Section 220 of the Delaware General Corporation Law entitles a stockholder with a proper purpose to inspect corporate books and records “necessary and essential” to achieving that purpose. Historically, board minutes, resolutions and similar documents were sufficient for Section 220 inspections. However, as advancing technology has resulted not only in new forms of electronic records and communications, such as emails and text messages, but the pervasive and ubiquitous use thereof, the Delaware courts have had to address whether these forms of electronic information constitute corporate books and records subject to inspection under Section 220. This panel will discuss the recent case law in the area of books and records inspections and provide practice tips for transactional counsel and litigators from board minute-taking, to corporate record-keeping, to making and responding to Section 220 demands, and to litigating Section 220 actions.
Originating at common law, the right of a stockholder to inspect the books and records of a corporation is well established in Delaware. The common law recognized inspection rights to provide a stockholder a means of “self-protection.” As a part owner, a stockholder was entitled to know the condition of the corporation and how corporate fiduciaries and agents were conducting its business and affairs. The common law right, though, was a qualified one, requiring the stockholder to show that the inspection was for a “proper purpose”—a purpose relating to the stockholder’s interest as an owner of the corporation’s stock, and not for speculative reasons, idle curiosity, or unlawful ends. In addition, a stockholder generally was not entitled to inspect all of the books and records of the corporation, but only those that were “necessary and essential” to accomplish the stockholder’s proper purpose.
At common law, a stockholder’s right of inspection was enforceable through a formalistic and burdensome mandamus procedure in Delaware Superior Court. A stockholder’s right of inspection, however, has been codified in Delaware in some form for more than 100 years. The current statutory provision, 8 Del. C. § 220, provides a summary procedure by which a stockholder with a proper purpose may gain prompt access to corporate books and records or apply to the Delaware Court of Chancery for an order to compel an inspection.
Historically, stockholders infrequently exercised their right to inspect corporate books and records. But beginning about 20 years, the Delaware courts have encouraged (and at times even admonished) stockholders to use books and records inspections as an information-gathering tool before filing breach-of-fiduciary-duty complaints subject to heightened pleading standards. Referred to as one of the “tools at hand,” Section 220 demands have become commonplace and, as a result of recent case law developments, have expanded beyond the derivative context alleging corporate mismanagement so as to now oftentimes precede direct actions by stockholders challenging corporate mergers.
At the same time as books and records demands have become much more prevalent, advances in technology have resulted in new forms and stores of corporate information not traditionally thought of as corporate “books and records.” Consequently, stockholders seeking to exercise their inspection rights now increasingly demand the production of not only board minutes, resolutions, consents and related materials, but also electronically stored information such as emails and text messages between or among corporate directors and officers.
Mindful that stockholder books and records inspections are not equivalent to comprehensive discovery in a plenary case and should not be used as a means to conduct a “fishing expedition,” the Delaware courts typically have been reluctant to order production of such electronic documents or communications and instead have deemed traditional board-level materials, such as minutes and resolutions, sufficient to satisfy a stockholder’s purpose. But a court’s determination whether certain documents are “necessary and essential” to a stockholder’s purpose is necessarily one that is dependent on the specific facts and circumstances. Further, the Delaware courts will interpret Section 220 “in light of companies’ actual and evolving record-keeping and communication practices.” Thus, if a corporation’s traditional, non-electronic books and records are insufficient to satisfy a stockholder’s proper purpose, then a court will likely order emails and other electronic documents to be produced. As the Delaware Supreme Court observed in a recent case, “[t]oday, emails and other electronic communications do much of the work of the paper correspondence of yore.”
This program will discuss the recent case law in the area of books and records inspections and provide practice tips for transactional counsel and litigators in light of directors’ and officers’ common use of electronic communications to conduct corporate business—from board minute-taking, to corporate record-keeping, to making and responding to Section 220 demands, and to litigating Section 220 actions.