Delaware stockholders and directors have an important tool in their arsenal to obtain information from a Delaware corporation: Section 220 of the Delaware General Corporation Law ("DGCL"). The statute confers standing upon stockholders or directors to demand inspection of the books and records of a Delaware corporation. 8 Del. C. § 220. This post will provide a primer on the litigation of books and records demands pursuant to Section 220 of the DGCL before the Delaware Court of Chancery.
The Books and Records Demand
The first step in making a books and records demand under Section 220 is to submit a formal demand letter to the corporation that complies with the provisions of Section 220. These requirements include:
- The demand must be made under oath.
- Where the stockholder is not a record holder of stock or member of a nonstock corporation, the demand shall: (a) state the person's status as a stockholder, (b) be accompanied by documentary evidence of beneficial ownership of the stock, and (c) state that such documentary evidence is a true and correct copy of what it purports to be.
- The demand must be directed to the corporation at its registered office in Delaware or at its principal place of business.
- If the demand it not made by the stockholder (but rather, for example, by its counsel), then the demand must be accompanied by a power of attorney or such other writing authorizing the attorney or agent to so act on behalf of the stockholder.
8 Del. C. § 220(b).
The Delaware Court of Chancery strictly construes the technical requirements set forth in Section 220. If a petitioning stockholder or director fails to comply with these requirements, the demand may be denied.
Under Section 220(b), a books and records demand must also state a proper purpose for why the documents are being sought. Proper purposes include, but are not limited to: (1) to value the stockholder's interest in the corporation, and (2) to investigate mismanagement or wrongdoing. This is not an exclusive list.
To investigate mismanagement or wrongdoing, "a stockholder must present some credible basis from which the Court can infer that mismanagement, waste or wrongdoing may have occurred." Thomas & Betts Corp. v. Leviton Mfg. Co. Inc., 681 A.2d 1026, 1031 (Del. 1996); Murfey v. WHC Ventures, LLC, et al., 236 A.3d 337, 341 (Del. 2020). A demand will not be approved for "idle curiosity" or to permit a "fishing expedition."
Scope of Documents Requested
Section 220(b) permits a stockholder, upon stating a proper purpose under oath, to inspect: (1) the corporation's stock ledger, (2) its list of stockholders, and (3) "other books and records" of the corporation.
As to demands for "other books and records" of a corporation, the Court of Chancery will only permit inspection for those categories of documents that are "narrowly tailored" or "necessary and essential" to the proper purpose set forth in the demand. A stockholder will be allowed to inspect only those documents that it proves to be "essential and sufficient" to the accomplishment of its stated purpose(s). Tactron, Inc. v. KDI Corp., 1985 WL 44694, at *1 (Del. Ch. Jan. 10, 1985).
Time Period for Compliance
Under Section 220(c), if the Delaware corporation refuses to permit compliance with the demand within 5 business days, then the stockholder or director may file an action with the Delaware Court of Chancery to compel the corporation to permit inspection of the requested books and records.
In Which Court Must a Section 220 Action be Filed?
Under Section 220(c), the Delaware Court of Chancery is "vested with exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought." In other words, if the action is asserted in Delaware, the Delaware Court of Chancery is the proper court in which to file such an action.
The question has arisen as to whether a books and records action seeking documents of a Delaware corporation can be litigated outside of the State of Delaware, for example, in the state in which the corporation is located. The Court of Chancery issued a ruling last year holding that a books and records demand under Section 220 must be brought in Delaware even though the company was headquartered in California and that state's statutory scheme permits foreign entities to bring such actions in that state. That ruling was discussed in a prior post here.
How Quickly Are Books and Records Actions Litigated?
Section 220 books and records actions are summary proceedings that are litigated at a faster pace than non-expedited actions. A Section 220 petition must be accompanied by a motion to expedite the proceedings. Often times, litigators request that a trial be scheduled 60-90 days from the filing of the complaint. The scheduling of the trial can depend on a number of factors, including the court's availability, whether some external event is scheduled that may impact timing (i.e. an annual shareholder meeting, a proposed sale of the company, etc.), and whether irreparable harm has been shown by the plaintiffs.
What Discovery is Permissible in a Books and Records Action?
Narrow and targeted discovery is permitted in a Delaware books and records action. Discovery can be taken on, for example, the purpose stated in the demand letter, the need for the documents demanded, or the affirmative defenses raised in opposition to the demand. Depositions may take place to evaluate these issues. Of course, the stockholder cannot seek in discovery the books and records that are ultimately being sought in the demand.
Does Section 220 Apply to Alternative Entities, i.e. LLC's or LP's?
Section 220 only applies to Delaware corporations. Demands for books and records made upon Delaware limited liability companies or Delaware limited partnerships are made pursuant to Section 18-305 of the Delaware LLC Act, and Section 17-305 of the Delaware Revised Uniform Limited Partnership Act, respectively.
What Does a Books and Records Trial Entail?
Books and records trials are often more akin to an "evidentiary hearing" given the narrow scope of issues being litigated. The Court of Chancery will typically set aside a full-day or half-day hearing for evidence to be heard. No opening or closing statements are made, and there is no jury in the Court of Chancery. Rather, the parties' arguments are set forth in pre-trial or post-trial submissions.
Often times, parties will stipulate to having the case "tried on the papers" if there are no material facts in dispute. This means that the parties will forego live testimony and instead hold oral argument before the Court based upon the paper record before it.
How Quickly will the Court Rule?
This can vary. In some instances, the Court may issue a bench ruling the day of the evidentiary hearing or, if tried on the papers, the day of oral argument. In other instances, the Court may request post-trial briefing, and then issue a ruling after reviewing the post-trial submissions.
Will the Court Shift Fees in Favor of the Prevailing Party?
This is a very common question. The Court of Chancery follows the American Rule, meaning that each side must bear their own fees. However, the Court may shift fees in the event that a party engages in bad faith conduct during the course of the litigation. The Court also has discretion to shift fees in the event that an underlying contract or agreement permits fee-shifting.
Can a Books and Records Action be Appealed?
Yes, books and records actions can be appealed. A notice of appeal must be filed within 30 days of the final ruling by the Court of Chancery. The appeal is made directly to the Delaware Supreme Court. After briefing is submitted, Delaware's High Court will determine whether oral argument is necessary. If so, oral argument will be scheduled, and the Court will then rule on the appeal. This full appeal process may take up to 6 to 12 months from the filing of the notice of appeal, absent the appellant seeking expedited review.
Section 220 of the DGCL provides stockholders and directors with an invaluable resource to inspect a corporation's books and records or stockholder list, and can serve useful purposes such as valuing a stockholder's interest, communicating with other shareholders before an election of directors, investigating corporate misconduct or wrongdoing by the fiduciaries of a corporation, among other purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.