December 6, 2021

Volume XI, Number 340


December 06, 2021

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Vice Chancellor Veers Away from Delaware Section 220 Precedent

Last year, we highlighted the risks of filing a Section 220 books and records request post-litigation, citing a case where the Delaware Chancery Court found that such use was an improper attempt to “sue first, ask questions later.”

Recently, the Delaware Chancery Court opined on this issue again in Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corporation – this time, the Vice Chancellor took a more expansive view in favor of the parties seeking information under Section 220. Section 220 of the Delaware General Corporation Law allows stockholders to inspect books and records of a Delaware corporation for any proper purpose and to compel inspection if such inspection is refused.

In Lebanon, Vice Chancellor Laster refused to expand the “proper purpose” requirement as also implying a “purpose-plus-an-end” requirement. Although the Court of Chancery has held that the most important factor in the Section 220 analysis is the stockholder’s purpose in seeking such information, VC Laster held that the proper purpose requirement did not include a condition that a requesting party specifically state in the initial demand what will be done with documents that are received (e.g., to evaluate potential claims, initiate litigation, seek other corrective measures, etc.). In fact, VC Laster’s opinion is particularly instructive because it provides a list of previously accepted purposes under which a stockholder can seek information which satisfy the “proper purpose” requirement, including (among others):

  • To investigate allegedly improper transactions or mismanagement;

  • To clarify an unexplained discrepancy in the corporation’s financial statements regarding assets;

  • To communicate with other stockholders in order to effectuate changes in management policies; and

  • To determine an individual’s suitability to serve as a director.

Further, Vice Chancellor Laster spoke to the “credible basis” standard derived from established Delaware law, which states that a stockholder must show a credible basis that there is “possible mismanagement” that warrants investigation. VC Laster held that defendants cannot rely on the defense that plaintiffs “only-want-to-sue” as a way to avoid producing documents in response to a Section 220 request by cabining that request to the merits of a potential shareholder derivative claim – a plaintiff may still have an additional credible basis of wrongdoing worthy of further investigation to justify the demand for relevant information.

Separately and importantly, VC Laster noted that relevant emails between members of a corporation are subject to production in response to a Section 220 request even if those emails were sent using personal accounts.

The Lebanon opinion is extremely informative in elucidating the parameters of Section 220’s requirements. This decision illustrates various views that courts may take in evaluating Section 220 requests in favor of the stockholder, and is indicative of the ambiguities of Section 220. Litigants should remain cautious in the event that a plaintiff casts a wide net by seeking a broad range of information wrapped in the cloak of a Section 220 request.

© 2021 Proskauer Rose LLP. National Law Review, Volume X, Number 65

About this Author

Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset...

Hena Vora Litigation Attorney

Hena Vora earned her J.D. from Emory University School of Law, where she received the Pro Bono Publico honor and a Transactional Law Certificate. In addition, she was a national competitor on the Moot Court Society and served as president of Emory’s South Asian Law Students Association. While at Emory, she served as judicial intern for Judge Denny Chin at the U.S. Court of Appeals for the Second Circuit, legal extern for General Electric and securities research assistant to Professor George Georgiev.

Prior to law school, Hena worked as a paralegal at Cravath, Swaine & Moore, LLP...