Standard to Allege Mismanagement in Motion to Dismiss Section 220 Complaint

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—e.g., one reasonably related to the interests of stockholders. It is well established that the investigation of corporate mismanagement or wrongdoing is a proper purpose under DGCL Section 220. But, to state a proper purpose to investigate mismanagement or wrongdoing of a corporation, a stockholder must allege a “credible basis” to infer “possible” mismanagement or wrongdoing. The Court of Chancery has noted that the “credible basis” standard has, however, the lowest possible burden of proof under Delaware law.

A Section 220 action for books and records is a summary proceeding. In commenting on whether a defendant should move to dismiss a books-and-records action under Court of Chancery Rule 12(b)(6), the court has counseled against filing a motion to dismiss a Section 220 complaint. The court has explained that the plaintiff-friendly standard in a motion to dismiss combined with the lenient “credible basis” standard results in a “doubly” high burden to succeed in a motion to dismiss a Section 220 complaint, which results in inefficiency. The motion to dismiss will delay the summary Section 220 action that would otherwise have proceeded expeditiously to trial. At the trial of a Section 220 action, where it is unconstrained by the procedural posture of a motion to dismiss, the court may make determinations about the sufficiency of evidence and weigh competing inferences to strike the balance required under the “credible basis” standard between granting stockholders proper access to a corporation’s records and protecting them from wasteful fishing expeditions based on the mere suspicion or curiosity of a stockholder. A recent transcript decision of the Court of Chancery reaffirms these principles, and clarifies the “credible basis” standard to state a proper purpose to investigate mismanagement or wrongdoing in the context of a Rule 12(b)(6) motion to dismiss a Section 220 complaint.