IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE


CLIFFORD ELOW,                  )
                                )
               Plaintiff,       )
                                )
          v.                    )            C.A. No. 12721-VCMR
                                )
EXPRESS SCRIPTS HOLDING         )
COMPANY,                        )
                                )
               Defendant.       )
_______________________________ )
AMITKUMAR KHANDHAR,             )
                                )
               Plaintiff,       )            C.A. No. 12734-VCMR
                                )
          v.                    )
                                )
EXPRESS SCRIPTS HOLDING         )
COMPANY,                        )
                                )
               Defendant.       )

                   MEMORANDUM OPINION
                   Date Submitted: April 26, 2017
                    Date Decided: May 31, 2017


Peter B. Andrews, Craig J. Springer, and David M. Sborz, ANDREWS &
SPRINGER, LLC, Wilmington, Delaware; Jeffrey M. Norton and Roger
A. Sachar Jr., NEWMAN FERRARA LLP, New York, New York;
Attorneys for Plaintiff Clifford Elow.

Peter B. Andrews, Craig J. Springer, and David M. Sborz, ANDREWS &
SPRINGER, LLC, Wilmington, Delaware; Melinda A. Nicholson and
Michael R. Robinson, KAHN SWICK & FOTI, LLC, Madisonville,
Louisiana; Attorneys for Plaintiff Amitkumar Khandhar.
Paul J. Lockwood and Jenness E. Parker, SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP, Wilmington, Delaware; Jay B. Kasner and
Scott D. Musoff, SKADDEN, ARPS, SLATE, MEAGHER & FLOM
LLP, New York, New York; Attorneys for Defendant.



MONTGOMERY-REEVES, Vice Chancellor.




                               2
      This case involves two demands to inspect the books and records of a

pharmacy benefit management company. The plaintiffs seek numerous books

and records to investigate potential mismanagement based on pleadings in

other legal actions involving the defendant company and public statements

made by the company’s management. The defendant company argues that

one of the plaintiff’s demands is improper and does not meet the form and

manner requirements of the statute. The defendant further argues that both

demands have an improper purpose and lack a credible basis to infer

wrongdoing. Defendant also challenges the broad scope of the inspection

demands.

      This memorandum opinion contains my findings and conclusions

following a one-day trial. For the reasons discussed herein, I find that one

plaintiff’s demand does not meet the form and manner requirements;

therefore, he is not entitled to inspection. The other plaintiff’s demand meets

the form and manner requirements, states a proper purpose, and entitles him

to inspect all books and records necessary and sufficient to investigate

potential managerial wrongdoing.




                                      3
I.     BACKGROUND

       These are my findings of fact after a one-day trial based on the parties’

stipulations and 74 exhibits. I accord the evidence the weight and credibility

I find it deserves.1

       A.     The Parties and Relevant Non-Parties

       Plaintiff Clifford Elow has been a stockholder of Express Scripts

Holding Company (“Express Scripts” or the “Company”) since April 2012.2

Plaintiff Amitkumar Khandhar also purports to own Express Scripts stock.

       Defendant Express Scripts is a Delaware corporation headquartered in

St. Louis, Missouri. Express Scripts provides pharmacy benefit management

(“PBM”) services. David Queller is the Senior Vice President of Sales and

Account Management for Express Scripts.               George Paz is the former

Chairman and Chief Executive Officer of Express Scripts. Tim Wentworth is

President of Express Scripts.




1
       After being identified initially, individuals are referenced herein by their
       surnames without regard to formal titles such as “Dr.” No disrespect is
       intended. Exhibits are cited as “JX #,” and facts drawn from the parties’ Joint
       Pre-Trial Stipulation and Order are cited as “PTO ¶ #.” Unless otherwise
       indicated, citations to the parties’ briefs are to post-trial briefs.
2
       PTO ¶ 2.

                                          4
      Non-party Anthem, Inc. (“Anthem”), previously WellPoint, Inc.

(“WellPoint”), is Express Scripts’s largest commercial client. Non-party

Express Scripts, Inc. (“ESI”) is a wholly-owned subsidiary of Express Scripts.

      B.     The Anthem Relationship
      In 2009, Express Scripts entered into a ten-year contract with Anthem

to provide PBM services to certain Anthem health plans. Anthem is a large

client for ESI in the PBM services space. Revenues from the contract

represented approximately 12.2%, 14%, 16.6%, 17%, and 18% of Express

Scripts’s consolidated revenue for the years 2013, 2014, 2015, 2016, and the

three months ended March 31, 2017, respectively. Anthem’s contribution to

the Company’s profitability is expected to “continue to increase . . . as the

contract nears its termination in 2019.”3

      Section 3.1(a) of the Anthem contract requires ESI to “perform services

under the Agreement ‘in a prudent and expert manner in accordance with this

Agreement and all Laws.’”4 The agreement also creates a “periodic pricing

review” procedure, which gives Anthem the ability to propose adjustments to




3
      Letter to Vice Chancellor Montgomery-Reeves Ex. B, at 27 (April 26, 2017)
      (Express Scripts Form 10-Q for Quarter ended March 31, 2017) (hereinafter
      “Letter”); JX 44, at 72.
4
      JX 22, ¶ 6.

                                       5
the pricing schedule every three years. 5 Section 5.6 of the agreement

provides:

             [Anthem] or a third party consultant retained by
             Anthem will conduct a market analysis every three
             (3) years during the Term of this Agreement to
             ensure that [Anthem] is receiving competitive
             benchmark pricing. In the event [Anthem] or its
             third party consultant determines that such pricing
             terms are not competitive, [Anthem] shall have the
             ability to propose renegotiated pricing terms to
             [ESI] and [Anthem] and [ESI] agrees to negotiate in
             good faith over the proposed new pricing terms.
             Notwithstanding the foregoing, to be effective any
             new pricing must be agreed to by [ESI] in writing.6

In 2012, ESI and Anthem reached an agreement after Anthem’s first periodic

pricing review.7

      In 2015, Express Scripts and Anthem started the same negotiation

process in anticipation of the 2015 pricing review.8 Aware of this process

through comments made by Anthem, analysts began asking Express Scripts

questions about the Anthem contract and relationship.9 On February 25, 2015,

during an investor call, Queller stated that Express Scripts had


5
      PTO ¶ 5.
6
      Id.
7
      JX 37, at 4.
8
      Id.; JX 78, at 5.
9
      JX 37, at 4; JX 25, ¶ 192.

                                      6
              a great relationship with Anthem. We’re right now
              working with them very closely to help them
              prepare for their 1/1/16 business . . . [o]ur teams
              work together closely each and every day. The
              relationship is very, very solid. . . . we don’t think
              that it’s appropriate to talk out in public about our
              relationship from that regard. And we look forward
              to having them as a client through the end of the
              contract term which is at the end of 2019.10

       On July 29, 2015, during a second-quarter earnings call, Wentworth

stated that Express Scripts continued “close collaboration” with its clients and

that “performance to date and the positive feedback we continue to receive

gives us confidence that we will have strong retention across the board.”11

During the third-quarter earnings call on October 28, 2015, Wentworth stated

that the Company’s “strong client relationship positions us well for 2016” and

“based on our results this year, we are confident about next year’s selling and

retention season.”12 Paz, the Chairman of the board at that time, was present

on all of the relevant calls.13




10
       JX 75, at 2; JX 33, at 33.
11
       JX 75, at 2; JX 35, at 4.
12
       JX 75, at 3; JX 36, at 5.
13
       JX 33, at 2; JX 35, at 2; JX 36, at 2.

                                           7
      C.     Litigation Ensues

      The second renegotiation did not go as well as the first. On March 21,

2016, Anthem initiated litigation in the United States District Court for the

Southern District of New York, alleging that ESI had breached the agreement

(the “Anthem Action”).14 The Anthem complaint alleges that ESI acted in

bad faith and materially breached Section 5.6 by (1) delaying the repricing

process for months; (2) refusing to negotiate over Anthem’s pricing proposals

for competitive benchmark pricing or in excess of the competitive benchmark

pricing; (3) repudiating its contractual obligations to reprice the contract to

ensure Anthem’s receipt of competitive benchmark pricing; and (4) failing to

offer “anything remotely close to competitive benchmark pricing as

required.” 15 The complaint also alleges ESI breached Section 3.1(a)’s

requirement that ESI perform its operational duties in a “prudent and expert

manner” due to its systems defects, consistent failure to devote sufficient

resources to its work, inadequate training of its personnel, extremely high

employee turnover, and lack of required expertise.16 These breaches, Anthem

contends, have placed it at significant risk of enforcement actions by the


14
      PTO ¶ 6; JX 22.
15
      JX 22, ¶ 4.
16
      Id. ¶ 6.

                                      8
Centers for Medicare & Medicaid Services (“CMS”) and caused hundreds of

millions of dollars in damages. 17 Anthem purportedly notified ESI of its

breaches of the contract on February 16, 2015 and April 1, 2015.18

      On June 13, 2016, ESI answered the complaint and asserted

counterclaims. 19 ESI admits that it received the notices of breach from

Anthem and “respectfully refers the Court to the document[s] referred to

therein for an accurate description of [their] terms.” 20 ESI contends that

Anthem agreed to a higher contract price over the term of the contract in

exchange for more up-front cash and now attempts to re-write the

agreement.21 ESI avers that it is not obligated to accept Anthem’s proposals

of new pricing terms every three years; instead, it must negotiate in good faith,

which it did when it made five counterproposals before March 2016.22 And

Anthem, not ESI, failed to negotiate in good faith by (1) taking aggressive

positions in 2014 (before the ability to trigger the periodic pricing review) that



17
      Id.
18
      JX 54, ¶ 7; JX 22, ¶ 24; JX 25, ¶¶ 45, 74.
19
      JX 25.
20
      Id. ¶¶ 45, 74.
21
      Id. ¶¶ 2-3.
22
      Id. ¶¶ 4-5.

                                        9
were incompatible with the plain terms of the agreement and (2) demanding

approximately $12-13 billion—$3 billion a year over the next four years of

the contract—from ESI, while Anthem employees were stating publicly that

they expected to receive less than $3 billion total.23

      ESI also contends that any “operational breaches” are not supported by

the facts because Anthem’s Medicare “star rating” with CMS has improved

over this period, and Anthem has received no sanctions or penalties (in

contrast with its competitors).24 ESI asserts that any operational issues were

isolated. And those operational issues resulted from the massive volume of

Anthem’s transactions and the complex nature of Anthem’s plans and

requirements.25 ESI points to the lack of allegations regarding any missed ESI

“performance guarantees,” which require that ESI deliver a certain level of

performance and impose a monetary penalty for anything less.26

      On May 4, 2016, a class action lawsuit was filed in the same court (the

“Securities Action”). It alleges that Express Scripts violated Federal securities

laws by telling investors the Anthem relationship was strong and accounting


23
      Id. ¶¶ 5-6, 8, 191-96.
24
      Id. ¶¶ 12-13.
25
      Id.
26
      Id. ¶¶ 14-15.

                                       10
for the Anthem agreement’s renewal in publicly-filed financial statements.

The complaint further alleges that during this time, Express Scripts’s

management knew that the 2012-2013 pricing negotiations severely damaged

the parties’ relationship, that the Company had received two formal notices of

breach, and that Anthem demanded a $15 billion pricing concession.27 The

complaint further alleges that the relationship continued to deteriorate

throughout 2015, but the parties could not resolve their dispute. 28 The

investors only learned of these issues in January 2016, when Anthem publicly

threatened to terminate its contract with Express Scripts.29

      D.     Procedural History

      On May 18, 2016, Elow sent a books and records inspection demand to

ESI. 30 On July 28, 2016, Khandhar sent a books and records inspection

demand to Express Scripts.31 On August 9, 2016, Express Scripts rejected

Khandhar’s demand.32 On August 12, 2016, Elow filed a complaint pursuant



27
      PTO ¶ 7; JX 45; JX 54.
28
      JX 54 ¶ 12.
29
      Id. ¶ 13.
30
      PTO ¶ 8; JX 5.
31
      PTO ¶ 9; JX 13.
32
      PTO ¶ 10.

                                      11
to Section 220 against ESI.33 On August 17, 2016, Khandhar responded by

letter.34 On August 24, 2016, Elow voluntarily dismissed his complaint, and

on August 25, 2016, Elow made demand on Express Scripts to inspect its

books and records.35 On September 1, 2016, Express Scripts denied Elow’s

demand, and Elow filed the complaint in this action on September 6, 2016.36

On September 7, 2016, Express Scripts again rejected Khandhar’s demand,

and Khandhar filed his complaint in this action on September 8, 2016.37 No

books or records have been produced by Express Scripts in response to

Khandhar or Elow’s demands. On October 4, 2016, this Court consolidated

the actions for pre-trial purposes.38 This Court held trial in both actions on

March 3, 2017. On April 26, 2017, Elow and Khandhar submitted a letter to

the Court attaching the Company’s updated financial filings that were relevant

to the assertions in this action.




33
       Id. ¶ 14.
34
       Id.
35
       Id. ¶¶ 14-15.
36
       Id. ¶¶ 16, 18.
37
       Id. ¶¶ 12, 19.
38
       Id. ¶ 20.

                                     12
II.   ANALYSIS
      Section 220 of Delaware General Corporation Law provides

stockholders of a Delaware Corporation with the right to inspect the books

and records of a Company for any proper purpose.39 A proper purpose for a

demand to inspect books and records “shall mean a purpose reasonably related

to such person’s interest as a stockholder.”40

             Where the stockholder seeks to inspect the
             corporation’s books and records, other than its stock
             ledger or list of stockholders, such stockholder shall
             first establish that:

             (1) Such stockholder is a stockholder;

             (2) Such stockholder has complied with this section
             respecting the form and manner of making demand
             for inspection of such documents; and

             (3) The inspection such stockholder seeks is for a
             proper purpose.41

      A.     Khandhar’s Demand Does Not Satisfy Section 220’s Form
             and Manner Requirements
      As to the form and manner requirements of Section 220, “[t]he statute

requires the documentary evidence [of beneficial ownership of stock] to




39
      8 Del. C. § 220.
40
      Id. § 220(b).
41
      Id. § 220(c).

                                      13
accompany the demand for inspection.” 42 “Delaware courts require strict

adherence to the section 220 inspection demand procedural requirements.”43

These requirements “protect ‘corporations from improper demands by

requiring that evidence of beneficial ownership be both furnished with the

demand and provided under oath.’”44 “The purpose of § 220 is not served if

the shareholder supplies a document that does not actually evidence that she

is the beneficial owner of the company’s stock on the relevant date.”45

      In Central Laborers Pension Fund v. News Corp., the statute’s

requirements were not followed when the demand did not include evidence of

beneficial ownership, among other deficiencies. 46 The Delaware Supreme

Court held that the plaintiff’s subsequent submission of an account statement

as proof of beneficial ownership of the defendant corporation’s stock did not

meet the procedural requirements for an inspection demand.47 This is because



42
      Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139, 146 (Del. 2012).
43
      Id. at 145.
44
      Id. (quoting Seinfeld v. Verizon Commc’ns, Inc., 873 A.2d 316, 317 (Del. Ch.
      2005)) (emphasis in original).
45
      Smith v. Horizon Lines, Inc., 2009 WL 2913887, at *2 (Del. Ch. Aug. 31,
      2009).
46
      45 A.3d at 146.
47
      Id.

                                       14
the demand must be in “proper form before litigation is initiated.” 48 The

“right of the corporation to receive and consider a demand” is defeated and

“an integral part of the statute rendered nugatory when . . . an effort to comply

with the requirements of form is made during the course of the litigation

without delivering new form of demand.”49

      Khandhar’s demand does not contain adequate proof of his ownership

of Express Script stock. His name is not included anywhere on the attached

stock purchase plan document—the purported evidence of his continued stock

ownership. 50 Khandhar does not argue that he has made a new form of

demand. Thus, Khandhar’s demand is improper because it did not comply

with the form and manner requirements before the litigation was initiated, and

Khandhar may not inspect the books and records sought in this action.

      B.       Elow’s Demand States a Proper Purpose

      Express Scripts raises no challenges to Elow’s status as a stockholder

or to the form and manner of his inspection demand; thus, I turn to whether

Elow has stated a proper purpose under Section 220. Elow’s demand states

that he seeks inspection of books and records in order to:


48
      Id. (emphasis in original).
49
      Id.
50
      JX 13.

                                       15
             (1) determin[e] whether the Company’s officers
             and/or directors have properly discharged their
             fiduciary duties to the Company; (2) obtain
             information to determine whether or not the
             Company’s officers and/or directors are
             independent and disinterested, and whether they
             have acted in good faith; and (3) take any
             appropriate action in the event that any wrongdoing
             is revealed, including instituting a derivate suit with
             allegations that a pre-litigation demand on the board
             of directors (the “Board”) of Express Scripts should
             be excused, and (if such suit is filed) to provide the
             court with particularized allegations from which to
             evaluate the demand-excused issue.51

      “[A] stockholder has the burden of proof to demonstrate a proper

purpose by a preponderance of the evidence.”52 “It is well-established that a

stockholder’s desire to investigate wrongdoing or mismanagement is a ‘proper

purpose.’”53 “A stockholder is ‘not required to prove by a preponderance of

the evidence that waste and mismanagement are actually occurring.’”54 The

stockholder must only show “some evidence” to establish “a credible basis

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




51
      JX 75, at 1.
52
      Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006).
53
      Id. (quoting Nodana v. Petroleum Corp. v. State ex rel. Brennan, 123 A.2d
      243, 246 (Del. 1956)).
54
      Id. at 123 (quoting Thomas & Betts Corp. v. Leviton Mfg. Co. Inc., 681 A.2d
      1026, 1031 (Del. 1996)).

                                       16
that would warrant further investigation.” 55 The “credible basis” standard

“sets the lowest possible burden of proof.”56 In deciding whether a credible

basis exists to infer mismanagement or wrongdoing, the “threshold may be

satisfied by a credible showing, through documents, logic, testimony or

otherwise, that there are legitimate issues of wrongdoing.”57 “The trial court

may rely on ‘circumstantial evidence,’” and “[h]earsay statements may be

considered, provided they are sufficiently reliable.”58

      Elow seeks to investigate whether officers and directors breached their

fiduciary duties by (1) allowing ESI to breach its contractual obligations to

service Anthem’s customers in a prudent and expert manner and to engage in

good faith benchmark pricing negotiations; (2) failing to prevent ESI’s

breaches despite a known duty to act in the face of knowledge about the issues




55
      Id. at 123; see also Melzer v. CNET Networks, Inc., 934 A.2d 912, 917 (Del.
      Ch. 2007).
56
      Seinfeld, 909 A.2d at 123.
57
      Id. (quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563,
      568 (Del. 1997)) (internal quotation marks omitted).
58
      Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 778 (Del. Ch. 2016) (citing
      Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d
      1264, 1273 (Del. 2014); Marmon v. Arbinet-Thexchange, Inc., 2004 WL
      936512, at *4 (Del. Ch. Apr. 28, 2004); Thomas & Betts, 681 A.2d at 1032-
      33; Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 208-13 (Del. Ch. 1976)).

                                      17
with Anthem; and (3) communicating dishonestly with the stockholders

regarding the Anthem contract and customer retention.59

      In support of this claim, Elow points to the pleadings in the Anthem

Action, the Securities Action complaints, and public statements made by

Express Scripts.60 Elow argues that “it is irrelevant whether the allegations

will ultimately be proved true in a court of law;” the totality of the allegations

and public statements make wrongdoing plausible and, thus, establishes a

credible basis.61 Elow states that the Anthem allegations, coupled with ESI’s


59
      Elow’s Opening Br. 31-32.
60
      Id. at 33. Express Scripts argues that the Anthem complaint is inadmissible
      hearsay. Express Scripts Opening Br. 34-36. Elow, however, is not relying
      solely on the Anthem complaint’s allegations to prove that there is a credible
      basis from which to infer a possible breach or mismanagement. Elow also
      points to ESI’s own admissions in the pleadings and Express Scripts
      management’s public statements to show there is a credible basis to infer that
      a dispute regarding the Anthem contract occurred and that certain misleading
      representations were made to the public regarding that relationship.
      Additionally, in Thomas & Betts Corp. v. Leviton Mfg. Co., Inc., the
      Delaware Supreme Court affirmed this Court’s consideration of hearsay
      testimony and its ultimate decision to discredit that testimony as unworthy
      of belief. 681 A.2d 1026, 1032 (Del. 1996). See also Amalgamated Bank v.
      Yahoo! Inc., 132 A.3d 752, 778 (Del. Ch. 2016); Marmon v. Arbinet-
      Thexchange, Inc., 2004 WL 936512, at *4 (Del. Ch. Apr. 28, 2004) (“In
      [Thomas & Betts], the Supreme Court indicated that, had this Court found
      the disputed testimony reliable, it could properly have considered the hearsay
      testimony to determine whether there was a credible basis to infer that
      mismanagement had occurred.”); Skoglund v. Ormund, Indus., Inc., 372 A.2d
      204, 208-13 (Del. Ch. 1976)).
61
      Elow’s Opening Br. 33-34. Express Scripts argues that the filing of a
      complaint is not enough to support a “credible basis” from which to infer
      wrongdoing. Express Scripts’s Opening Br. 37 (citing Graulich v. Dell Inc.,
                                        18
own answer and counterclaims, create the inference that there were

“numerous problems with ESI’s administration of the Agreement” and its

“negotiation over the Agreement’s competitive benchmark pricing

provision.”62

      Elow also asserts that ESI’s own admissions and contentions in the

Anthem Action are evidence that the Company’s representatives misled

investors about the relationship with Anthem.63 Specifically, Elow argues that

Express Scripts was telling the public that Express Scripts had “a great

relationship with Anthem,” that Express Scripts was “look[ing] forward to

having them as a client through the end of the contract term which is at the

end of 2019,” and that “[t]he relationship is very, very solid.”64 But, in reality,

Anthem already had served ESI with notices “detailing numerous operational

breaches of the Agreement” and had threatened to terminate the agreement if

the breaches were not cured.65


      2011 WL 1843813, at *5, n.49 (Del. Ch. May 16, 2011)). Here, however,
      Elow is not relying solely on the complaint to show a credible basis. Elow
      also points to ESI’s own answer and counterclaims and the public statements
      of Express Scripts’s management. See supra note 60.
62
      Elow’s Answering Br. 6; JXS 22, 25-29.
63
      Elow’s Answering Br. 6-7.
64
      JX 75, at 2.
65
      Elow’s Opening Br. 11.

                                        19
      By July 2015, Express Scripts communicated to the public that it was

in “close collaboration” with its clients and that “performance to date and the

positive feedback we continue to receive gives us confidence that we will have

strong retention across the board.”66 Express Scripts also represented that the

Company’s “strong client relationship positions us well for 2016,” and “based

on our results this year, we are confident about next year’s selling and

retention season.” 67 But these statements gave a false impression, Elow

argues, because Anthem (a customer that represented approximately $17

billion of Express Scripts’s $100 billion in annual revenue) had sent a second

notice of breach on April 1, 2015 and a demand for $12-13 billion in pricing

concessions over the next four years of the agreement.68

      Defendant has made numerous arguments and presented evidence

challenging the merits of the underlying claims. But, at this stage, I cannot

analyze the strength of the merits of the potential underlying claims. Instead,

I must determine if the plaintiff has put forth “some evidence” to establish “a

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



66
      JX 75, at 2.
67
      Id. at 3.
68
      Elow’s Opening Br. 13; JX 22, at ¶ 24; JX 25, at ¶ 45; Letter Ex. A, at 8; Ex.
      B, at 27.

                                        20
mismanagement that would warrant further investigation” through

“documents, logic, testimony or otherwise.”69 Elow has asked to investigate

a serious allegation that the largest client of the Company terminated its

contract because ESI refused to negotiate in good faith and did not work

adequately to cure the operational breaches. At the same time this relationship

was deteriorating by ESI’s own admissions, Express Scripts allegedly was

representing to the market that the relationship was strong, the contract would

continue, and the future with the client looked bright.70 I conclude that the

pleadings in the Anthem Action, coupled with the statements made by Express

Scripts’s management, are enough to meet the “lowest burden of proof” set

by Delaware law.71

      Express Scripts also argues that these purposes are not in fact Elow’s

true purposes, but that they are sham purposes constructed by the lawyers to

maintain this action.72 Express Scripts does not point to any credible evidence

of such a scheme, and I do not find any merit to the argument that Elow should




69
      Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 123 (Del. 2006).
70
      JX 25; JX 33; JX 75.
71
      Seinfeld, 909 A.2d at 123.
72
      Express Scripts’s Opening Br. 21-29; Express Scripts’s Answering Br. 11-
      12.

                                      21
be precluded from obtaining documents as a stockholder because his true

purpose is to maintain this action on behalf of his lawyers. Elow is within his

rights to rely on counsel’s advice in making a demand, prosecuting this action,

and determining next steps.73

      C.     The Document Requests Must Be Narrowly Tailored to
             Elow’s Purpose
      Because I conclude that Elow has shown a proper purpose for his

inspection, I now turn to the documents requested. In his demand, Elow seeks

the following documents from January 1, 2015 until the present:

         1. Books and records created or dated during the
            Relevant Period related to any proceedings of the
            Express Scripts Board or a committee of the Board,
            if those proceedings in any way relate to the
            Company’s relationship with Anthem, or its
            predecessor, WellPoint, Inc.

         2. Books and records created or dated during the
            Relevant Period related to any proceedings of the
            Express Scripts Board or a committee of the Board,
            if those proceedings in any way relate to the
            Company’s use of C360 and/or Foundation 14.


73
      Express Scripts also asserts that Elow does not have an ultimate use for these
      documents while conceding that Elow’s demand suggests he will use the
      documents to inform his decision of whether to pursue legal action. Express
      Scripts’s Answering Br. 12-13; Oral Arg. Tr. 92. Express Scripts argues that
      Elow’s subsequent testimony contradicts the demand letter because he states
      he is merely “considering” derivative litigation as an option. Elow does not
      explain how this is contradictory or why a stockholder would need to know
      prior to an inspection whether he or she definitively will pursue litigation no
      matter what the documents revealed.

                                        22
            3. Books and records created or dated during the
               Relevant Period related to any proceedings of the
               Express Scripts Board or a committee of the Board,
               if those proceedings in any way relate to Super PA.

            4. Books and records created or dated during the
               Relevant Period related to any proceedings of the
               Express Scripts Board or a committee of the Board,
               if those proceedings in any way relate to the
               submission of reports to CMS.

            5. A copy of the Company’s Code of Ethics and/or
               Code of Conduct, to the extent one exists.74

At trial, counsel for Elow stated that “books and records” included

communications, such as e-mails, of all of the board members relating to these

issues.75

       “The 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.”76 “It is the responsibility of the

trial court to tailor the inspection to the stockholder’s stated purpose.”77 “The

plaintiff can obtain books and records that ‘address the crux of the



74
       JX 75, at 4.
75
       Tr. 86.
76
       Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035 (Del. 1996).
77
       Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 787 (Del. Ch. 2016)
       (quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 569
       (Del. 1997)).

                                       23
shareholder’s purpose and if that information is unavailable from another

source.’”78

      Here, Elow seeks a broad set of documents, essentially any director or

officer books or records, including communications, connected to any board

or committee proceedings relating to Anthem, C360, Foundation 14, Super

PA, or any submission of reports to CMS.79 Elow, however, has only shown

that board or committee packages (including agendas, minutes, or

presentations) relating to the Anthem relationship dated from January 1, 2015

until the present are essential for purposes of this Section 220 demand. This

necessarily includes documents regarding C360, Foundation 14, Super PA, or

submission of reports to CMS as they relate to the Anthem relationship. Elow

also may obtain the Company’s code of ethics or conduct. Elow is not entitled

to any documents about these products or topics if the documents are not

relevant to Anthem or Anthem’s use of the products.              Elow has not

demonstrated that broader categories of documents or communications not




78
      Id. at 788 (quoting Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr.
      Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014)).
79
      Elow’s Opening Br. 37-38; JX 75, at 4.

                                      24
included in board packages are necessary. I condition the request upon the

parties’ negotiation of a reasonable confidentiality order.80

      Express Scripts asks that any production be incorporated by reference

into any future derivative complaint. 81        Under Section 220(c) of the

DGCL, “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.’”82 “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.’”83


80
      See Yahoo!, 132 A.3d at 796-97 (“[T]here is a presumption that the
      production of books and records pursuant to section 220 should be
      ‘conditioned upon a reasonable confidentiality order.’”) (quoting 1 EDWARD
      P. WELCH ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW §
      220.06, at 7-238.1)) (internal quotation marks omitted).
81
      Express Scripts’s Opening Br. 28-29.
82
      Yahoo!, 132 A.3d at 796 (quoting 8 Del. C. § 220(c)).
83
      Id. (quoting 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.” Id. at 796-97 (citing
      CM & M Gp., Inc. v. Carroll, 453 A.2d 788, 793–94 (Del. 1982)). “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.” Id. (citing United Techs. Corp. v.
      Treppel, 109 A.3d 553, 558–59 (Del. 2014)).

                                       25
      In Yahoo!, this Court granted a request to incorporate any production

of documents into any subsequent derivative complaint because it “protects

the legitimate interests of both [the defendant] and the judiciary by ensuring

that any complaint that [the plaintiff] files will not be based on cherry-picked

documents.” 84 The Court analyzed this step as a logical extension of the

incorporation-by-reference doctrine that has been used to allow “a court to

consider documents that have been incorporated by reference in a complaint

when ruling on a motion to dismiss.” 85 The doctrine “permits a court to

review the actual document to ensure that the plaintiff has not misrepresented

its contents and that any inference the plaintiff seeks to have drawn is a

reasonable one” and “limits the ability of the plaintiff to take language out of

context, because the defendants can point the court to the entire document.”86

In support of its reasoning, the Court pointed to “an approach that Delaware

decisions have taken when ruling on motions to dismiss after plaintiffs have




84
      Id. at 797 (citing 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); H–M Wexford LLC v. Encorp, Inc., 832 A.2d 129,
      139 (Del. Ch. 2003)).
85
      Id.
86
      Id. (citing 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)).

                                        26
taken    expedited     discovery    in    support    of   preliminary    injunction

applications.”87 For example, in the Morton’s case, then-Chancellor Strine

treated discovery material that plaintiffs obtained in connection with their

preliminary injunction application and relied on when formulating their

complaint as incorporated by reference in the complaint for purposes of the

Court’s decision on the motion to dismiss.88 The Yahoo! Court held that “[t]he

Incorporation Condition accomplishes the same result for the materials

generated by the pre-suit investigation that [plaintiff] is conducting using

Section 220.”89

        The Court, however, warned that this does not change the pleading

standards or alter the inferences the Court must take in plaintiff’s favor in the

Rule 12(b)(6) and Rule 23.1 contexts, namely that all well-pled and

particularized factual allegations will be taken as true, respectively.90 “[I]f 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


87
        Id. at 798 (citing In re Gardner Denver, Inc., 2014 WL 715705, at *8 (Del.
        Ch. Feb. 21, 2014; Morton's, 74 A.3d at 658 n.3; Simplexity, LLC v. Zeinfeld,
        2013 WL 5702374, at *1 n.2 (Del. Ch. Oct. 17, 2013)).
88
        Id. at 798-99 (citing Morton’s, 74 A.3d at 658 n.3).
89
        Id. at 799.
90
        Id. at 798.

                                         27
the inference.”91 Further, this is not “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.”92 Instead, the plaintiff “can and should

file a complaint, if it chooses to do so, as if the Incorporation Condition had

not been imposed.”93 “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.”94 “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.”95 I follow that reasoning and apply the

incorporation-by-reference doctrine to this case.

III.   CONCLUSION

       For the reasons discussed above, I deny Khandhar’s demand to inspect

the books and records of Express Scripts and grant Elow’s demand subject to



91
       Id.
92
       Id. at 799.
93
       Id.
94
       Id.
95
       Id.

                                      28
a confidentiality order and the incorporation-by-reference doctrine. Parties

shall submit a conforming order within 10 days.

      IT IS SO ORDERED.




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