What Is a Section 220 Books and Records Demand?

Delaware law grants corporate leadership tremendous power to run the company as they see fit. The law also gives stockholders the ability to investigate the company’s internal books and records to hold leadership accountable, such as in fiduciary duty disputes. However, you can’t just buy a stock and then demand access to confidential information right then and there. If you want to make a Section 220 books and records Demand, you must follow precise steps and meet certain qualifications.

What Exactly Is a Section 220 Books and Records Demand?

A Section 220 demand is a formal written request sent by a stockholder to a Delaware corporation asking to review specific internal documents. Delaware law gives stockholders the power to hold corporate leadership accountable by requiring the company to open its internal records.

The separation of ownership and control defines the modern corporation. A stockholder provides the capital, while the board of directors and corporate officers manage the daily operations. Sometimes, directors hide behind corporate walls and refuse to share information with the people who actually own the company. A stockholder uses this statute to investigate suspected breaches of fiduciary duty by a director or officer.

The corporation must respond, and if it refuses without a valid reason, the stockholder can sue the corporation. This statute provides a powerful avenue for an individual to uncover the truth when she believes leadership is harming her investment. For example, if she invests in a technology company and suspects the chief executive officer is funneling corporate funds to a separate personal business, she can use this demand to obtain the financial ledgers and board approvals related to those specific transactions.

Who Is Allowed to File a Section 220 Demand?

Any current stockholder of a Delaware corporation can file a Section 220 demand if she meets the specific legal requirements. The individual must hold stock in the company at the time she makes the demand and maintain her ownership throughout the inspection process.

Delaware law recognizes two types of stock ownership. A record owner has her name listed directly in the company’s official stock ledger. A beneficial owner holds her shares through an intermediary, such as a retail broker or trading platform. Delaware allows both types of owners to make a demand, but the rules differ slightly.

A beneficial owner must provide extra proof of her ownership under oath. This proof usually involves an official account statement from her broker confirming her ownership status. The stockholder must also show she is acting to protect her investment and not merely harassing the company. She must strictly follow the procedural rules of the Delaware General Corporation Law, which require the demand letter to be in writing and signed under oath. A single technical error in how she formats or signs the letter can result in the company denying her request in full.

What Is a Proper Purpose for Inspecting Corporate Records?

A proper purpose is a valid, legally acceptable reason for a stockholder to seek access to a company’s internal documents. Delaware courts require the stockholder to state a primary purpose that relates directly to her interest as an investor.

A stockholder cannot demand documents just because she is curious about how the company operates. She must have a specific reason recognized by the court. Common proper purposes include:

• Investigating corporate mismanagement or wrongdoing by leadership.
• Determining the true financial condition of the company.
• Valuing her shares of stock for a potential sale.
• Communicating with other stockholders about an upcoming corporate meeting.
• Reviewing the independence of the board of directors.

Investigating wrongdoing is the most common purpose for a demand. However, a stockholder cannot simply state she suspects fraud or “has a hunch.” Instead, she must present a credible basis to support her suspicion. For example, if the stockholder reads a credible news article about a Securities and Exchange Commission (SEC) investigation into the company or notices that there is a series of highly unusual accounting irregularities in public filings, the stockholder can use those facts to help establish a credible basis.

What Types of Documents Can a Stockholder Request?

Stockholders should only request documents that are both necessary and essential to the stated proper purpose. If Delaware courts suspect you are going on a “fishing expedition” or trying to satisfy your own curiosity, your request will almost certainly be denied. As a result, the request must be tailored specifically to the concerns you are trying to raise.

Of course, that is easier said than done. Determining exactly what must be turned over and what is irrelevant is a heavily contested issue in these disputes. To keep the case moving forward, stockholders usually request these documents because they are highly likely to have relevant information:

• Board of directors meeting minutes and formal resolutions.
• Presentations and slide decks given to the board by management.
• Financial statements and accounting records.
• Work emails and text messages of corporate officers.

Frequently Asked Questions (FAQs) About Delaware Books and Records Demands

Does a stockholder need a lawyer to make a demand?

Making successful books and records demands without an attorney experienced in Delaware corporate litigation is almost impossible. That is because the procedural rules of the Court of Chancery are incredibly dense and strictly enforced. If you make even a small or highly technical mistake, your demand will likely be rejected, and the courts will not assist.  

Can a corporation charge the stockholder for producing documents?

Sometimes. The Court of Chancery has held that stockholders can be charged the “reasonable costs” of copying records. Additionally, stockholders may be penalized with having to pay associated costs if the demand was made in bad faith. However, the corporation cannot hide behind excessive document charges to prevent stockholders from investigating the books and records.

How Shlansky Law Group Can Help Your Books and Records Request

If you suspect corporate wrongdoing or your company is going through Delaware corporate governance disputes, a Section 220 books and records request is one of the primary ways to peek behind the curtain and see how the company is actually operating. At SLG, our highly experienced team has spent decades helping clients gain access to these records by properly filing the demand and demonstrating a proper purpose.

If you suspect corporate mismanagement and need to inspect the company’s books and records, call Shlansky Law Group today at 347.378.6990.