Stockholders of Delaware corporations for many years have had the right to examine stock ledgers, stockholder lists and “books and records” for a “proper purpose” under Section 220 of the Delaware General Corporation Law. Until recently, however, the concepts of “books and records” and “proper purpose” were not defined in the DGCL.
Over time, Delaware courts have broadened the scope of books and records demands, allowing stockholders to gain access not just to formal corporate records like board minutes, but also to informal documents such as emails and text messages. Courts have also lowered the threshold for demonstrating “proper purpose,” requiring only a “credible basis” to suspect corporate wrongdoing.
The expansive judicial interpretation of Section 220 has led to a surge in inspection demands, often a precursor to stockholder lawsuits, significantly increasing compliance costs and litigation risks for companies.
This led to calls for reform of the books and records inspection rules. The calls have also come amid the backdrop of a growing debate about Delaware’s standing as the jurisdiction of choice for incorporation. Some high-profile business leaders, including Elon Musk and Mark Zuckerberg, have been upset about recent decisions in the Delaware courts and have questioned whether Delaware remains the best place to incorporate, creating speculation about companies redomiciling elsewhere or “DExit” as the threatened exodus has been nicknamed.
Responding to these concerns, the Delaware legislature recently adopted significant amendments to the DGCL, including an overhaul of Section 220. The Section 220 amendment seeks to restore predictability and limit the scope of document production by explicitly defining “books and records”, imposing stricter conditions on stockholder requests and restrictions on how stockholders could use inspected records, while preserving the inspection rights of stockholders with a truly proper purpose.
The changes to DGCL Section 220 could be summarized as follows:
Definition of “Books and Records”. Prior to the Amendment, Section 220 had no explicit definition for “books and records”, leading to disputes over scope. The term “books and records” is now defined to consist of the following:
- Certificate of incorporation and any document incorporated by reference in the certificate of incorporation;
- By-laws and any document incorporated by reference in the bylaws;
- Minutes of meetings and written consents of stockholders for the past three years;
- Written or electronic communications to stockholders within the past three years;
- Minutes of meetings and written consents of the board of directors or any board committee;
- Materials provided to the board or any board committee regarding actions taken by the board or any such committee;
- Annual financial statements for the last three years;
- Any agreement entered into with a current or prospective stockholder under §122(18) of the DGCL; and
- Director and officer independence questionnaires (listed companies only).
Court Authority to Order Production. Previously, courts could order production of various corporate records beyond books and records. The Amendment limits the Delaware Court of Chancery to ordering only the books and records identified above, with two exceptions: (i) if the company lacks certain records, the court may order the “functional equivalent”; and (ii) if the stockholder has a “compelling need,” the court may order additional records.
Inspection Conditions. Previously, stockholders only needed a “proper purpose” for inspection. The Amendment adds three new conditions: (i) the stockholder must act in “good faith” for a proper purpose; (ii) the request must be made with “reasonable particularity”; and (iii) the purpose must be “specifically related” to the requested records.
Confidentiality and Use Restrictions. Previously, there was no explicit statutory authority for corporations to impose confidentiality restrictions. Under the Amendment, corporations may condition production on the stockholder agreeing to “reasonable restrictions” on confidentiality, use or distribution of records. Companies may also redact information not specifically related to the stockholder’s purpose.
Compelling Need Exception. Under the Amendment, the Court of Chancery may order a corporation to produce specific records not within the new definition of “books and records” if the stockholder otherwise satisfies the aforementioned inspection conditions (“proper purpose”, “reasonable particularity” and “specific relation”), shows a “compelling need” to further its proper purpose and demonstrates by clear and convincing evidence that specific records are necessary and essential to further such purpose.
Observations
First, the proper purpose standard under the express language of old Section 220 applied to all three categories of corporate records: stock ledgers, stockholder lists and books and records. As amended, the conditions that stockholders must satisfy when seeking inspection – “proper purpose”, “reasonable particularity” and “specific relation” – technically only apply to books and records under the express language of Section 220. It will be interesting to see whether stockholders seize on this inconsistency and take the position that they are entitled to inspect stock ledgers and stockholder lists without needing to satisfy the statutory conditions.
Second, books and records now explicitly includes materials provided to the board of directors or any board committee in connection with actions taken by the board or such committee. Companies often struggle with the dilemma of whether and to what extent any materials should be sent to the directors (and any observers) in advance of board meetings, as opposed to just presenting information and perhaps a power point presentation at the meeting. With board materials now explicitly included within the scope of books and records for the purpose of Section 220 inspections, companies should include this among the list of factors to consider when contemplating whether or not to include any particular document among board materials.
Third, while new Section 220 generally limits the scope of books and records demands to those documents listed in the definition of books and records, the exception for such other records for which a stockholder can show a “clear and compelling” need creates the potential for the courts to interpret this broadly. If so, stockholders may be able to gain access to some of the same informal types of records that the Amendment was ostensibly seeking to restrict, such as emails and texts. It may also open the door for stockholders to demand more than three years of those books and records that are otherwise limited to the past three years under the new definition, namely minutes of stockholder meetings, stockholder consents, communications with stockholders and annual financials. This could potentially weaken the practical value of the Amendment in a significant way.
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