termination without cause

dramatically more favorable to de Castro. For a termination on November 24, 2012, after

twelve days of service, her changes increased the value of his payout by $21 million, or

263%. For a termination on November 24, 2013, after one year and twelve days of

service, her changes increased the value of his payout by $11.25 million, or 94%.

The categories of Equity Awards that provided de Castro with his increased

payout each contained elements that the Committee had never approved, had approved

based on incorrect information, or both. The final terms of the Make-Whole RSUs

incorporated 100% vesting for a termination without cause and the incremental value that

Mayer reallocated. The Committee never approved either change. The final terms of the

Incentive RSUs and the Options used the Twelve-Month Tail, which the Committee

never considered because Mayer told the directors incorrectly that the Original Offer

Letter already included a Twelve-Month Tail. The final terms of the Incentive RSUs and

20
the Options also eliminated the Specified Percentage, which the Committee approved

based on the incorrect assumption that the Original Offer Letter already included the

Twelve-Month Tail. The Committee never received any calculations showing the value

of the changes, much less the aggregate effect of all of the changes.

E. Yahoo Hires De Castro.

On October 15, 2012, de Castro executed the Final Offer Letter, and Yahoo issued

a press release announcing the hiring. In the press release, Mayer cited de Castro‘s

expertise in ―Internet advertising and his proven success in structuring and scaling global

organizations.‖ JX 14 at 1.

That same day Yahoo issued a Form 8-K that attached the Final Offer Letter.

Public reception was mixed to negative. The Wall Street Journal described the

compensation package as ―staggering.‖ JX 16 at 1. The Business Insider ran an article

titled, ―Did Marissa Mayer Just Make a Horrible Mistake? Several Ex-Googlers Think

So.‖ JX 17 at 1. It cited sources from Google who expressed generally negative reviews

of de Castro‘s competence and personality. One source stated that ―Google should pay

Yahoo to take him.‖ JX 17 at 3. Another described him as the ―literally the worst hire

ever.‖ Id. at 4. The sources who praised de Castro as smart and disciplined nevertheless

questioned his ability to get along with others.

F. Mayer Fires De Castro.

On November 12, 2012, de Castro started at Yahoo. His pay package for his first

year was $39.2 million, making him the eighth-highest paid executive in Silicon Valley.

21
In all of the United States, only eight CEOs of public companies earned more than $39.2

million in 2013. He even made more than Mayer.

de Castro‘s responsibilities included running ―sales, operations, media and

business development functions.‖ JX 15 at 6. Mayer expected him to boost Yahoo‘s

revenue by expanding the scope of its digital advertising. A key part of his job was

building relationships with big advertisers.

de Castro did not perform. In every quarter after he started, Yahoo‘s advertising

revenue declined. de Castro also did not get along well with Yahoo management. Within

a year of hiring him, Mayer personally took control of de Castro‘s advertising team.

In January 2014, fourteen months after de Castro started as COO, Mayer decided

to fire him. The Committee approved her decision through action by written consent

dated January 12, 2014. The resolutions stated:

WHEREAS, management has discussed with the Committee the
termination without cause of the employment of Henrique de Castro, Chief
Operating Officer of the Company, effective on or about January 14, 2014,
and that in connection with such termination, Mr. de Castro will receive the
severance benefits for a termination without cause provided for in his
employment offer letter with the Company, dated October 15, 2012, his
Severance Agreement with the Company, dated February 28, 2013, and his
Company equity award agreements (collectively the ―Agreements‖);

NOW, THEREFORE, BE IT RESOLVED, that, the Committee hereby
approves the termination without cause of the employment of Henrique de
Castro and the payment of the severance benefits provided for in the
Agreements . . . .

JX 25 at 1.

The Committee did not actually meet in person or by phone. There is no evidence

of what information the Committee had, other than the vague reference in the resolution

22
to management having ―discussed with the Committee the termination without cause.‖

There is no evidence that the Committee evaluated the alternative of a for-cause

termination or was provided with a calculation of the severance benefits that de Castro

would receive.

In an internal memo to Yahoo employees, Mayer took responsibility for the firing,

stating: ―I made the difficult decision that our COO, Henrique de Castro, should leave the

company.‖ JX 27 at 2. On January 15, 2014, Yahoo filed a Form 8-K announcing simply

that de Castro was ―leaving the Company‖ and would receive ―severance benefits

provided for in his [Final] Offer Letter.‖ JX 29 at 3.

The media provided extensive coverage of the termination. A New York Times

article attributed de Castro‘s termination to poor performance. JX 28. Another described

his pay package as ―stratospheric‖ ―[e]ven by Silicon Valley standards.‖ JX 31 at 1.

Investors reacted negatively. The CtW Investment Group was an organization that

represented union pension funds owning own approximately 2 million shares of Yahoo.

CtW ―called on Yahoo to take steps to ensure it won‘t overpay for executive talent.‖ JX

34 at 1. CtW also called on Mayer to resign from her position as a director of Wal-Mart

Stores, Inc. and questioned Yahoo‘s decision to pay de Castro a make-whole bonus.

G. The Payout

On February 4, 2014, the Committee met for the first time since de Castro‘s

termination. His unvested Options had performance vesting criteria that had to be met.

Based on the Company‘s performance, the Committee ―certifie[d] that the portion of the

full year 2013 tranches of the Performance Options that shall vest is: 79%.‖ JX 33 at 3.

23
The Committee also discussed the level of bonus that should be paid to the five members

of senior management who participated in the Executive Incentive Plan, including Mayer

and de Castro.

The Committee met again on February 27, 2014. Despite having approved de

Castro‘s termination without cause via action by written consent on January 12, this

meeting was the first time the Committee discussed the reasons for his termination.

Mayer explained that ―de Castro had not achieved his revenue or operational objectives,

including those with respect to advertisers. Overall he had not performed to the desired

level . . . [and] she had given him feedback on the deficiencies in his performance and he

still failed to correct or improve his performance.‖ JX 36 at 7. The Committee decided

not to award de Castro a bonus under the Executive Incentive Plan.

On April 16, 2014, in the proxy statement for its annual meeting, Yahoo finally

disclosed to its stockholders that de Castro had been terminated without cause, triggering

$59.96 million in severance. The payout comprised the following amounts:

 $1.14 million in cash, representing his base salary for twelve months ($600,000)
plus a target annual bonus equal to 90% of his base salary ($540,000).

 $9.62 million in value from the accelerated vesting of 238,474 Incentive RSUs,
representing the additional 25% of the remaining Incentive RSUs that would have
vested within twelve months after his termination date.

 $16.02 million in value from the accelerated vesting of Options to acquire 746,362
shares of common stock, representing 79% of the additional 25% of the remaining
Options that would have vested within twelve months after his termination date.

 $31.18 million from the accelerated vesting of 772,832 Make-Whole RSUs,
representing 100% of the original award.

24
JX 39 at 82-83. If Yahoo had terminated de Castro for cause, he would have forfeited his

unvested Equity Awards.

Based on the target value of the Equity Awards, their anticipated value for a

termination in early January 2014 was $23.58 million (versus $11.25 million under the

Original Offer Letter). Combined with his cash severance of one year base salary plus

bonus, the anticipated value of the total severance package was around $24.72 million.19

de Castro‘s actual severance payout was nearly $60 million, with the difference

driven by an increase in Yahoo‘s stock price from $15.68 to $40.34 during the fourteen

months that he was employed. The bulk of that increase was attributable to Yahoo‘s

investment in Alibaba Group Holding Limited, an e-commerce company based in China.

At the 2014 annual meeting, Yahoo held its advisory say-on-pay vote. Holders of

71% of Yahoo‘s outstanding shares voted in favor of Yahoo‘s executive compensation

plan. Of the shares present or represented by proxy, 92% voted in favor.

H. Amalgamated Makes A Section 220 Demand.

Meanwhile, on February 24, 2014, Amalgamated served a demand on Yahoo for

books and records. See JX 35 (the ―Demand‖). Amalgamated contended that it had a

legally recognized purpose for exploring these matters, namely the ―investigation of

potential mismanagement, including mismanagement in connection with the payment of

19
These estimates deploy the same methodology as Tables 4 and 5. The principal
difference between a termination on November 24, 2013, and in early January 2014 is that
another month of the Make-Whole RSUs would have vested. Under the Final Offer Letter, this
reduces the amount of Make-Whole RSUs subject to accelerated vesting by 1/36, with a target
value of $416,666.

25
compensation to a corporation‘s officers and directors.‖ Id. at 2. The Demand recited

some of the facts surrounding de Castro‘s hiring and firing. Id. at 2-3. The Demand asked

for five categories of documents and provided ten illustrative subcategories that it

identified as falling under the first category. The specific requests appear and are

addressed in the Legal Analysis, infra.

On March 3, 2014, Yahoo rejected the Demand. Yahoo took the position that (i)

Amalgamated‘s documentation of its share ownership did not strictly comply with

Section 220; (ii) Amalgamated lacked authority to make the demand; (iii) the Demand

did not identify a credible basis to infer wrongdoing; and (iv) the scope of the inspection

was overly broad. Compl. Ex. B at 1-2. Yahoo agreed to ―allow an appropriate inspection

of its books and records, consistent with section 220‖ so long as Amalgamated addressed

Yahoo‘s concerns and executed a confidentiality agreement. Id. at 3.

On March 13, 2014, Amalgamated provided Yahoo with additional documentation

evidencing its ownership of Yahoo stock. The documents consisted of account statements

for two of the funds for which Amalgamated served as trustee, demonstrating that the

funds held Yahoo stock from January 2012 through the date of the Demand. After that,

until this litigation was filed, Yahoo did not contest Amalgamated‘s standing to make a

Section 220 demand.

On May 14, 2014, Yahoo offered to provide Amalgamated ―board-level materials–

minutes and attachments, resolutions, presentations, and reports–reflecting decisions or

discussions by the [Board] (including committees) about considering, recommending, or

approving, the appointment, compensation, severance, or termination of [de Castro].‖

26
Compl. Ex. D at 1 (the ―Board-Level Materials‖). In response, Amalgamated sought to

clarify whether the Board-Level Materials included documents that Mayer had reviewed,

but which the full Board or a committee had not reviewed. Yahoo declined to provide any

documents other than what the Board or a committee had reviewed. The record at trial

established that the Board-Level Materials did not include documents that Mayer had

reviewed, but which the full Board or a committee had not reviewed.

On August 12, 2014, Amalgamated accepted Yahoo‘s proposed document

production while reserving its right to file suit to compel the production of additional

documents. On September 12, 2014, Amalgamated and Yahoo entered into a

confidentiality agreement. On September 17, 2014, Yahoo produced 677 pages of

documents. The production included minutes and materials from sixteen meetings of the

Board or the Committee between September 2012 and February 2014 that related to the

hiring, compensation, or termination of de Castro. The production also contained

comparative executive compensation data, drafts of the offer letters that the directors had

considered, and the final agreements between de Castro and Yahoo. Although Yahoo had

declined to answer Amalgamated‘s question about the scope of what it considered Board-

Level Materials, the production in fact did not include documents that Mayer reviewed

that had not gone to the full Board or a committee.

On October 14, 2014, Amalgamated requested eleven more categories of

documents. Yahoo denied the request because it did not believe Amalgamated had a

credible basis to infer wrongdoing or that the new categories were necessary or essential

to its stated purpose. On March 10, 2015, Amalgamated filed this action.

27
 II. LEGAL ANALYSIS

Section 220(b) of the Delaware General Corporation Law provides as follows:

Any stockholder, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose, and to
make copies and extracts from: (1) The corporation‘s stock ledger, a list of
its stockholders, and its other books and records . . . .

8 Del. C. § 220(b). ―The Section 220 demand for books and records under the Delaware

General Corporation Law serves many salutary goals in the corporate governance

landscape, but the burden on the plaintiff is not insubstantial.‖ Sec. First Corp. v. U.S.

Die Casting & Dev. Co., 687 A.2d 563, 565 (Del. 1997).

To obtain books and records under Section 220(b), the plaintiff must establish by a

preponderance of the evidence that the plaintiff (i) is a stockholder, (ii) complied with

statutory requirements specifying the form and manner for making a demand, and (iii)

possesses a proper purpose for conducting the inspection. Cent. Laborers Pension Fund

v. News Corp., 45 A.3d 139, 144 (Del. 2012). After meeting these requirements, the

plaintiff must demonstrate by a preponderance of the evidence that ―each category of

books and records is essential‖ to the plaintiff‘s purpose. Sec. First, 687 A.2d at 569.

Once the plaintiff has made the necessary showing, the court must determine the

scope of the inspection. The order should permit access to books and records that are

―essential‖ for the plaintiff to achieve its purpose, but should stop at the quantum of

information that the court deems ―sufficient.‖ Thomas & Betts Corp. v. Leviton Mfg. Co.,

681 A.2d 1026, 1035 (Del. 1996). The production order ―must be carefully tailored.‖ Sec.

First, 687 A.2d at 565. Framed metaphorically, it should be ―circumscribed with rifled

28
precision‖ to target the plaintiff‘s proper purpose. Id. at 570. It should not be a sawed-off

shotgun blast.

A. The Form And Manner Requirements

If the party seeking books and records is not a record holder of the corporation‘s

stock, then Section 220 requires that the demand attach prima facie evidence that the

party making the demand is either a beneficial owner or a duly empowered agent acting

on behalf of a record holder or beneficial owner. The statutory language states:

In every instance where the stockholder is other than a record holder of
stock in a stock corporation, . . . the demand under oath shall [1] state the
person‘s status as a stockholder, [2] be accompanied by documentary
evidence of beneficial ownership of the stock, and [3] state that such
documentary evidence is a true and correct copy of what it purports to be.

8 Del. C. § 220(b) (enumeration added). ―Delaware courts require strict adherence to the

section 220 inspection demand procedural requirements.‖ Cent. Laborers, 45 A.3d at

145. ―Strict adherence to the section 220 procedural requirements for making an

inspection demand protects the right of the corporation to receive and consider a demand

in proper form before litigation is initiated.‖ Id. at 146 (quotation marks omitted).

In this case, Amalgamated satisfied the statutory requirements by (i) stating in the

Demand, under oath, that the LongView LargeCap 500 Index Fund and the LongView

LargeCap 500 Index Fund Veba (together, the ―Funds‖) owned shares of Yahoo common

stock, (ii) providing documentary evidence supporting the Funds‘ ownership at a point

proximate to the date of the Demand and stating in the Demand, under oath, that the

documentation was what it appeared to be, and (iii) stating in the Demand, under oath,

29
that Amalgamated was acting as the trustee of the Funds for purposes of making the

Demand. See JX 35 at 1, 7.

Yahoo correctly observes that the Demand attached account statements reflecting

the Funds‘ ownership of Yahoo common stock as of February 21, 2014, three days before

the date of the Demand. According to Yahoo, this is statutorily inadequate because the

date of the account statements is not the same as the date of the Demand. Yahoo also

observes that the Funds did not continually update their documentation to provide

evidence of their continuing ownership of Yahoo common stock. Neither observation

provides a valid basis for defeating an inspection.

Section 220 must be applied with some appreciation of the practical considerations

surrounding its use. It takes a non-trivial amount of time to obtain documentation

evidencing stockholder status. The most commonly used method is account statements,

which are issued periodically. If Section 220 truly required evidence of stock ownership

as of the moment that the demand was sent, then a stockholder could not comply without

some form of same-day record. In my view, requiring that level of documentation would

be an unreasonable reading of the statute. What Section 220 instead requires is

documentation sufficiently proximate in time to the date of the demand as to be

consistent with and corroborate the averment of stock ownership made in the demand

itself. Recent brokerage statements are adequate. See Paul v. China MediaExpress

Hldgs., Inc., 2012 WL 28818, at *3 n.19 (Del. Ch. Jan. 5, 2012). In this case, evidence of

the Funds‘ ownership dated a few days before the Demand certainly sufficed.

30
 Amalgamated and the Funds also were not required to provide Yahoo with an

ongoing stream of daily trading and ownership records confirming their continuing stock

ownership. The plain language of the statute only requires evidence that the demanding

party is a stockholder at the time of the demand. See 8 Del C. § 220(b). The statute does

not require a continuing showing, which would be impractical and overly burdensome for

both the party making the demand and for the company responding to it. No one wants to

send or receive a box of daily account statements covering a period of months (except

perhaps a law firm paid by the hour to assemble or review them).

Nevertheless, the use of Section 220 carries with it an implicit obligation on the

part of the demanding party to advise the company if it loses its status as a stockholder or

its authority to act on behalf of a stockholder. In an appropriate case, a court might well

impose a remedy on an erstwhile stockholder or a once-but-no-longer-authorized agent

that continued to use Section 220 under false pretenses. That was not the case here.

Finally, Amalgamated established its authority to act on behalf of the Funds by

averring under oath that it acted as the trustee for the Funds. This court has held that

similarly situated business principals need not provide documentary support to confirm

their apparent authority to act on behalf of an entity. ―A general partner in a limited

partnership needs no written power of attorney to act on behalf of the limited partnership.

Similarly, the president of a corporation can make a demand on behalf of the corporation

without supplying written authorization or a board of directors‘ resolution.‖ 1 Welch et

al., Folk on the Delaware General Corporation Law § 220.02, at 7-209 (6th ed. 2015)

(citing Odyssey P’rs v. Trans World Corp., 1983 WL 18011, at *1 (Del. Ch. Mar. 29,

31
1983), and Agency Rent-A-Car, Inc. v. Gateway Indus., Inc., 1980 WL 3040, at *4-7

(Del. Ch. July 21, 1980) (footnote omitted)). The trustee for an index fund has analogous

authority. In this case, Amalgamated even provided decisions by this court recognizing

its authority to make Section 220 demands on behalf of funds for which it served as

trustee.20 Amalgamated satisfied the form and manner requirements.

B. Amalgamated’s Proper Purposes

A party seeking to inspect books and records must have a proper purpose. In the

language of the statute, ―[a] proper purpose shall mean a purpose reasonably related to

such person‘s interest as a stockholder.‖ 8 Del. C. § 220(b).

Amalgamated‘s Demand described the purposes for the inspection as follows:

Amalgamated is making this Demand to: (1) investigate Yahoo‘s payment
of what appears to be excessive compensation to Yahoo‘s former Chief
Operating Officer (―COO‖), Henrique de Castro (―Mr. de Castro‖); (2)
assess the independence of the non-management members of Yahoo‘s
Board, including the members of the Compensation and Leadership
Development Committee (the ―Compensation Committee‖), who would

20
See Amalgamated Bank v. Dauphin Cty. Empls. Ret. Fund, 61 A.3d 617, at *1 n.2 (Del.
2013) (TABLE) (describing ―Amalgamated Bank, as Trustee for the LongView LargeCap 500
Index Fund [and] LongView LargeCap 500 Index VEBA Fund‖ as a ―shareholder‖ where
Amalgamated requested postponement of derivative action while it completed a parallel Section
220 action); In re Freeport-McMoRan Cooper & Cold Inc. Deriv. Litig., 2013 WL 616296, at *1
n.1 (Del. Ch. Feb. 14, 2013) (granting motion to intervene in Section 220 action filed by
―Amalgamated Bank, as Trustee for the LongView LargeCap 500 Index Fund [and the]
LongView LargeCap 500 Index VEBA Fund‖); Amalgamated Bank v. NetApp, Inc., 2012 WL
379908, at *1 (Del. Ch. Feb. 6, 2012) (―Amalgamated Bank, as Trustee of the LongView Funds .
. . , is a NetApp, Inc., stockholder . . . .‖); In re Tyson Foods, Inc. Consol. S’holder Litig., 919
A.2d 563, 571 n.4 (Del. Ch. 2007) (―Amalgamated‘s shareholder standing derives from its
trusteeship of the LongView MidCap 400 Index Fund.‖); see also China MediaExpress, 2012
WL 28818, at 3 n.19 (dismissing form and manner claim after plaintiff produced evidence of
stock ownership at trial).

32
 have approved any compensation paid to Mr. de Castro; and (3) investigate
the circumstances surrounding Mr. de Castro‘s departure from the
Company.

JX 35 at 1-2. The Demand summarized Amalgamated‘s reasons for believing de Castro‘s

compensation resulted from mismanagement or constituted waste.

1. Investigating Wrongdoing Or Mismanagement

―[A] stockholder‘s desire to investigate wrongdoing or mismanagement is a

‗proper purpose.‘‖ Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).

To conduct an inspection, a stockholder ―is not required to prove by a preponderance of

the evidence that waste and mismanagement are actually occurring.‖21 A stockholder

―need only show, by a preponderance of the evidence, a credible basis from which the

Court of Chancery can infer there is possible mismanagement that would warrant further

investigation.‖22 A showing that is sufficient to conduct an inspection ―may ultimately

21
Id. at 123 (alteration and quotation marks omitted); accord City of Westland Police &
Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 286-87 (Del. 2010) (―Such evidence need not
prove that wrongdoing, in fact, occurred.‖); Sec. First, 687 A.2d at 565 (―The stockholder need
not actually prove the wrongdoing itself by a preponderance of the evidence.‖); id. at 567 (―The
actual wrongdoing itself need not be proved in a Section 220 proceeding, however.‖); Thomas &
Betts, 681 A.2d at 1031 (―[Stockholders] are not required to prove by a preponderance of the
evidence that waste and [mis]management are actually occurring.‖).
22
Seinfeld, 909 A.2d at 123; accord Axcelis, 1 A.3d at 286-87 (―[A] plaintiff seeking
inspection of books and records must present some evidence, through documents, logic,
testimony or otherwise, to suggest a credible basis from which the Court of Chancery could infer
that wrongdoing may have occurred.‖ (quotation marks and footnote omitted)); id. at 287 (―To
obtain Section 220 relief based on [investigating possible wrongdoing or mismanagement], the
plaintiff-stockholder must present some evidence to suggest a credible basis from which a court
could infer possible mismanagement that would warrant further investigation.‖ (quotation marks
omitted)); Thomas & Betts, 681 A.2d at 1031 (―[A] stockholder must present some credible basis
from which the court can infer that waste or mismanagement may have occurred.‖).

33
fall well short of demonstrating that anything wrong occurred.‖ Seinfeld, 909 A.2d at 123

(quotation marks omitted).

―[T]he ‗credible basis‘ standard sets the lowest possible burden of proof.‖ Id. The

―threshold may be satisfied by a credible showing, through documents, logic, testimony

or otherwise, that there are legitimate issues of wrongdoing.‖ Id. at 123 (quotation marks

omitted); accord Sec. First, 687 A.2d at 568. The trial court may rely on ―circumstantial

evidence.‖ Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d

1264, 1273 (Del. 2014). Hearsay statements may be considered, provided they are

sufficiently reliable.23

In this case, Amalgamated established a credible basis to suspect wrongdoing in

connection with de Castro‘s hiring and firing. The possible wrongdoing may fall under

the headings of breach of fiduciary duty or waste.

a. Possible Breach of Fiduciary Duty

Mark Twain is often credited (perhaps erroneously) with observing that history

may not repeat itself, but it often rhymes. The credible basis for concern about

wrongdoing at Yahoo evokes the Disney case, with the details updated for a twenty-first

century, New Economy company. Like the current scenario, Disney involved a CEO

hiring a number-two executive for munificent compensation, poor performance by the

23
See Thomas & Betts, 681 A.2d at 1032-33; Marmon v. Arbinet-Thexchange, Inc., 2004
WL 936512, at *4 (Del. Ch. Apr. 28, 2004); Skoglund v. Ormand Indus., Inc., 372 A.2d 204,
208-13 (Del. Ch. 1976).

34
number-two executive, and a no-fault termination after approximately a year on the job

that conferred dynastic wealth on the executive under circumstances where a for-cause

termination could have been justified. Certainly there are factual distinctions, but the

assonance is there.

The Disney saga began with a complaint filed without the benefit of a Section 220

inspection. Chancellor Chandler dismissed the complaint for failing to plead with

particularity that demand was futile. In re Walt Disney Co. Deriv. Litig. (Disney I), 731

A.2d 342, 351 (Del. Ch. 1998) (subsequent history omitted). On appeal, the Delaware

Supreme Court affirmed the Chancellor‘s legal analysis, but noted that the facts presented

―a very troubling case on the merits.‖ Brehm v. Eisner (Disney II), 746 A.2d 244, 249

(Del. 2000).

On the one hand, it appears from the Complaint that: (a) the compensation
and termination payout for Ovitz were exceedingly lucrative, if not
luxurious, compared to Ovitz‘ value to the Company; and (b) the processes
of the boards of directors in dealing with the approval and termination of
the Ovitz Employment Agreement were casual, if not sloppy and
perfunctory. On the other hand, the Complaint is so inartfully drafted that it
was properly dismissed under our pleading standards for derivative suits.
From what we can ferret out of this deficient pleading, the processes of the
Old Board and the New Board were hardly paradigms of good corporate
governance practices. Moreover, the sheer size of the payout to Ovitz, as
alleged, pushes the envelope of judicial respect for the business judgment
of directors in making compensation decisions. Therefore, both as to the
processes of the two Boards and the waste test, this is a close case.

Id. Later in the decision, the high court observed that ―[o]ne can understand why Disney

stockholders would be upset with such an extraordinarily lucrative compensation

agreement and termination payout awarded a company president who served for only a

little over a year and who underperformed to the extent alleged.‖ Id. at 267.

35
 After affirming the dismissal of the complaint as framed, the Delaware Supreme

Court noted that the plaintiffs ―may well have the ‗tools at hand‘ to develop the necessary

facts for pleading purposes,‖ including using Section 220. Id. at 266. Citing the ―unusual

nature of this case,‖ the senior tribunal reversed the dismissal ―only to the extent that the

dismissal ordered by the Court of Chancery was with prejudice.‖ Id. at 267. The without-

prejudice dismissal would ―permit plaintiffs to file an amended complaint in accordance

with the rulings of this Court as set forth in this opinion.‖ Id. The high court noted that it

did not ―presume to direct the Court of Chancery how it should decide any proceeding

under Section 220‖ but that ―[f]rom a timing perspective . . . such a proceeding is a

summary one that should be managed expeditiously.‖ Id.

The plaintiffs took the hint. They used Section 220, obtained books and records,

and filed an amended complaint. This time, the claims survived a motion to dismiss for

failure to plead that demand was futile. In re Walt Disney Co. Deriv. Litig. (Disney III),

825 A.2d 275 (Del. Ch. 2003). The Chancellor helpfully summarized his reasoning:

Stated briefly, plaintiffs‘ new allegations give rise to a cognizable question
whether the defendant directors of the Walt Disney Company should be
held personally liable to the corporation for a knowing or intentional lack of
due care in the directors‘ decision-making process regarding Ovitz‘s
employment and termination. It is rare when a court imposes liability on
directors of a corporation for breach of the duty of care, and this Court is
hesitant to second-guess the business judgment of a disinterested and
independent board of directors. But the facts alleged in the new complaint
do not implicate merely negligent or grossly negligent decision making by
corporate directors. Quite the contrary; plaintiffs‘ new complaint suggests
that the Disney directors failed to exercise any business judgment and
failed to make any good faith attempt to fulfill their fiduciary duties to
Disney and its stockholders. Allegations that Disney‘s directors abdicated
all responsibility to consider appropriately an action of material importance
to the corporation puts directly in question whether the board‘s decision-

36
 making processes were employed in a good faith effort to advance
corporate interests. In short, the new complaint alleges facts implying that
the Disney directors failed to act in good faith and meet minimal
proceduralist standards of attention. Based on the facts asserted in the new
complaint, therefore, I believe plaintiffs have stated cognizable claims for
which demand is excused and on which a more complete factual record is
necessary.

Id. at 278 (quotation marks and footnote omitted).

Eventually, after a full trial, the defendants prevailed on the merits. In re Walt

Disney Co. Deriv. Litig. (Disney IV), 907 A.2d 693 (Del. Ch. 2005), aff’d, 906 A.2d 27

(Del. 2006). Because the Disney saga went the distance, we came to know the facts as

developed after extensive discovery and as analyzed by the court. Those facts differed

materially from the pleading-stage allegations and the reasonable inferences they

supported.

From my standpoint, both factually and legally, the current showing regarding the

events at Yahoo falls somewhere between Disney I and Disney III. Amalgamated has

collected publicly available materials and received some information from Yahoo. The

resulting record is troubling and fails to answer important questions about the conduct of

Mayer, the Committee, and the Board in both the hiring and firing of de Castro. I need

not and do not hold that the record developed to date establishes wrongdoing, nor even

that it supports a claim for wrongdoing. It does, in my view, provide a ―credible basis

from which the Court of Chancery can infer there is possible mismanagement that would

warrant further investigation.‖ Seinfeld, 909 A.2d at 123. To state what should be

obvious, the existence of a credible basis to suspect possible wrongdoing sufficient to

warrant further investigation does not mean that wrongdoing actually occurred. Even in

37
Disney, where the complaint survived a motion to dismiss, the defendants ultimately

prevailed.

One basis for potential wrongdoing is a possible breach of fiduciary duty. For

analytical clarity, this decision first discusses de Castro‘s hiring, then turns to his firing.

That separation is artificial, because the two decisions are factually and legally

interrelated. Taken together, they are more troubling than either individually.

i. Possible Breaches In The Hiring Process

There is a credible basis to suspect possible breaches of fiduciary duty by Mayer

during the hiring process. Officers are corporate fiduciaries who owe the same fiduciary

duties to the corporation and its stockholders as directors. Gantler v. Stephens, 965 A.2d

695, 708-09 (Del. 2009). Officers also are agents who report to the board of directors in

its capacity as the governing body for the corporation.24 ―The General Corporation Law

24
See 8 Del. C. § 141(a). A vibrant debate exists over the extent to which the full agency
law regime should apply to officers. One of the principal disputes appears to be whether officers
should be liable for simple negligence, like agents generally, or whether some form of more
deferential standard of review, such as the business judgment rule, should apply to their
decisions. This opinion does not speculate on that issue. For examples of the debate over the
standard of review, see Lyman Johnson & Robert Ricca, Reality Check on Officer Liability, 67
Bus. Law. 75 (2011); Paul Graf, A Realistic Approach to Officer Liability, 66 Bus. Law. 315
(2011); Lyman P.Q. Johnson & David Millon, Recalling Why Corporate Officers are
Fiduciaries, 46 Wm. & Mary L. Rev. 1597 (2005); Lawrence A. Hamermesh & A. Gilchrist
Sparks III, Corporate Officers and the Business Judgment Rule: A Reply to Professor Johnson,
60 Bus. Law. 865 (2005); Lyman P.Q. Johnson, Corporate Officers and the Business Judgment
Rule, 60 Bus. Law. 439 (2005); A. Gilchrist Sparks, III & Lawrence A. Hamermesh, Common
Law Duties of Non-Director Corporate Officers, 48 Bus. Law. 215 (1992). For examples of
scholarly analyses addressing other aspects of the officer‘s role as corporate agent, see Megan
W. Shaner, The (Un)Enforcement of Corporate Officers’ Duties, 48 U.C. Davis L. Rev. 271
(2014); Amitai Aviram, Officers’ Fiduciary Duties and the Nature of Corporate Organs, 2013
U. Ill. L. Rev. 763; Megan W. Shaner, Restoring the Balance of Power in Corporate

38
of the State of Delaware . . . and the decisions of [the Delaware Supreme] Court have

repeatedly recognized the fundamental principle that the management of the business and

affairs of a Delaware corporation is entrusted to its directors, who are the duly elected

and authorized representatives of the stockholders.‖25 Within this relationship, officers

have a duty to comply with the board‘s directives. See Restatement (Third) of Agency §

8.09 (2006). Stated in the negative, ―[a] chief executive officer . . . may not act in a

manner contrary to the express desires of the board of directors.‖ Disney IV, 907 A.2d at

775 n.570. Officers also have a duty to provide the board of directors with the

information that the directors need to perform their statutory and fiduciary roles. 26

Management: Enforcing an Officer’s Duty of Obedience, 66 Bus. Law. 27 (2010); Donald C.
Langevoort, Agency Law Inside the Corporation: Problems of Candor and Knowledge, 71 U.
Cin. L. Rev. 1187 (2003).
25
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 41-42 (Del. 1994); see,
e.g., McMullin v. Beran, 765 A.2d 910, 916 (Del. 2000) (―One of the fundamental principles of
the Delaware General Corporation Law statute is that the business affairs of a corporation are
managed by or under the direction of its board of directors.‖); Quickturn Design Sys., Inc. v.
Shapiro, 721 A.2d 1281, 1291-92 (Del. 1998) (―One of the most basic tenets of Delaware
corporate law is that the board of directors has the ultimate responsibility for managing the
business and affairs of a corporation . . . . Section 141(a) . . . confers upon any newly elected
board of directors full power to manage and direct the business and affairs of a Delaware
corporation.‖); Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. 1989)
(―Delaware law confers the management of the corporate enterprise to the stockholders‘ duly
elected board representatives.‖).
26
See Restatement (Third) of Agency § 8.11 (describing agent‘s duty to provide principal
with facts that the agent knows); see also Kalisman v. Friedman, 2013 WL 1668205, at *4 (Del.
Ch. Apr. 17, 2013) (discussing director information rights); Lewis v. Vogelstein, 699 A.2d 327,
334 (Del. Ch. 1997) (Allen, C.) (―[S]ince the relationship between a principal and agent is
fiduciary in character, the agent . . . must act not only with candor, but with loyalty.‖); cf.
Hampshire Gp., Ltd. v. Kuttner, 2010 WL 2739995, at *34 (Del. Ch. July 12, 2010) (Strine,
V.C.) (―[W]hen a corporate officer is aware of financial misreporting that involves high-level
management and that has evaded the corporation‘s auditors, and nonetheless certifies that he is

39
 There is a credible basis to suspect that Mayer failed to provide material

information to the Committee during the early stages of the hiring process, when she

cryptically withheld 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 as ―generally more than the data supported.‖ JX5 at 2.

More seriously, there is a credible basis to suspect that Mayer provided inaccurate

information to the Committee about the terms of the Original Offer Letter when asking

them to approve a change to de Castro‘s package, and that the Committee agreed to the

change based on the inaccurate information that Mayer provided. The changes effectively

doubled the payout on the Incentive RSUs and Options.

It may be that Mayer‘s conduct did not constitute a breach of fiduciary duty, but it

is worthy of investigation. Based on the current record, it is not clear why Mayer did

these things, and a range of explanations are possible. She may have made an innocent

mistake, and if this case ever proceeds on the merits, it might be shown to be

inconsequential. She may have been negligent to some degree. Although it seems

not aware of any material weakness in the company‘s internal controls, he is making a false
statement and failing to bring material information to the board, in breach of his duty of
loyalty.‖); Ryan v. Gifford, 935 A.2d 258, 272 (Del. Ch. 2007) (holding that complaint stated
claim for breach of the duty of loyalty against CFO and vice president who knew about
backdating but ―kept silent‖); Hoover Indus., Inc. v. Chase, 1988 WL 73758, at *2 (Del. Ch. July
13, 1988) (Allen, C.) (―A director does breach his duty of loyalty if he knows the company has
been defrauded and does not report what he knows to the board or to an appropriate committee
of the board, at the very least when he is involved in the fraud and keeps silent in order to escape
detection.‖). See generally Langevoort, supra, at 1191-1208 (discussing duty of candor for
officers under agency principles and corporate law).

40
unlikely, perhaps she had some improper motive. Amalgamated observes that just as

Eisner was negotiating with his friend Ovitz in the Disney case, Mayer was negotiating

with a colleague from her former employer. At this stage, I am not suggesting, nor

inferring, that Mayer intentionally hid information or lied to the Committee. This

decision determines only that there is a credible basis for further investigation.

The credible basis becomes stronger, in my view, because of the changes that

Mayer made to the Final Offer Letter. The Committee approved the Original Offer Letter,

signed off on the elimination of the Specified Percentage for the Incentive RSUs and

Options, and reserved its authority to approve any material changes in de Castro‘s

employment agreement. In preparing the Final Offer Letter, Mayer made additional

changes to the terms of de Castro‘s employment that materially increased his potential

compensation. Mayer does not appear to have informed the Committee about the

changes, and they do not appear to have been authorized by the Committee. Again, based

on the current record, it is not clear why Mayer did these things, and the explanation may

well be innocent or innocuous. Regardless, further investigation is warranted.

Grounds also exist for investigation into the roles played by the Yahoo directors.

At the pleading stage in Disney III, Chancellor Chandler held that the directors‘ lack of

involvement in Ovitz‘ hiring stated a claim for bad faith conduct. There, as here, the

corporation‘s CEO conducted the negotiations. When Eisner eventually briefed Disney‘s

compensation committee, Eisner did not give the directors all of the information he had,

only a rough and incomplete summary of the terms of the offer he had made. The

committee members also did not receive any ―analytical document showing the potential

41
payout to Ovitz throughout the contract, or the possible cost of his severance package

upon a non-fault termination.‖ 825 A.2d at 280 (formatting omitted). After a short

meeting, the compensation committee approved the offer and gave Eisner the authority to

finalize the contract if the terms fell within the framework of the summary. The full

Disney board then met and appointed Ovitz to the office of President. Two months later,

the final employment agreement was executed in a form that ―differed significantly‖ from

the terms that the compensation committee had reviewed. Id. at 282. When considered

together with the allegations regarding Ovitz‘s subsequent no-fault termination, the

Chancellor held that these allegations supported an inference that the directors had acted

in an ―ostrich-like‖ manner that fell outside the protection of the business judgment rule.

Id. at 288. That behavior in turn ―suggest[ed] that the defendant directors consciously and

intentionally disregarded their responsibilities, adopting a ‗we don‘t care about the risks‘

attitude concerning a material corporate decision.‖ Id. at 289. As pled, that supported an

inference of bad faith conduct: the ―defendant directors knew that they were making

material decisions without adequate information and without adequate deliberation, and .

. . they simply did not care if the decisions caused the corporation and its stockholders to

suffer injury or loss.‖ Id.

Based on the current record, the Yahoo directors were more involved in the hiring

than the Disney directors were, but the facts still bear a close resemblance to the

allegations in Disney III. The 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:

42
―While there may be instances in which a board may act with deference to corporate

officers‘ judgments, executive compensation is not one of those instances. The board

must exercise its own business judgment in approving an executive compensation

transaction.‖ Haywood v. Ambase Corp., 2005 WL 2130614, at *6 (Del. Ch. Aug. 22,

2005). Directors who choose not to ask questions take the risk that they may have to

provide explanations later, or at least produce explanatory books and records as part of a

Section 220 investigation.

This decision does not hold that the Yahoo directors breached their duties. It holds

only that compared with the bookends of Disney I and Disney III, there is a credible basis

to investigate possible claims of breach of duty by the Committee and the Board.

ii. Possible Breaches In The Firing Process

The same is true for de Castro‘s firing, where there is a credible basis to suspect

the possibility of wrongdoing by Mayer, the Committee, and the Board. The issue at this

stage turns on why Yahoo‘s fiduciaries agreed to a without-cause termination when a for-

cause alternative was potentially available. The same issue troubled the court in Disney

III. See 825 A.2d at 287-88. Mayer decided initially to terminate de Castro and

characterize it as ―without cause.‖ Despite the financial implications, the Committee did

not question Mayer‘s decision. They do not appear to have asked any questions at all.

Instead, they rubberstamped what Mayer had done through a quick email exchange of

written consents. The directors did not engage until three weeks later, when the

Committee determined to what degree Yahoo had met the performance criteria for option

vesting. The Committee did not receive a report about the reasons for de Castro‘s

43
termination until three weeks after that, when they decided not to award de Castro a

bonus under the Executive Incentive Plan. As in Disney III, this suggests ostrich-like

conduct warranting further investigation.

b. Possible Waste

In addition to a credible basis to suspect wrongdoing involving potential breaches

of fiduciary duty, there is also reason to suspect waste. ―Corporate waste occurs when a

corporation is caused to effect a transaction on terms that no person of ordinary, sound

business judgment could conclude represent a fair exchange.‖ Steiner v. Meyerson, 1995

WL 441999, at *1 (Del. Ch. July 19, 1995) (Allen, C.).

This is obviously an extreme test, very rarely satisfied by a shareholder
plaintiff. The difficulty of this test does not reflect judicial laxity or
sympathy, but rather reflects the law‘s understanding of what rules will
help promote wealth creating activity. If courts were permitted more freely
to ―second guess‖ the terms of corporate contracts (on for example a
―reasonableness‖ ground) there would be a substantial disincentive created
for officers and directors (especially directors who generally receive no
incentive compensation) to approve risky transactions. Yet the corporate
form, with its limited liability and potential for investor diversification, has
great utility in part because these characteristics encourage the assumption
of economic risk. The very high hurdle that a shareholder must overcome if
he seeks to impose liability on a theory of corporate waste is, thus, in fact a
protection of one of the basic utilities that the corporate form offers.

Id.

Despite the difficult standard for waste, Delaware courts have permitted

complaints challenging senior executive compensation as waste to survive the pleading

stage. For example, Chancellor Chandler held that a stockholder plaintiff had stated a

claim for waste involving a $68 million compensation package for the outgoing CEO of

Citigroup, Inc., Charles Prince, ―whose failures as CEO were allegedly responsible . . .

44
for billions of dollars of losses at Citigroup.‖ In re Citigroup Inc. S’holder Deriv. Litig.,

964 A.2d 106, 138 (Del. Ch. 2009). The court explained that although directors have

discretion when setting executive compensation, ―there is an outer limit‖ to that

discretion, ―at which point a decision of the directors on executive compensation is so

disproportionately large as to be unconscionable and constitute waste.‖ Id. (quoting

Disney II, 746 A.2d at 262-63 & n.56). Chancellor Chandler credited the allegation that

Prince‘s $68 million severance package was ―so one sided‖ that it met the ―admittedly

stringent‖ waste standard. Id. at 138-39.

The question for present purposes is whether there is reason to believe that waste

may have occurred. There is reason to believe that by making changes to the Final Offer

Letter, Mayer increased de Castro‘s compensation unilaterally, without Committee or

Board approval, suggesting waste. There is also reason to believe that de Castro could

have been fired for cause, thereby avoiding the payment of any severance. Instead, Mayer

decided that the termination would be without cause, and the Committee members went

along. On the facts presented, Amalgamated has established a basis for further

investigation.

2. Exploring Director Disinterestedness And Independence

Another purpose for using Section 220 is to investigate questions of director

disinterestedness and independence.27 The Delaware Supreme Court has observed that it

27
See Rock Solid Gelt Ltd. v. SmartPill Corp., 2012 WL 4841602, at *4 (Del. Ch. Oct.
10, 2012); La. Mun. Police Empls. Ret. Sys. v. Morgan Stanley & Co. Inc., 2011 WL 773316, at

45
is ―within [a stockholder‘s] power to explore these matters‖ using Section 220. Beam ex

rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1056 (Del. 2004).

The high court observed that appropriate areas for inspection for this purpose could

include the company‘s ―process of nominating board members,‖ the degree of

management involvement in or influence over the nomination process, and ―whether the

process incorporated procedural safeguards to ensure directors‘ independence.‖ Id. The

high court also posited that a stockholder might use Section 220 to review minutes

showing how ―the directors handled [management] proposals or conduct in various

contexts,‖ which could reveal patterns of behavior.28

More recently, the Delaware Supreme Court has indicated that a plaintiff could

obtain ―a file of the disclosure questionnaires for the board‖ or similar materials that

could ―provide more detail about the thickness of the relationship[s]‖ in the boardroom.

Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1024 (Del. 2015). At the same

time, the Delaware Supreme Court candidly observed that Section 220 likely has ―limited

utility‖ for purposes of uncovering this type of information.29

*7 (Del. Ch. Mar. 4, 2011); Haywood v. Ambase Corp., 2005 WL 2130614, at *6 (Del. Ch. Aug.
22, 2005); Amalgamated Bank v. UICI, 2005 WL 1377432, at *3 (Del. Ch. June 2, 2005);
Grimes v. DSC Commc’ns Corp., 724 A.2d 561, 566 (Del. Ch. 1998).
28
Id.; see also Grimes v. Donald, 673 A.2d 1207, 1216 n.11 (Del. 1996) (noting that
Section 220 may be used to obtain information to support arguments regarding demand futility);
Rales v. Blasband, 634 A.2d 927, 934 n.10 (Del. 1993) (same).
29
Id.; accord Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 889 n.32 (Del. Ch. 1999)
(Strine, V.C.) (noting that there were limits to the extent to which a plaintiff could use books and
records to explore a relationship between a director and an interested party before filing and that

46
 In this case, Amalgamated identified a proper purpose in seeking to obtain books

and records for the purpose of investigating questions of director disinterestedness and

independence.

3. Exculpation As A Means Of Cutting Off Otherwise Proper Purposes

In a recent decision, this court held that a stockholder who sought books and

records for the purpose of bringing a derivative action for breach of fiduciary duty lacked

a proper purpose for conducting an inspection where the corporation had an exculpatory

provision and the stockholder had not identified a credible basis for believing that that the

directors had engaged in non-exculpated conduct. Se. Pa. Transp. Auth. v. Abbvie, Inc.,

2015 WL 1753033, at *14 (Del. Ch. Apr. 15, 2015), aff’d, 2016 WL 235217 (Del. Jan.

20, 2016) (ORDER). Yahoo has an exculpatory provision. Relying on Abbvie, Yahoo

argues that Amalgamated lacks a proper purpose and that the inspection should be

denied.

The Abbvie decision and this case are distinguishable on their facts. First, the

evidence of possible wrongdoing in Abbvie was flimsy at best: the directors had agreed to

pay a termination fee to an acquirer if an inversion transaction failed to go through. 2015

WL 1753033, at *14. The potential for regulatory problems was a known risk, the parties

―one wonders how a plaintiff could use tools such as 8 Del. C. § 220 or public filings to generate
such facts‖); J. Travis Laster & K. Tyler O‘Connell, Directors’ Social and Business
Relationships in the Pre-Suit Demand Contest, 8 No. 1 M & A Law. 20 (May 2004) (―The
[Beam] Court reiterated its often-repeated suggestion that stockholder plaintiffs inspect corporate
books and records before filing, however, this admonition rings somewhat hollow in this case.
Would-be plaintiffs might reasonably ask, exactly what proof of exceedingly close friendship
among directors are they likely to find?‖).

47
to the transaction bargained over it, and the board approved a merger agreement that

provided for the termination fee. Id. at *14-15. The grounds for concern regarding the

hiring and firing of de Castro are much stronger.

Second, the Abbvie decision noted that there were a variety of purposes for which

a stockholder could use books and records, but concluded ―from the Plaintiffs‘ statements

at oral argument . . . that both Plaintiffs seek an investigation to aid in future derivative

litigation‖ and that ―litigation is the sole motivation for the Plaintiffs‘ investigations.‖

2015 WL 1753033, at *12. Amalgamated has not similarly limited its potential uses of

the fruits of its investigation. The Delaware Supreme Court has stated that

[s]tockholders may use information about corporate mismanagement, waste
or wrongdoing in several ways. For example, they may institute derivative
litigation; seek an audience with the board of directors to discuss proposed
reform or, failing in that, they may prepare a stockholder resolution for the
next annual meeting, or mount a proxy fight to elect directors.

Seinfeld, 909 A.2d at 119-20 (quotation marks and alterations omitted); accord Saito v.

McKesson HBOC, Inc., 806 A.2d 113, 117 (Del. 2002). Exculpation is not an impediment

to the potential use of information obtained pursuant to Section 220 for taking action

other than filing a lawsuit.

Third, given the meager showing of potential wrongdoing by the plaintiffs in

Abbvie, the court understandably concluded that there was no basis to suspect the

possibility of misconduct that might support a non-exculpated claim. That is not the case

here. The claim that survived a motion to dismiss in Disney III was that the directors had

48
not acted in good faith, which is an aspect of the duty of loyalty and hence not subject to

exculpation.30 The waste claim also could fall outside the exculpatory provision. Waste

traditionally has been viewed as a separate cause of action, but it also can be understood

as a means of proving bad faith conduct. See Sample v. Morgan, 914 A.2d 647, 670 (Del.

Ch. 2007) (Strine, V.C.) (characterizing waste as a transaction ―so one-sided as to create

an inference that no person acting in a good faith pursuit of the corporation‘s interests

could have approved the terms‖ (emphasis added)).

I have doubts that Amalgamated will be able to pursue and prevail on a non-

exculpated claim against Yahoo‘s outside directors. My skepticism rests on a

combination of confidence in what the record will show about the directors‘ oversight,

knowledge of the significant protections disinterested and independent directors enjoy,

and familiarity with the difficulties involved in litigation. The question now, however, is

not whether Amalgamated will prevail. Nor is the question even whether it is reasonably

conceivable that Amalgamated could prevail. The inquiry is whether Amalgamated has

established a credible basis from which the Court of Chancery can infer there is possible

mismanagement that would warrant further investigation. Seinfeld, 909 A.2d at 123. On

30
See 8 Del. C. § 102(b)(7)(ii) (excluding ―acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law‖); Disney III, 825 A.2d at 290
(―[P]laintiffs‘ allegations support claims that fall outside the liability waiver provided under
Disney‘s certificate of incorporation.‖); see also Stone ex rel. AmSouth Bancorporation v. Ritter,
911 A.2d 362, 369-70 (Del. 2006) (―The failure to act in good faith may result in liability
because the requirement to act in good faith is a subsidiary element, i.e., a condition, of the
fundamental duty of loyalty.‖ (quotation marks and alterations omitted)).

49
the facts, I do not believe that the potential for directors to rely on exculpation if and

when a case is filed on the merits warrants foreclosing an inspection now.

There is also the possibility of a claim against Mayer in her capacity as an officer.

Section 102(b)(7) does not authorize exculpation for officers.31 In Abbvie, the court

recognized this possibility but observed that the plaintiffs had ―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.‖ 2015 WL 1753033, at *13 n.108. In this case,

there is evidence supporting potential misconduct by Mayer in her capacity as an officer,

including when providing information to the Board, making changes to the Final Offer

Letter, and deciding on a without-cause termination for de Castro. A suit solely against

Mayer would face legal hurdles, but the exculpatory provision is not one of them. It

would be premature on the facts presented to allow Yahoo to rely on its exculpatory

provision to foreclose Amalgamated from investigating further.

C. The Scope Of The Inspection

Because Amalgamated has satisfied the prerequisites for conducting an inspection,

this court‘s task is to determine its scope. ―[I]t is the responsibility of the trial court to

tailor the inspection to the stockholder‘s stated purpose.‖ Sec. First Corp. v. U.S. Die

Casting & Dev. Co., 687 A.2d 563, 569 (Del. 1997).

31
8 Del. C. § 102(b)(7) (authorizing ―a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director‖); Gantler v. Stephens, 965 A.2d 695, 709 n.37 (Del. 2009)
(―Although legislatively possible, there currently is no statutory provision authorizing
comparable exculpation of corporate officers.‖).

50
 ―[T]he burden of proof is always on the party seeking inspection to establish that

each category of the books and records requested is essential and sufficient to [the

party‘s] stated purpose.‖32 In Delaware decisions framing the standard, the adjective

―necessary‖ sometimes replaces ―essential.‖33 Usually, however, Delaware cases use

both,34 thereby demonstrating fealty to ―the law‘s hoary tradition of deploying joint

terms, such as ‗indemnify and hold harmless,‘ where technically one term would

suffice.‖35

32
Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996); accord
Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 371 (Del. 2011) (―A shareholder . . . [must]
show that the specific books and records he seeks to inspect are essential to the accomplishment
of the stockholder‘s articulated purpose for the inspection.‖ (quotation marks and alterations
omitted)); id. at 367 (―We affirm . . . on the alternative ground that [the plaintiff] has not shown
that the Covington Report is essential to his stated purpose.‖); id. at 371-72 (elaborating on what
it means for a document to be ―essential‖).
33
See, e.g., Norfolk Cty. Ret. Sys. v. Jos. A. Bank Clothiers, Inc., 2009 WL 353746, at *5
(Del. Ch. Feb. 12, 2009) (―I must examine . . . the scope of the documents necessary and
sufficient to address any proper purpose.‖); Dobler v. Montgomery Cellular Hldg. Co., 2001 WL
1334182, at *7 n.28 (Del. Ch. Oct. 19, 2001) (―The Court is required to evaluate, under the
circumstances, whether the sought after document is necessary for the proper purposes of the
shareholders.‖). At least one decision uses another synonym, ―required.‖ Carapico v. Phila.
Stock Exch., Inc., 791 A.2d 787, 793 (Del. Ch. 2000) (describing the test as whether the
requested documents are ―reasonably required to satisfy the purpose of the demand‖).
34
See, e.g., Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d
1264, 1271 (Del. 2014) (noting that appellants did not dispute that the operative standard for a
Section 220 action was whether the documents were ―necessary and essential‖); Saito, 806 A.2d
at 116 (―The scope of a stockholder‘s inspection . . . is limited to those books and records that are
necessary and essential to accomplish the stated, proper purpose.‖); BBC Acq. Corp. v. Durr-
Fillauer Med., Inc., 623 A.2d 85, 88 (Del. Ch. 1992) (stating standard as whether documents are
―necessary, essential, and sufficient for the shareholders‘ purpose‖).
35
Quadrant Structured Prods. Co. v. Vertin, 106 A.3d 992, 1024-25 (Del. 2013)
(certifying question to New York Court of Appeals; attaching exhibit quoting trial court report
provided in response to similar question posed by Delaware Supreme Court as part of its

51
 Subtle connotations aside, the terms ―necessary‖ and ―essential‖ are functionally

synonymous for purposes of Section 220. Sanders v. Ohmite Hldgs., LLC, 17 A.3d 1186,

1194 n.2 (Del. Ch. 2011). The plaintiff can obtain books and records that ―address the

‗crux of the shareholder‘s purpose‘ and if that information ‗is unavailable from another

source.‘‖ Wal-Mart, 95 A.3d at 1271 (quoting Espinoza, 32 A.3d at 371-72).

To reinforce the foundation of indispensability (however framed), the operative

standard trowels a layer of sufficiency (―essential and sufficient‖). Thomas & Betts, 681

A.2d at 1035. The inspection should stop at the quantum of information that the court

deems ―sufficient‖ to accomplish the plaintiff‘s stated purpose. Id. If the books and

records are not ―essential‖ for the stockholder‘s purpose, then the stockholder already has

―sufficient‖ information and the inspection can be denied as seeking materials beyond

what is ―needed to perform the task.‖ Carapico, 791 A.2d at 793 (quoting BBC Acq., 623

A.2d at 88). Stated conversely, if the stockholder already has ―sufficient‖ information

from other sources or as a result of other books and records requests, then the inspection

remand), certified question answered, 16 N.E.3d 1165 (N.Y. 2014); see Majkowski v. Am.
Imaging Mgmt. Servs., LLC, 913 A.2d 572, 588 (Del. Ch. 2006) (Strine, V.C.) (declining to give
separate meaning to the phrase ―hold harmless‖; noting that ―[t]he terms ‗indemnify‘ and ‗hold
harmless‘ have a long history of joint use throughout the lexicon of Anglo–American legal
practice‖). See generally Bryan A. Garner, The Redbook: A Manual on Legal Style § 11.2 at 224
(3d ed. 2013) (―The doublet and triplet phrasing common in Middle English still survives in legal
writing, especially contracts, wills, and trusts. That‘s probably the worst possible soil for it to
grow in because those who interpret legal writing are impelled to strain for distinctions so that no
word is rendered surplusage. Yet that is exactly all but one word . . . is [in these phrases].‖).

52
can be curtailed because the additional materials are not ―essential.‖ 36 Whether

documents meet the test is ―fact specific and will necessarily depend on the context in

which the shareholder‘s inspection demand arises.‖ Wal-Mart, 95 A.3d at 1283

(quotation marks omitted).

1. Books and Records Related To De Castro’s Hiring

The first request in the Demand seeks ―[a]ll Yahoo books and records relating to

Mr. de Castro‘s compensation (including salary, bonus, stock options, severance

payments, RSUs, and all other compensation outlined in the [Final] Offer Letter).‖ JX 35

at 3. The first request defines this category as ―including‖ ten subcategories:

(a) any metrics utilized to set Mr. de Castro‘s compensation;

(b) any comparison(s) of Mr. de Castro‘s compensation to the
compensation of other past or present executive officers of Yahoo;

(c) any comparison(s) of Mr. de Castro‘s compensation to the
compensation of COOs or other executive officers at publicly-traded
companies other than Yahoo;

(d) minutes of any meetings involving any discussion of any
compensation plan, including the 1995 Stock Plan (as defined in the
[Final] Offer Letter), pursuant to which Mr. de Castro has received
or will receive compensation;

36
See, e.g., Marathon P’rs, L.P. v. M&F Worldwide Corp., 2004 WL 1728604, at *8
(Del. Ch. July 30, 2004) (denying inspection for valuation purposes because plaintiff ―presented
no evidence showing that the publicly available information is insufficient to value its publicly
traded shares‖); Radwick Pty. Ltd. v. Med., Inc., 1984 WL 8264, at *3 (Del. Ch. Nov. 7, 1984)
(―In deciding the extent of the stockholder‘s inspection rights, the Court should consider . . . the
information previously provided by the company . . . .‖); R. Franklin Balotti & Jesse A.
Finkelstein, 1 The Delaware Law of Corporations and Business Organizations § 7.47, at 7-102.4
(3d ed. Supp. 2011) (―In determining whether to permit inspection (or the scope of any
inspection), the court may examine the extent to which the corporation has previously furnished
information (by public disclosure or otherwise) to stockholders.‖).

53
 (e) any policies and procedures applicable to the setting of Mr. de
Castro‘s compensation, including any policies and procedures
relating to the setting of compensation for executive officers of
Yahoo;

(f) any Board minutes and presentations relating to Mr. de Castro‘s
compensation;

(g) any Compensation Committee minutes and presentations relating to
Mr. de Castro‘s compensation;

(h) any expert‘s or consultant‘s reports or opinions concerning Mr. de
Castro‘s compensation;

(i) all drafts of the [Final] Offer Letter; and

(j) documents reflecting the amounts and conditions of Mr. de Castro‘s
post-employment payments or compensation.

Id. at 3-4.

If this case was a plenary action where the complaint had survived a motion to

dismiss, and if the plaintiff had framed these demands as requests for production of

documents pursuant to Rule 34, then Yahoo would be obligated to produce all responsive

documents in its possession, custody, and control. See Ct. Ch. R. 34. If Yahoo wished to

limit the scope of its production, the burden would lie with Yahoo to identify reasonable

limitations and, if necessary, obtain an order from the court. See Ct. Ch. R. 26 (b)(1) &

(c).

A Section 220 inspection, however, is not the equivalent of discovery in a plenary

action. ―The two procedures are not the same and should not be confused.‖ Sec. First,

687 A.2d at 570. Unlike in plenary discovery, where the responding party bears the

burden of limiting its scope, the burden in a Section 220 proceeding is on the party

seeking production. See Thomas & Betts, 681 A.2d at 1035. Moreover, the court must

54
tailor the production order to balance the interests of the stockholder and the corporation.

See Sec. First, 687 A.2d at 569. As the Delaware Supreme Court has explained,

[Section 220] does not open the door to the wide ranging discovery that
would be available in support of litigation. For this statutory tool to be
meaningful, however, . . . [a] stockholder who demands inspection . . .
should be given access to all of the documents in the corporation‘s
possession, custody or control, that are necessary to satisfy [that
stockholder‘s] proper purpose. Thus, where a § 220 claim is based on
alleged corporate wrongdoing, and assuming the allegation is meritorious,
the stockholder should be given enough information to effectively address
the problem, either through derivative litigation or through direct contact
with the corporation‘s directors and/or stockholders.

Saito v. McKesson HBOC, Inc., 806 A.2d 113, 114-15 (Del. 2002). ―The 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 rights. The issue is whether the documents are

necessary and essential to satisfy the stockholder‘s proper purpose.‖ Id. at 118.

The starting point—and often the ending point—for a sufficient inspection will be

board level documents evidencing the directors‘ decisions and deliberations, as well as

the materials that the directors received and considered.37 A corporation usually can

37
See City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281, 291
(Del. 2010) (stating that ―[board] accountability‖ for declining to accept the resignation of a
director who did not receive support from a majority of a quorum ―should take the form of being
subject to a shareholder‘s Section 220 right to seek inspection of any documents and other
records upon which the board relied‖); Cook v. Hewlett-Packard, 2014 WL 311111, at *4 (Del.
Ch. Jan. 30, 2014) (limiting inspection to ―board-level‖ documents relating to an acquisition and
subsequent problems with the acquired company); Robotti & Co. v. Gulfport Energy Corp., 2007
WL 2019796, at *4 (Del. Ch. July 3, 2007) (permitting inspection of board minutes); Grimes v.
DSC Commc’ns Corp., 724 A.2d 561, 567 (Del. Ch. 1998) (stating that ―[t]he right to obtain
corporate records for the purpose of determining whether or not a demand was improperly
refused focuses on the committee process itself and extends at least to reports or minutes,
reflecting the corporate action,‖ including ―copies of the Special Committee‘s report, minutes of

55
collect and provide these documents easily and quickly with minimal burden. In many

organizations, the corporate secretary maintains a central file for each board meeting in

either paper or electronic form. The file contains the minutes for the meeting and the

materials that the directors received and reviewed.38 These appear to be the types of

documents that Yahoo referred to as the Board-Level Materials. A better nomenclature

might be the ―Formal Board Materials‖ or the ―Official Board Materials,‖ but this

decision will use Yahoo‘s term.

In this case, the Board-Level Materials relating to de Castro‘s hiring were

indisputably subject to inspection. These documents provided direct evidence of what the

directors thought and did, and they were necessary for Amalgamated to investigate the

hiring and the directors‘ disinterestedness and independence. Yahoo has represented that

the Board-Level Materials have been provided. To the extent there are types of materials

the meetings of the Special Committee and minutes of any meeting of the board of directors
relating to the creation or functioning of the Special Committee, including any meeting of the
board of directors at which the recommendation of the Special Committee was considered or
approved‖ (quotation marks and footnote omitted)).
38
See, e.g., 3 William B. Solomon & Michael A. Nemeroff, Practice Checklist,
Successful Partnering Between Inside & Outside Counsel § 46A:31 (2015) (―In connection with
the corporate secretary‘s role as the company‘s record keeper, the corporate secretary often
maintains the official minutes of the meetings of the board in a central location. . . . The
corporate secretary generally prepares board packages or gathers them from the applicable
members of management, reviews what is gathered to ensure it is narrowly tailored to the
board‘s purposes and disseminates the materials necessary for the board members to review in
advance of each meeting of the board.‖); Soc‘y of Corp. Sec‘ys. & Gov‘ce Prof‘ls, Corporation
Minutes: A Publication for the Corporate Secretary 23-24 (Feb. 2014) (―Corporate secretaries
may also maintain separate meeting files for each board and committee meeting which includes
the material related to the meeting and materials referenced in the minutes. . . . Companies have
also started storing these materials electronically. . . .‖).

56
that did not appear in Yahoo‘s production, it is reasonably inferable that the directors did

not receive or review them when hiring de Castro.39

Because Yahoo produced Board-Level Materials, the dispute in this case turns on

whether and to what degree Yahoo must produce additional books and records relating to

de Castro‘s hiring. Amalgamated seeks production of two additional categories. First,

Amalgamated seeks Mayer‘s files, including emails40 (the ―Mayer Documents‖). Second,

Amalgamated seeks documents, including emails, that reflect ―discussions or decisions of

the full Board or Committee.‖ Dkt. 25 at 33 (the ―Additional Board Documents‖).

Documents in this category would include memos and notes about the subject matter of

the Demand. It also would include emails to and from the directors from management or

the compensation consultant, emails among the directors themselves, and documents and

communications prepared by Yahoo officers and employees about the Board‘s

deliberations.

a. Mayer’s Documents

39
See In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514, at *20 (Del.
Ch. May 21, 2013) (denying motion to dismiss pursuant to Rule 23.1; noting that the complaint
supported its allegations ―with references to books and records obtained using Section 220, and
with inferences that this Court can reasonably draw from the absence of books and records that
the Company could be expected to produce‖); In re Tyson Foods, Inc. Consol. S’holder Litig.,
919 A.2d 563, 578 (Del. Ch. 2007) (explaining that ―it is more reasonable to infer that
exculpatory documents would be provided [in response to a Section 220 demand] than to believe
the opposite: that such documents existed and yet were inexplicably withheld‖).
40
―The plural form of e-mail is. . . e-mails, even though there's no corresponding plural
of mail as mails.‖ Ben Zimmer, The Plural of E-mail, N.Y. Times (May 7, 2010), available at
http://www.nytimes.com/2010/05/09/magazine/09FOB-onlanguage-t.html.

57
 This court has the power to order production of documents prepared by officers

and employees as part of a Section 220 inspection.41 The question is whether the

documents are essential to fulfilling the plaintiff‘s purpose.

The Wal-Mart case provides one example of a situation where this court found it

necessary to order access to officer and employee level documents. The plaintiffs

established a credible basis to suspect wide-ranging illegal conduct at a Wal-Mart

subsidiary followed by an internal cover-up. Wal-Mart, 95 A.3d at 1267-68. Chief Justice

Strine, then Chancellor, ordered an inspection of documents held by (i) eleven

custodians, including senior officers and employees, (ii) the Chair of Wal-Mart‘s Audit

Committee, and (iii) anyone who served as an assistant to those twelve individuals. Id. at

1269. The final order required Wal-Mart to produce ―officer (and lower)-level documents

regardless of whether they were ever provided to Wal-Mart‘s Board of Directors or any

committee thereof.‖ Id. at 1270.

On appeal, Wal-Mart challenged the order requiring production of officer and

employee documents. The Delaware Supreme Court affirmed, explaining that because the

stockholder sought to investigate misconduct involving officers, ―officer-level documents

are necessary and essential to determining whether and to what extent mismanagement

occurred and what information was transmitted.‖ Id. at 1273. The Delaware Supreme

41
See Wal-Mart, 95 A.3d at 1273; see also McKesson Corp. v. Saito, 818 A.2d 970 (Del.
2003) (TABLE) (affirming Court of Chancery decision requiring production of officer level
documents).

58
Court added that the officer-level documents ―may establish director knowledge . . . by

establishing that certain Wal-Mart offers were in a ‗reporting relationship‘ to Wal-Mart

directors, that those officers did in fact report to specific directors, and that those officers

received key information.‖ Id.; see also Beam, 845 A.2d at 1056 (explaining that officer-

level documents also can be necessary to understand how ―directors handled

[management] proposals or conduct in various contexts,‖ which could reveal patterns of

boardroom behavior).

This case is not Wal-Mart, and in my view the facts of this case do not support the

type of production that the Delaware Supreme Court approved there. To its credit,

Amalgamated has not sought a similarly broad inspection. Amalgamated only seeks

production of the Mayer Documents.

The evidence establishes that the Mayer Documents are necessary for a

meaningful investigation of de Castro‘s hiring. The trial record establishes that Mayer

was the principal corporate actor in the hiring process. She had all of the direct contact

with de Castro and conducted all of the discussions. She negotiated all of the financial

terms in the Original and Final Offer Letters. At present, she appears to be the person

who modified the terms of the Final Offer Letter. Her documents, including notes and

emails, will provide otherwise unavailable information about and insight into her

discussions and negotiations. Those books and records will show what Mayer knew and

when, and they will reveal any variations between what Mayer knew and what she told

the Board.

59
 The scope of the production of the Mayer Documents will include email and other

electronic documents, which count as corporate books and records. Yahoo argues that

electronic documents are beyond the scope of Section 220, because the statute does not

mention ―electronically stored information.‖ Although it is true that Section 220 does not

contain those words, Yahoo is wrong that inspection rights are limited to paper records.

Stockholder inspection rights in Delaware date from the turn of the twentieth

century, when the courts recognized them under the common law. See, e.g., State ex rel.

De Julvecourt v. Pan-Am. Co., 61 A. 398 (Del. Super. 1904), aff’d, 63 A. 1118 (Del.

1904). In that era and for a long time afterwards, courts logically focused on paper

documents, but times have changed. ―‗Books‘ as we know them may cease to exist in the

evolution of the Information Age.‖ Francis G.X. Pileggi, Kevin F. Brady, & Jill Argo,

Inspecting Corporate ‘Books and Records’ in a Digital World: The Role of Electronically

Stored Information, 37 Del. J. Corp. L. 163, 165 (2012). Today, over 90% of business

documents are stored electronically. Id. Limiting ―books and records‖ to physical

documents ―could cause Section 220 to become obsolete or ineffective.‖ Id. at 164.

In other areas, Delaware law has moved beyond defining corporate records as

exclusively physical documents. Fifteen years ago, the General Assembly updated

Section 224 of the DGCL to recognize that corporate books and records are stored in

electronic form. The statute now states:

Any records maintained by a corporation in the regular course of its
business . . . may . . . be in the form of[] any information storage
device . . . . When records are kept in such manner, a clearly legible paper
form produced from or by means of the information storage device or

60
 method shall be . . . accepted for all other purposes, to the same extent as an
original paper record of the same information would have been . . . .

8 Del. C. § 224. Not surprisingly, Delaware precedents have ordered the production of

electronic documents and emails in Section 220 actions.42

If Mayer chose to use a personal email account to conduct Yahoo business, she

must produce responsive documents. ―[R]ights of shareholders secured by § 220 cannot

be defeated simply by having another entity hold the records.‖ Dobler, 2001 WL

1334182, at *10. A corporate record retains its character regardless of the medium used

to create it. By analogy, if two officers used their home computers to produce a

confidential corporate document that they shared with one another over their private

email addresses, no one would think that the report was a personal document that the

officers could sell for their own profit. See Ind. Elec. Workers Pension Tr. Fund IBEW v.

Wal-Mart Stores, Inc., 7779-CS, at 97-98 (Del. Ch. May 20, 2013) (Strine, C.)

(TRANSCRIPT) (using analogy to explain why Section 220 can extend to officers‘ and

employees‘ personal email accounts when used for official business). As with other

42
See, e.g., Wal-Mart, 95 A.3d at 1274 (affirming order requiring production of
electronic documents, including data collected from disaster recovery tapes); In re Lululemon
Athletica Inc. 220 Litig., 2015 WL 1957196, at *6 (Del. Ch. Apr. 30, 2015) (explaining
reasoning for ordering production of emails); Tanyous v. Happy Child World, Inc., 2008 WL
2780357, at *7 n.50 (Del. Ch. July 17, 2008) (requiring production of ―[c]orrespondence file
with Citizens Bank including all e-mails, letters, reports, etc.‖); Deephaven Risk Arb Trading,
Ltd. v. UnitedGlobalCom, Inc., 2005 WL 1713067, at *10 (Del. Ch. July 13, 2005) (ordering
production of ―electronic communications‖); Dobler v. Montgomery Cellular Hldg. Co., 2001
WL 1334182, at *5-7 (Del. Ch. Oct. 19, 2001) (ordering production of emails ―which reflect the
decision making‖ of corporation‘s directors); see also Khanna v. Covad Commc’ns Gp, Inc.,
2004 WL 187274, at *9 (Del. Ch. Jan. 23, 2004) (considering production of emails in a Section
220 action but finding the request excessive given stated purpose).

61
categories of documents subject to production under Section 220, what matters is whether

the record is essential and sufficient to satisfy the stockholder‘s proper purpose, not its

source. See Wal-Mart, 95 A.3d at 1273.

b. Additional Board Documents

The Additional Board Documents are held by Yahoo officers and employees and

by the directors themselves. Just as this court has the power to order production of

corporate documents prepared by officers and employees as part of a Section 220

inspection, this court has the power to order production of corporate documents held by

directors.43 Once again, the question is whether the documents are essential to fulfilling

the plaintiff‘s purpose.

The problem with the Additional Board Documents is the potential breadth of the

category. It necessarily overlaps to some degree with the Mayer Documents, which

Yahoo will provide. The discussion in this section therefore focuses on the Additional

43
Through its jurisdiction over a corporation, a court can compel production of
documents in the possession of officers, directors, and managing agents of the firm. See In re
Activision Blizzard, Inc., 86 A.3d 531, 552 (Del. Ch. 2014); Hamilton P’rs, L.P. v. Englard, 11
A.3d 1180, 1214 (Del. Ch. 2010); Hoechst Celanese Corp. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa., 1997 WL 716898, at *1 (Del. Super. Aug. 18, 1997) (ORDER); 7 Daniel R.
Coquillette et al., Moore’s Federal Practice – Civil § 30.03 (3d ed. 1997 & Supp. 2013); see also
Dalton v. Am. Inv. Co., 1981 WL 7619, at *1 (Del. Ch. June 9, 1981) (noting Court‘s
discretionary authority to order a corporation to produce a particular officer, director, or
managing agent for deposition in a particular location); Lasher v. Sterwin Labs., 1980 WL
10017, at *1-2 (Del. Ch. Jan. 28, 1980) (ordering defendant corporations to produce witness for
deposition in Delaware); 8A Charles Alan Wright et al., Federal Practice and Procedure § 2107
(3d ed. 1998 & Supp. 2010) (―A [third party] subpoena is not necessary if the person to be
examined is a party or an officer, director, or a managing agent of the party‖ (footnote omitted)).
The court can impose sanctions or other consequences on the firm if the officer, director, or
managing agent fails to comply.

62
Board Documents relating to de Castro‘s hiring that are not already subject to production

as Mayer Documents. But even with this limitation, the category of Additional Board

Documents is still expansive and could encompass numerous document custodians. In

addition to the directors themselves, possible custodians include Yahoo‘s compensation

consultant, members of his team, and any other officers or employees who were involved

in the hiring decision, such as personnel in Yahoo‘s human resources department.

Possible documents would include anything memorializing or referring to the hiring

decision and the directors‘ deliberations, including emails.

In my view, Amalgamated has not carried its burden to justify a production of this

scope. Amalgamated would be entitled to that type of production in a plenary proceeding,

but this is a Section 220 action.

A subset of the Additional Board Documents is justified. The production will be

limited to Webb, James, Ligouri, and Wilson, who were the members of the Committee.

Yahoo will produce their documents regarding de Castro‘s hiring, including their email

communications.

2. Books And Records Relating To De Castro’s Termination

The second and third requests in the Demand address de Castro‘s termination.

Request 2 asks for ―[a]ll books and records relating to Mr. de Castro‘s termination from

Yahoo, including all Board and Compensation Committee minutes and presentations

relating to Mr. de Castro‘s termination.‖ JX 34 at 4. Request 3 asks for ―[a]ny expert‘s or

consultant‘s reports or opinions concerning Mr. de Castro‘s termination, including books

and records sufficient to determine whether Mr. de Castro was terminated for ‗Cause.‘‖

63
Id. Here again, Yahoo has produced the Board-Level Materials. The question is what

else, if anything, needs to be produced.

Request 3 is easily dealt with. The trial record established that de Castro was not

terminated for ―Cause,‖ so Amalgamated has its answer. Production of any expert‘s or

consultant‘s report or opinions concerning de Castro‘s termination is necessary for

Amalgamated‘s inspection, because these reports or opinions (if any) establish the

informational base potentially available to Mayer and the Board. By limiting its

production to Board-Level Materials, Yahoo may have excluded reports or opinions that

Yahoo received below the Board level. The request as framed is narrow and targeted, and

Yahoo will respond to it without limitation. If Yahoo‘s officers, or its human resources

department, obtained a report or opinion from an expert or consultant about de Castro‘s

termination, then that is something Yahoo should know and readily be able to provide.

Request 2 presents the same issues as Request 1, except that Request 2 addresses

de Castro‘s firing while Request 1 involves the hiring. This decision‘s rulings on the

Mayer Documents and the specified Additional Board Documents apply equally to

Request 2, albeit with the subject matter modified. If anything, the case for producing the

Mayer Documents and the specified Additional Board Documents is stronger for the

termination, because it was Mayer who determined that de Castro had not performed his

duties or fulfilled his responsibilities and decided to fire him. The Committee then

approved the termination without deliberation or meaningful information, and the

directors only became substantively involved after the fact.

64
 3. Books And Records Relating To De Castro’s Performance

The fourth request in the Demand seeks ―[a]ll books and records relating to Mr. de

Castro‘s job performance at Yahoo, including Board and Compensation Committee

minutes relating to Mr. de Castro‘s performance as Chief Operating Officer.‖ Id. Yahoo

already has produced the Board-Level Materials. For the reasons already discussed,

Yahoo also will produce the Mayer Documents and the specified Additional Board

Documents.

The record provides reason to believe that there are additional books and records

beyond the Board-Level Materials that are essential to Amalgamated‘s inspection. For

example, Mayer told the Committee that she gave de Castro ―feedback on the

deficiencies in his performance.‖ JX 36 at 7. It also seems likely that Mayer may have

kept some or all of the directors informed about developments with de Castro outside of

formal Board meetings. That seems particularly true for events in January 2014, where

the official record of Committee involvement is decidedly sparse.

4. Board Appointments And Nominations

The fifth and final request in the Demand is ―[a]ll books and records concerning

discussions, communications, or decisions as to the nominations of the current members

of the Company‘s Board, and the placement of such directors on any committees or

subcommittees of the Company‘s Board.‖ JX 35 at 4. Yahoo has not produced any

documents responsive to this category.

The scope of the inspection called for by this request is potentially broad, but it is

something that the Delaware Supreme Court contemplated in Beam and more recently in

65
Wal-Mart and Sanchez. I nevertheless believe the production should be tailored. In the

first instance, the subject matter of the request is limited as follows:

● Rather than extending to ―the nominations of the current members of the
Company‘s Board,‖ the request shall cover only the initial nominations of the
current members of the Board.

● For purposes of the re-nomination of any existing member of the Board, the
request shall apply only to the extent that there was consideration by the Board,
the Nomination Committee, or Mayer about re-nominating a particular current
member of the Board. Yahoo and its counsel should be able to determine relatively
quickly by asking Mayer and the directors whether this has occurred. This should
enable Yahoo to avoid a potentially broad search entirely or, if further
investigation is necessarily, target the issue.

● The request about the placement of the directors on committees shall apply only to
the directors who served on the Committee during the period that encompassed de
Castro‘s hiring and firing.

Yahoo and its counsel should be able to determine whether and to what degree

Yahoo keeps files on these matters. If Yahoo does not have a centralized file, then the

custodians for purposes of production shall be Mayer, Yahoo‘s corporate secretary,

Yahoo‘s head of human resources, and any officer or employee specifically tasked with

director recruitment and evaluation, committee assignments, and board effectiveness.

Yahoo also will produce any annual director questionnaires and related materials that the

directors complete as part of Yahoo‘s preparation of its proxy or applications for

directors‘ and officers‘ liability insurance. At present, Amalgamated has not convinced

me that searching the outside directors‘ files and emails on this issue is warranted.

5. The Counsel Documents

A final issue that runs across all of the categories sought in the Demand is

consultations with counsel (―Counsel Documents‖). The Delaware Supreme Court has

66
held that if a stockholder has shown that particular documents are essential to its

inspection, then the stockholder can overcome the attorney-client privilege and work

product doctrine by making the showing required by Garner v. Wolfinbarger, 430 F.2d

1093 (5th Cir. 1970). See Wal-Mart, 95 A.3d at 1275-81. Before reaching the Garner

analysis, however, the trial court first must determine that the documents are essential,

because that inquiry ―is dispositive of the threshold question—the scope of document

production to which the plaintiff is entitled under Section 220.‖ Id. at 1278; accord

Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 374 (Del. 2011).

At this point, I do not believe that Amalgamated has justified having Yahoo search

broadly for Counsel Documents. To the extent that Yahoo previously identified any

Counsel Documents during its collection of the Board-Level Documents, or if Yahoo

identifies any when producing the Mayer Documents and the Additional Board

Documents, then Yahoo will identify those documents on a privilege log. It is premature

for this court to do anything other than require Yahoo to log documents.

D. The Incorporation Condition

Yahoo raises one issue of first impression. Yahoo asks that this court condition

any further production on Amalgamated incorporating by reference into any derivative

action complaint that it files the full scope of the documents that Yahoo has produced or

will produce in response to the Demand (the ―Incorporation Condition‖). Yahoo‘s request

is granted, and further production is conditioned on Amalgamated agreeing that the

entirety of Yahoo‘s production in response to the Demand is incorporated by reference in

any derivative action complaint it files relating to the subject matter of the demand.

67
 ―Section 220(c) of the DGCL gives broad discretion to the Court of Chancery to

condition a books and records inspection . . . .‖ United Techs. Corp. v. Treppel, 109 A.3d

553, 557-58 (Del. 2014). By statute, the Court of Chancery ―may, in its discretion,

prescribe any limitations or conditions with reference to the inspection, or award such

other or further relief as the Court may deem just and proper.‖ 8 Del. C. § 220(c).

―The ability to limit the use of information gathered from an inspection . . . has

long been recognized as within the Court of Chancery‘s discretion.‖ United Techs., 109

A.3d at 558. This court has used conditions as part of its effort to ―maintain a proper

balance between the rights of shareholders to obtain information based upon credible

allegations of corporation mismanagement and the rights of directors to manage the

business of the corporation without undue interference from stockholders.‖ Seinfeld v.

Verizon Commc’ns, Inc., 909 A.2d 117, 122 (Del. 2006).

One common limitation is to condition production on the stockholder entering into

a confidentiality agreement. See CM & M Gp., Inc. v. Carroll, 453 A.2d 788, 793-94

(Del. 1982). Although once novel, now ―[t]here is a presumption that the production of

books and records pursuant to section 220 should be ‗conditioned upon a reasonable

confidentiality order.‘‖ 1 Welch et al., supra, § 220.06, at 7-238.1 (quoting Disney v. The

Walt Disney Co., 857 A.2d 444, 447 (Del. Ch. 2004)). More recently, the Delaware

Supreme Court held that this court can condition a Section 220 production on the plaintiff

agreeing to file any subsequent derivative action in a Delaware court. See United Techs.,

109 A.3d at 558-59.

68
 In this case, the Incorporation Condition protects the legitimate interests of both

Yahoo and the judiciary by ensuring that any complaint that Amalgamated files will not

be based on cherry-picked documents. It achieves this goal by building on the

incorporation-by-reference doctrine, which permits a court to consider documents that

have been incorporated by reference in a complaint when ruling on a motion to dismiss.44

A plaintiff generally is master of its complaint and can choose what it wants to plead.

―[A]ll well-pleaded factual allegations are accepted as true.‖ Savor, Inc. v. FMR Corp.,

812 A.2d 894, 896 (Del. 2002). The plaintiff also is entitled to ―all reasonable inferences‖

that can be drawn from the allegations of the complaint. Id. at 897. If these principles

were applied mindlessly, however, a plaintiff could describe a document or take a

handful of words out of context and claim that the court was required to accept the

plaintiff‘s pleading-stage characterization. Instead, under the incorporation-by-reference

doctrine, ―[a] plaintiff may not reference certain documents outside the complaint and at

the same time prevent the court from considering those documents‘ actual terms.‖

Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013).

The incorporation-by-reference doctrine permits a court to review the actual

document to ensure that the plaintiff has not misrepresented its contents and that any

44
See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004); In re
Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 658 n.3 (Del. Ch. 2013) (Strine, C.); H-M
Wexford LLC v. Encorp, Inc., 832 A.2d 129, 139 (Del. Ch. 2003).

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inference the plaintiff seeks to have drawn is a reasonable one. 45 The doctrine limits the

ability of the plaintiff to take language out of context, because the defendants can point

the court to the entire document. The doctrine also enables courts to dispose of meritless

complaints at the pleading stage. ―Without the ability to consider the document at issue in

its entirety, ‗complaints that quoted only selected and misleading portions of such

documents could not be dismissed under Rule 12(b)(6) even though they would be

doomed to failure.‘‖ General Motors, 897 A.2d at 169-70 (quoting Santa Fe, 669 A.2d at

70). With the incorporation-by-reference doctrine, ―a complaint may, despite allegations

to the contrary, be dismissed where the unambiguous language of documents upon which

the claims are based contradict the complaint‘s allegations.‖ Encorp, 832 A.2d at 139.

Likewise, ―a claim may be dismissed if allegations in the complaint or in the exhibits

incorporated into the complaint effectively negate the claim as a matter of law.‖ Malpiede

v. Townson, 780 A.2d 1075, 1083 (Del. 2001).

The Incorporation Condition takes these concepts one step further by extending

them to other documents that Yahoo produces in response to the Demand. If Yahoo feels

that the plaintiff has seized on a document and taken it out of context, then the

Incorporation Condition will permit Yahoo to point the court to the other documents. The

Incorporation Condition also acknowledges that Yahoo has invested time litigating this

45
See In re General Motors (Hughes) S’holder Litig., 897 A.2d 162, 169-70 (Del. 2006);
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 70 (Del. 1995); In re Gardner Denver,
Inc., 2014 WL 715705, at *2 n.17 (Del. Ch. Feb. 21, 2014).

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action and producing documents, ―which comes at a cost to its stockholders.‖ United

Techs., 109 A.3d at 560. Imposing the condition helps balance Yahoo‘s rights against

those of the plaintiff by recognizing that the production as a whole should provide the

basis for any follow-on complaint, not just a handful of isolated documents or emails.

It is important to stress what the Incorporation Condition does not do. The

Incorporation Condition does not change the pleading standard that governs a motion to

dismiss. For purposes of a Rule 12(b)(6) motion, ―all well-pleaded factual allegations‖

still will be accepted as true. Savor, 812 A.2d at 896. If there are factual conflicts in the

documents or the circumstances support competing interpretations, and if the plaintiff

makes a well-pleaded factual allegation, then the allegation will be credited. The plaintiff

also will be entitled to ―all reasonable inferences.‖ Id. at 897. This means that if a

document or the circumstances support more than one possible inference, and if the

inference that the plaintiff seeks is reasonable, then the plaintiff receives the inference. Id.

The same applies for a Rule 23.1 motion. All particularized factual allegations still

will be accepted as true. Rales v. Blasband, 634 A.2d 927, 931 (Del. 1993). The court

will ―draw all inferences from those particularized facts in favor of the plaintiff, and not

the defendant.‖ Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. 2015).

And when determining whether a plaintiff has pled facts supporting an inference that a

director cannot act independently of an interested director for purposes of demand

excusal, ―all particularized facts pled by the plaintiffs about the relationships between the

director and the interested party‖ will be considered ―in their totality and not in isolation

from each other.‖ Id. at 1019.

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 In the end, the only effect of the Incorporation Condition will be to ensure that the

plaintiff cannot seize on a document, take it out of context, and insist on an unreasonable

inference that the court could not draw if it considered related documents. It will allow

the court to address complaints that should not advance past the pleading stage, but it will

not prevent a plaintiff from stating a well-pled claim. At a functional level, the

Incorporation Condition resembles an approach that Delaware decisions have taken when

ruling on motions to dismiss after plaintiffs have taken expedited discovery in support of

preliminary injunction applications.46 In the Morton’s case, for example, then-Chancellor

Strine denied an application for a preliminary injunction. Afterwards, the plaintiffs

amended their complaint, and the defendants moved to dismiss the complaint for failing

to state a cognizable claim. The plaintiffs had taken four depositions during the injunction

phase, and the defendants attached the transcripts to their briefs. Chancellor Strine held

that the plaintiffs had ―plain[ly] reli[ed]‖ on ―the discovery material taken in connection

with their preliminary injunction application‖ when formulating their complaint, and he

therefore treated the discovery material as incorporated by reference for purposes of his

decision. Morton’s, 74 A3d at 658 n.3. The Incorporation Condition accomplishes the

46
See Gardner Denver, 2014 WL 715705, at *8 (treating five depositions taken during
expedited discovery as ―integral‖ to the complaint for purposes of a motion to dismiss even
though the plaintiffs had not cited all of them); Morton’s, 74 A3d at 658 n.3; see also Simplexity,
LLC v. Zeinfeld, 2013 WL 5702374, at *1 n.2 (Del. Ch. Oct. 17, 2013) (noting that although the
court was only considering the documents explicitly incorporated by reference in the complaint,
―the facts developed through expedited discovery only reinforce th[is] decision‖).

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same result for the materials generated by the pre-suit investigation that Amalgamated is

conducting using Section 220.

Amalgamated protests that the strictures of Rule 11 make the Incorporation

Condition unnecessary. See Ct. Ch. R. 11. It is true, as Amalgamated argues, that Rule 11

mitigates the cherry-picking problem to some degree, but invoking Rule 11 is strong

medicine. The more common case will involve a plaintiff‘s counsel seeking to draw an

unreasonable inference by citing a document in isolation, not in bad faith but perhaps

over-zealously in the belief that the document reveals more than it does. The

Incorporation Condition enables a court to deal with that in more measured fashion.

A final procedural note: The Incorporation Condition does not mean that

Amalgamated should attach the entire Section 220 production to a future complaint, nor

is it an invitation for the defendants in a future action to file an appendix containing the

entire Section 220 production in support of their motion to dismiss. Either approach

would help the State of Delaware by generating hefty filing fees, but it would not help the

parties brief the motion or the judge make a ruling. Amalgamated can and should file a

complaint, if it chooses to do so, as if the Incorporation Condition had not been imposed.

Defense counsel must then use judgment and supply the court only with the limited

documents (if any) necessary to show that it would not be reasonable to draw a particular

inference on which the complaint depends.

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 III. CONCLUSION

Yahoo shall provide the additional books and records contemplated by this

opinion, subject to the Incorporation Condition. The production shall be completed

within thirty days. The parties shall submit a form of implementing order.

74