Chancery Court Continues Close Scrutiny in Section 220 Actions

Section 220 of the Delaware General Corporation Law affords shareholders of Delaware corporations the right to inspect the books and records of corporations in which they hold an ownership interest. This right is subject to compliance with certain form and manner requirements and a demonstration that the shareholder seeks the inspection for a proper purpose, defined as a purpose reasonably related to the requester’s interest as a shareholder. The shareholder has the burden of showing, by a preponderance of the evidence, a proper purpose for each item sought.

For nearly two decades, Delaware courts have encouraged the use of Section 220 requests by shareholders seeking to effect policy, personnel or governance reforms within Delaware corporations. See, e.g.,Rales v. Blasband , 634 A.2d 927, 935 n.10 (Del. 1993) andSouth v. Baker , C.A. No. 7294-VCL (Del. Ch. Sept. 25, 2012). Nevertheless, and perhaps mindful of the high costs associated with indiscriminate books-and-records requests, Delaware courts have not relaxed the statute’s substantive and procedural requirements. Indeed, in a pair of recent decisions,Louisiana Municipal Police Employees’ Retirement System v. Lennar , C.A. No. 7314-VCG, 2012 Del. Ch. LEXIS 230 (Del. Ch. Oct. 5, 2012) (LAMPERS ), andRock Solid Gelt Ltd. v. SmartPill , C.A. No. 7100-VCN, 2012 Del. Ch. LEXIS 234 (Del. Ch. Oct. 10, 2012), the Chancery Court applied careful scrutiny to the purposes shareholders asserted in their Section 220 requests.