Delaware law gives shareholders the right to request corporate books and records in order to investigate issues that are of interest to them. For several decades now, Delaware courts have encouraged shareholders to take advantage of this right as a matter of first course, to use the “tools at hand” and seek company records before filing litigation or making a litigation demand. In recent years, more shareholders (and their attorneys) have been following that advice, and the so-called “Section 220 books and records demand” is more common than ever.
Delaware courts have acknowledged, however, that the shareholder’s right to obtain corporate records must be balanced against the board’s right to manage the company’s business without undue interference. Accordingly, where a shareholder requests mundane company materials like stock ledgers or shareholder lists, the company generally must produce. But where the shareholder seeks more sensitive company records, the law puts the burden on the shareholder to show why the production is necessary.
To meet that burden, a shareholder seeking company materials must:
- articulate a “proper purpose” for their books and records request, or one that is reasonably related to a legitimate interest as a shareholder and is not adverse to the corporation’s best interests;
- if the purpose is to investigate or prosecute alleged wrongdoing, offer evidence to show there is a credible basis to believe mismanagement occurred; and
- explain why each category of documents sought is “essential” to fulfill the stated purpose.
Determining whether a shareholder request satisfies these requirements is a fact-intensive question, and should be informed by the broad body of Section 220 case law. When responding, companies should also consider whether
- the documents being sought are subject to a discovery stay in ongoing shareholder or class action litigation;
- a confidentiality agreement is necessary to ensure the documents are properly maintained; or
- producing of materials beyond the letter of the request could help explain away the shareholder’s concerns.
Because a Section 220 books and records request is often the first step toward shareholder litigation, companies should be thoughtful in their response, and be sure that both shareholder and company concerns are considered before any production occurs.