Section 220 Complaint Dismissed Pursuant to Rule 12(b)(6)

Section 220 of the Delaware General Corporation Law permits a stockholder to inspect the books and records of a corporation, provided that the demand for inspection meets certain form and manner requirements, and the inspection is sought for a proper purpose—one reasonably related to the interests of stockholders. The Delaware Supreme Court and the Court of Chancery have firmly established that investigation of corporate mismanagement or wrongdoing is a proper purpose under Section 220. To state a proper purpose to investigate mismanagement or wrongdoing of a corporation, a stockholder must, however, allege a “credible basis” to infer possible mismanagement or wrongdoing. The “credible basis” standard has been described as having the “lowest possible burden of proof under Delaware law.” Before filing a derivative action, the Supreme Court and the Court of Chancery have encouraged stockholders to use the tools at hand by first seeking inspection of a corporation’s books and records in order to successfully plead derivative claims under Court of Chancery Rule 23.1. Further, a Section 220 action for books and records is a summary proceeding, for which the Court of Chancery counsels against moving to dismiss based on its expedited nature and the attendant limited time to adjudicate a dispositive motion before trial.

In a recent decision, Master in Chancery Abigail LeGrow concluded, however, that despite the recommendations of the Delaware courts to seek a corporation’s books and records before filing derivative claims, and the lowest legal standard under Delaware law to obtain the right to inspect such records, a stockholder must nevertheless still satisfy the requirement to allege a “credible basis” for corporate mismanagement, or the Court of Chancery will entertain dismissal of even a summary proceeding for books and records at the pleadings stage under Court of Chancery Rule 12(b)(6). In Louisiana Municipal Police Employees’ Retirement System v. Hershey, C.A. No. 7996-ML (Del. Ch. November 8, 2013), LeGrow recommended dismissal of a stockholder’s complaint in a books-and-records action under Rule 12(b)(6). LeGrow held that the plaintiff stockholder failed to sustain its minimal burden of alleging a credible basis to infer mismanagement or wrongdoing of the defendant, The Hershey Co., as opposed to Hershey’s supply chain for cocoa, to support a proper purpose to inspect Hershey’s books and records under Section 220 of the DGCL.