Shlansky Law Group Helps Clients Draft and Respond to Section 220 Demands
Delaware law gives stockholders a statutory right to inspect a company’s books and records. For investors, this right is the most powerful method for uncovering corporate wrongdoing or gathering the information needed to understand their investment and its worth. For corporations, responding to a carefully crafted demand requires careful maneuvering. Delaware businesses must respect their stockholders’ rights, but businesses must also protect sensitive business information and prevent costly fishing expeditions.
At Shlansky Law Group, our experienced attorneys routinely litigate and advise clients on complex corporate governance conflicts. We help investors understand and enforce their rights before major disputes spiral out of control.
Call SLG today at 347.378.6990 to schedule a comprehensive consultation.
What Is a Section 220 Demand?
Under Section 220 of the Delaware General Corporation Law (DGCL), stockholders of a Delaware corporation have a qualified right to inspect the company’s books and records. The word “qualified” (as opposed to “absolute”) means that several requirements need to be met before a stockholder can flex their rights under Section 220. This means a stockholder cannot demand corporate records to satisfy his own curiosity or because he vaguely suspects wrongdoing due to disagreements over a business decision.
Section 220 requires stockholders to state a “proper purpose” for the inspection. The law states that a proper purpose is “a purpose that reasonably relate[s] to a stockholder’s interest as a stockholder.” The courts have ruled that there exist multiple of these proper purposes. One of the most common is the investigation of potential corporate mismanagement.
For example, a stockholder might file a Section 220 demand to obtain evidence of self-dealing by business leadership (a violation of the duty of loyalty) or of systemic failures in regulatory compliance (which can give rise to a Caremark claim). Without Section 220, it would be practically impossible for many of these claims to ever move forward.
The Credible Basis Standard
If a stockholder claims his proper purpose is to investigate corporate mismanagement, he must satisfy a specific evidentiary threshold known as the “credible basis” standard. Delaware courts have repeatedly held that stockholders need not prove actual wrongdoing at this early stage. They only need to show, by a preponderance of the evidence (i.e., “it is more likely than not”), a credible basis from which the court can infer possible mismanagement that warrants further investigation.
The credible basis standard is a very low bar to meet. However, a low bar does not mean the court rubber-stamps every demand it sees. The stockholder must present concrete evidence. A plaintiff cannot point to a sudden drop in the company’s stock price or a routine business setback and claim the board must have breached its duties.
What Must Be Turned Over for Inspection in a Section 220 Demand?
Once a court determines a stockholder has a proper purpose, it must define the physical scope of the inspection. Under Section 220, stockholders are only entitled to records that are “necessary and essential” for their stated purpose. The scope of production is one of the most fiercely debated topics in Delaware corporate law.
Historically, document productions were generally limited to formal board materials. These included board meeting minutes, drafted agendas, slide presentations given to the directors, and official voting resolutions. The rationale was simple: formal board materials accurately reflect what the directors knew, what they discussed, and how they voted. If a stockholder wanted to investigate the board, the official minutes were the appropriate place to look.
However, as standard business communication shifted to digital platforms, Delaware courts have adapted. In several prominent cases over the last few years, Delaware courts have expanded the scope of Section 220 productions to include “informal” communications. If the company could not produce sufficient formal board minutes, or if the directors clearly conducted official corporate business outside the boardroom, courts ordered the production of executive emails, text messages, and private messaging applications.
How the Delaware Court of Chancery Handles These Cases
Overall, the goal of Section 220 is to resolve initial information disputes as quickly and efficiently as possible. Thus, the Delaware Court of Chancery generally handles Section 220 cases as “summary proceedings.” This puts these cases on a highly expedited timeline compared to standard Chancery cases. Chancery cases already tend to move fast, because the Court does not use juries. Instead, the cases are decided by highly specialized judges who focus almost exclusively on Delaware corporate law.
To further assist in a speedy resolution, the discovery process within Section 220 litigation is extremely limited. For example, depositions are usually limited to a single corporate representative who will testify only on a limited set of topics, such as what types of documents the company keeps, how they are stored, where they are stored, and who can access them.
Trials over Section 220 are often concluded in a single fast-paced day. The judge will review the initial demand, the rejection letter, the evidence establishing a credible basis, and the legal arguments over the scope of the requested books and records. If the stockholder wins, the Court will issue a ruling that details exactly which categories of documents the company must produce and on what terms.
Stockholders who file a hastily drafted demand face numerous risks. Even if they “win” in court, a poorly drafted demand might not get the stockholders access to the documents they need to continue their case against the company’s leadership. Additionally, stockholders may face preclusion issues if they try to send another Section 220 demand.
Frequently Asked Questions (FAQs) about Section 220 Demands
Who is eligible to make a Section 220 demand?
Any stockholder of record or beneficial owner of a Delaware corporation can make a Section 220 demand. There is no minimum requirement for the number of shares owned or the length of time the shares have been held. Even a person holding a single share of stock has the statutory right to request corporate records, provided he meets the legal requirements of stating a proper purpose and demonstrating a credible basis when investigating potential wrongdoing.
How can an experienced attorney help with a Section 220 demand?
Whether you are making or responding to the demand, an experienced attorney is essential to getting the results you need.
For example, if you are making the demand, one of the most common issues that prevents it from being successful is that it is too broad. One of the key requirements to review corporate books and records is that the review serves a “proper purpose” that is reasonably related to a stockholder’s interest as a stockholder. This means that wanting to take a peek behind the scenes for your own satisfaction or to “go on a fishing expedition” won’t cut it.
SLG has many years of experience drafting and responding to Section 220 requests. We can draft a narrowly tailored demand to help you obtain the corporate records you need. On the business side, we regularly help our clients respond to these demands by identifying which records pertain to the request and which do not. This approach allows companies in Delaware to adhere to their statutory duties while maintaining their corporate privacy.
How does one start the Section 220 process?
The Section 200 process begins by drafting and serving a formal written demand to either the corporation’s registered agent in Delaware or its principal place of business. This is not a casual request; your demand must meet several legal requirements, such as:
- The demand must be made under oath. This usually requires a notarized affidavit.
- You must demonstrate evidence that you are a stockholder.
- The demand must explain the specific “proper purpose” for requesting access to the corporate records.
- Your demand needs to describe the specific categories of records you want, and why those records are “essential and sufficient” to your purpose.
If your demand fails to strictly comply with these legal requirements, the company will almost certainly reject it. That is why stockholders often call SLG’s experienced attorney team. Our attorneys are highly experienced in Delaware corporate law and can draft a demand letter that follows Delaware’s formal requirements.
SLG Helps Handle Section 220 Books and Records Demands
In a corporate governance dispute, information is the most valuable asset you can have. A successfully executed Section 220 demand can force a board to address systemic mismanagement or provide investors with the factual leverage they need to negotiate a favorable settlement. Conversely, a strong legal defense against improper demands protects companies from frivolous litigation, expensive document reviews, public smear campaigns, and fishing expeditions by disgruntled stockholders.
SLG has the knowledge and courtroom experience to both draft and respond to Section 220 books and records demands. Whether you are dealing with the initial demand letter or a litigation battle, SLG provides the legal guidance you need in order to win.
Do not let a Section 220 dispute compromise your investment or your company’s operational security. Call SLG today at 347.378.6990 for a confidential consultation.
