Chancery Extends Role of Statutory Defenses in Section 220 Demand Actions

In Beatrice Corwin Living Irrevocable Trust v. Pfizer, C.A. No. 10425-JL, (Del. Ch. Aug. 31, 2016), the Delaware Court of Chancery held that there was no credible basis to infer a potential Caremark claim for breach of fiduciary duty for failure to exercise oversight where the stockholder’s only identified use of corporate books and records was to investigate mismanagement or wrongdoing to evaluate potential litigation and the board’s actions ultimately would be “fully protected” by 8 Del. C. Section 141(e). In a post-trial memorandum opinion, Judge Abigail LeGrow, sitting by designation as a vice chancellor, applied the reasoning of SEPTA v. Abbvie, 2015 Del. Ch. LEXIS 110, at *1 (Del. Ch. Apr. 15, 2015), aff’d, 132 A.3d 1 (Del. 2016), and extended the court’s recent jurisprudence concerning statutory defenses in the context of demands to inspect corporate books and records.

The Corwin action arose after a stockholder-trustee plaintiff read an article published in The New York Times identifying Pfizer Inc. as a large multinational corporation that does not calculate its “repatriation tax” liability because it is not practicable to do so. Repatriation tax refers to foreign earnings that are “indefinitely reinvested” overseas and are not taxed under the U.S. tax laws until those accumulated earnings are repatriated to the United States. Indeed, Pfizer’s 2013 annual report indicated it made no tax provision for its international subsidiaries’ approximate $69 billion of earnings, noting these earnings were “intended to be indefinitely reinvested overseas” and the determination of any tax liability relating to these earnings was not practicable. On its face, Pfizer’s statement with its repatriation tax liability appeared to comply with Accounting Standards Codification 740-30, which does not require a company to report any deferred repatriation tax liability if the company states that the calculation would not be practicable. Notably, the term “practicable” is not defined by accounting standards. Pfizer’s 2013 annual report also indicated that Pfizer’s audit committee approved Pfizer’s financial statements after meeting with KPMG LLP, who gave an unqualified opinion to the audit committee and Pfizer’s board of directors that Pfizer’s 2013 financial statements were “free of material misstatement” and in conformity with generally accepted accounting practices (GAAP).