Delaware Chancery Court Addresses Records Inspection Requests Standards
The Delaware Chancery Court recently addressed the limits of shareholder inspection rights, holding that such requests must be specifically related to a proper purpose.
Plaintiffs, shareholders in defendant American Cash Exchange, Inc. (ACE), sought access to various books and records to value their stock and investigate potential fiduciary duty breaches. Plaintiffs believed that ACE had made materially misleading statements about the company’s financial outlook, and had omitted key information in other disclosures, such as the failure of a condition to one of ACE’s major contracts. In addition, plaintiffs claimed that ACE engaged in improper transactions with its president and controlling shareholder.
In granting certain of plaintiffs’ demands, the court identified two requirements governing inspection rights: shareholders must submit proper purposes for their requests, and their requests must be tailored to satisfy the stated purposes. The court explained that “the mere possibility that the plaintiff may use the information obtained to harm the corporation is not grounds for withholding or restricting the right of inspection.” As long as shareholders offer primary proper purposes for their requests, a secondary ulterior motive will not defeat their right to inspect. However, to check the possibility that plaintiffs may gain access to records by providing pretextual justifications, the court held that it will compel production only of what is “essential and sufficient” for shareholders to effectuate the purposes of their requests.
Doerler, et al. v. American Cash Exchange, Inc., Civil Action No. 7640-VCG (Del. Ch. Feb. 19, 2013).