January 20, 2022

The Corporate Guide: Stockholders Demanding Corporate Records? What You Should Know

What is a books and records demand?

Under Delaware General Corporation Law Section 220, stockholders have the right to inspect corporate records. Strict compliance with the statute is mandatory.

The philosophy underlying inspection rights is that “[a]s a matter of self-protection, the stockholder [is] entitled to know how his agents [are] conducting the affairs of the corporation…” Shaw v. Agri-Mark, Inc., 663 A.2d 464, 467 (Del. 1995).

DGCL § 220(b) sets forth the procedural requirements for a stockholder seeking to inspect corporate books and records, and strict compliance with the statute is mandatory.

What are the basic requirements?

  • The law requires that stockholder demands be made in writing and under oath under penalty of perjury.
  • The demanding party must be an owner of record or beneficial owner of the stock.
    • If the stockholder seeking inspection is an owner of record, no documentary evidence of ownership is required.
    • If the owner seeking inspection is a beneficial owner — like most stockholders of public companies — documentary evidence of ownership is required.
  • Beneficial owners must state their status, provide documentary evidence, and attest that the documentary evidence is true and correct.
  • Under Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 776 (Del. Ch. Feb. 2, 2016), it suffices to provide periodic account statements as evidence of beneficial ownership, as long as the statements are “sufficiently proximate in time” to the date of the demand.

Has a proper purpose been stated? 

  • A stockholder seeking corporate records must state a proper purpose for doing so — i.e., what it will do with the information or an end to which that investigation may lead. A proper purpose is one “reasonably related to such person’s interest as a stockholder.” 
  • If the stockholder is only seeking a stock list or stock ledger, the burden is on the corporation to prove that a proper purpose does not exist. 
  • If the stockholder seeks documents beyond the stock list or stock ledger, the stockholder must establish a proper purpose.

What are examples of proper purpose? 

  • Popular examples of a proper purposes include: 
    • To investigate allegedly improper transactions or mismanagement. 
    • To clarify an unexplained discrepancy in the corporation’s financial statements regarding assets. 
    • To ascertain the stock’s value or explore a possible sale of stock. 
    • To aid litigation the stockholder has instituted and to contact other stockholders regarding litigation and invite their association in the case. 
    • To inquire into the independence, good faith and due care of a special committee formed to consider a demand to institute derivative litigation.

How can I quickly identify a purpose that is improper? 

  • The following are examples of reasons for a 220 demand that are excluded from the definition of “proper purpose”: 
    • Mere suspicion or subjective belief of wrongdoing.
    • To institute annoying or harassing litigation against the corporation. 
    • To force the corporation to buy out a stockholder’s interest. 
    • To develop a cause of action against the company’s financial advisors during a transaction (or other third parties); or – “idle curiosity.”

What to consider if litigation is the only purpose described in the demand for records? 

  • A stockholder’s proper purpose must be stated with “credible basis” — the lowest possible burden of proof.
  • Credible basis requires simply that the stockholder has, through documents, logic, testimony or other sources, raised legitimate issues of wrongdoing or demonstrated that wrongdoing is possible. 
  • Even where there is credible basis to inspect records, the court will deny the demand if the wrongdoing is not justiciable. For example, the court has denied demands when: 
    • The litigation anticipated is time-barred. Graulich v. Dell, Inc., 2011 WL 1843818 (Del. Ch. May 16, 2011). 
    • The stockholder lacks standing to bring suit. West Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 641 (Del. Ch. 2006). 
    • The anticipated lawsuit would bring duty of care claims alone and the directors at issue would exculpated for breaches of care under Section 102(b)(7) of the DGCL. SE Pa. Transp. Auth. v. AbbVie, Inc., (Del. Ch. Apr. 15, 2015).

If there is a proper purpose, what types of corporate records can the stockholder see? 

  • The demand must identify the documents or categories of documents that the stockholder would like to inspect with rifled precision. Brehm v. Eisner, 746 A.2d 244, 266-67 (Del. 2000). 
    • “Rifled precision” depends on the relevant facts, and requires a qualitative analysis of documents demanded. Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1283 (Del. 2014). 
  • The documents identified must be “necessary and essential” to the proper purpose. 
    • “Necessary and essential” means that the documents or categories of documents deal with the crux of the stockholder’s purpose, and if that information is unavailable from another source. 
    • As with “rifled precision,” whether documents are necessary and essential is fact-specific and will necessarily depend on the context in which the stockholder’s inspection demand arises. Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014).

How long does my company have to respond? 

  • Once a stockholder makes a proper demand, the corporation has five business days to respond. 
  • A corporation’s failure to respond is tantamount to refusing the stockholder’s demand, which will allow the stockholder to file a lawsuit to compel inspection of the company’s records. 
  • Tips: Promptly engage outside counsel to seek an extension of response time and to analyze how to respond to the 220 demand. 
    • Try to be reasonable. When companies have flatly refused to produce records responsive to a valid 220 demand, the Court of Chancery has responded by permitting a records deposition before ordering the company to produce the records and by ordering the corporation to pay the stockholder’s fees related to efforts to obtain the books and records, including for the litigation. The Court also has presumed certain corporate records do not exist because the company declined to produce them in response to a valid books and records demand, which could present a challenge for merits litigation.

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