Improving the "tools at hand": recent Delaware books and records decisions.(Delaware)

Section 220 of the General Corporation law entitles stockholders to inspect corporate books and records for any proper purpose, and provides for a summary adjudication in the event the corporation resists. The Delaware Supreme Court regularly refers to Section 220 as the "tools at hand" that enable stockholders to investigate corporate wrongdoing. Recent Delaware decisions have improved the "tools at hand" by increasing their utility to stockholders while protecting corporations' legitimate privacy interests.

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Section 220 of the Delaware General Corporation Law (Section 220) permits any stockholder of a Delaware corporation to inspect corporate books and records for a proper purpose related to its interests as a stockholder, such as investigating possible corporate wrongdoing or valuing shares of stock. (1) A stockholder may exercise its informational rights under Section 220 by making a written demand under oath, setting forth the categories of documents sought and the purpose for the inspection. If the stockholder does not receive a satisfactory response within five business days, it may bring a summary proceeding against the corporation in Delaware's Court of Chancery, which entails limited discovery and a prompt trial date. The narrow issues in a Section 220 action are (1) whether the plaintiff is a stockholder, (2) whether the demand complied with the formal requirements of Section 220, (3) whether the demand states a proper purpose, and, if so (4) what documents are essential and sufficient to satisfy that purpose.

Delaware's Supreme Court has recognized that "Section 220 proceedings are an important part of the corporate governance landscape in Delaware." (2) Indeed, it has repeatedly admonished would-be derivative plaintiffs to use Section 220 as one of the "tools at hand" to gather facts needed to satisfy the heightened pleading requirements that apply to derivative complaints. (3) Further increasing Section 220's importance is a recent amendment to the statute, which extended stockholders' inspection rights to beneficial owners. Several recent decisions under Section 220 apply the statute in a manner that will improve its utility by declining to expand the defenses available to a corporation, while at the same time reducing a corporation's risk of complying with the statute.

Construing Recent Amendments to Section 220

The summary nature of a Section 220 proceeding requires that the statute's requirements "as to the form of a stockholder demand should be strictly followed." (4) The Court of Chancery's recent decision in Deephaven Risk ARB Trading, Ltd. v. UnitedGlobal.com, Inc. (5) applied previously unconstrued amendments to Section 220 in a manner that sensibly clarifies statute's formal requirements for a demand.

The version of the Section 220 in effect prior to August 1, 2003 only provided inspection rights to a "stockholder of record"--a requirement courts repeatedly invoked in denying Section 220 inspection rights to beneficial owners. (6) The current version of Section 220 expressly grants inspection rights to beneficial owners, provided that their demands are "accompanied by documentary …