Delaware Books and Records Demands in 2023: Protections and Pitfalls for Companies

In 2023, the Delaware Court of Chancery provided important guidance for companies and stockholders for inspection demands under Section 220 of the Delaware General Corporation Law. In various decisions, the Court addressed the ability of issue-motivated investors and their counsel to inspect corporate records related to the ESG-related decisions of a board of directors, underscored that formal board materials typically satisfy the properly stated purpose of a demand absent a clear showing by the stockholder that such materials are insufficient, and warned companies against producing board materials with redactions that the Court could perceive as excessive.

Statutory Basics

An individual or entity seeking records under Section 220 must establish three requirements to make a valid inspection demand: (i) its status as a stockholder of the corporation; (ii) compliance with the statutory requirements for making a demand, and (iii) a “proper purpose” for conducting the inspection.¹ A demand for materials under Section 220 must be made “under oath” and “state the person’s status as a stockholder, must be accompanied by documentary evidence of beneficial ownership of the stock, and must state that such documentary evidence is a true and correct copy of what it purports to be.”² The stockholder also must provide an executed power of attorney or similar instrument if an attorney makes the demand on the stockholder’s behalf.³

Further, the demand must state a proper purpose for the inspection, with the statute loosely defining a “proper purpose” as “a purpose reasonably related to such person’s interest as a stockholder.”⁴ Section 220(c) requires a company to respond no more than five business days after the demand is made, allows petitioners to seek orders compelling an inspection, and vests the Court of Chancery with “exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought.”⁵

Evaluating a Stockholder’s Stated Purpose

The most substantive question in any Section 220 demand is whether the stockholder has stated a proper purpose for its demand. Assessing the propriety of the stockholder’s stated purpose is “[t]he paramount factor in determining whether a stockholder is entitled to inspection of corporate books and records.”⁶ If the stated purpose is challenged, a stockholder bears the burden of proving its purpose is proper.⁷

The text of Section 220 specifically authorizes stockholders to inspect a corporation’s stock ledger or list of stockholders.⁸ Delaware courts have found an array of additional purposes to be proper under Section 220, including:

• investigating potential wrongdoing or breaches of fiduciary duty,
•  valuing a stockholder’s shares,
• assessing a director’s independence,
• exploring the circumstances under which a special committee was formed; and,
• communicating with other stockholders regarding a tender offer.⁹

Many inspection demands identify the investigation of wrongdoing as a primary purpose for seeking books and records. Demands seeking to uncover wrongdoing, mismanagement, breaches of fiduciary duty or corporate waste must present “some evidence to suggest a credible basis” for the Court to infer that wrongdoing occurred, which Delaware courts characterize as the “lowest possible burden of proof.”¹⁰ The stockholder need not make a showing that any wrongdoing “actually occurred.”¹¹ But a “mere statement of purpose to investigate possible general mismanagement, without more” falls below the credible-basis requirement.¹² Additionally, a demand to investigate wrongdoing cannot be a pretext for a different purpose, unrelated to the stockholder’s interest as a stockholder, such as obtaining documents to advance a political agenda.¹³

In a significant decision, the Court of Chancery in Simeone v. The Walt Disney Company found that a stockholder lacked a proper purpose to investigate an ESG-related decision by The Walt Disney Company’s board of directors to take a position on Florida’s “Parental Rights in Education” bill, sometimes referred to as the “Don’t Say Gay Law.” The Court determined, among other things, that the stockholder’s issue-motivated attorneys, and not the stockholder himself, were the primary drivers for the demand, and that the stockholder had failed to articulate a credible basis to investigate corporate wrongdoing where the board’s decision was protected under the business judgment rule.¹⁴ While the facts in Simeone were particularly bad for the stockholder-plaintiff, the decision is a useful reminder that, while rare, a company can defeat an improper stockholder demand by arguing that the demand lacks a proper purpose.

Determining the Scope of the Inspection

Assuming a Section 220 demand reflects a proper purpose, much of the action today focuses on determining which books and records a stockholder is entitled to inspect. It is well established that inspection demands are “limited to those books and records that are necessary and essential to accomplish the stated, proper purpose.”¹⁵  Document requests in a Section 220 demand must therefore be “circumscribed with rifled precision.”¹⁶ A stockholder’s stated purpose serves as a limiting principle on the categories of documents that it can demand to inspect; the stockholder bears the burden of establishing that each category is “essential to the accomplishment of the stockholder’s articulated purpose.”¹⁷ Indeed, the “court must give the petitioner everything that is ‘essential’ but stop at what is ‘sufficient’” for its stated inspection purpose.¹⁸

Recent rulings in Section 220 cases have divided the universe of materials that could be produced in response to a demand into three categories: (i) “formal board materials,” which may include agendas for board meetings, minutes and resolutions from those meetings, and materials directors received in connection with such meetings; (ii) “informal board materials,” such as communications between directors and officers outside of regular board meetings or communications between the directors themselves; and (iii) “officer-level materials,” meaning communications between officers or employees that were not shared with directors.¹⁹

“The starting point (and often the ending point) for an adequate inspection will be board-level documents that formally evidence the directors’ deliberations and decisions and comprise the materials that the directors formally received and considered.”²⁰ Where a corporation observes “traditional board formalities” of memorializing board actions through minutes and resolutions, it can satisfy most demands by providing those official records.²¹ Accordingly, current practice in Delaware involves a company providing a core set of formal board materials in response to a Section 220 demand, with the burden then shifting to the stockholder to establish why additional documents are necessary to fulfill the purpose of its demand. This practice follows the Delaware Supreme Court’s note of caution to the Court of Chancery to “not order emails to be produced when other materials (e.g., traditional board-level materials, such as minutes) would accomplish the petitioner’s proper purpose,” unless the stockholder demonstrates why those materials are insufficient.²² In Simeone, for example, the Court held that the company’s production of board-level materials concerning its response to the Florida legislation was sufficient, and the stockholder’s insistence on obtaining emails between officers and directors—across three years—was “vastly overbroad.”²³

Generally, stockholders can only obtain additional materials beyond formal board records by pointing to gaps or significant inconsistencies among the board-level documents. In In re Zendesk, Inc. Section 220 Litigation, the Court of Chancery considered a stockholder’s arguments that gaps and inconsistencies justified an inspection beyond board-level materials.²⁴ The Court dismissed the stockholder’s claim that there were gaps in board materials, with the Court pointing to the board presentations, memoranda, and minutes included in the company’s board-level production, all of which shed sufficient light on the transaction at the heart of the stockholder’s inspection demand.²⁵ And the Court minimized purported inconsistencies as either “instances in which the produced documents provide more detail” than materials in the stockholder’s possession, or as downright “nitpicky.”²⁶ The Court noted that, “[w]hile incremental details could be helpful to flesh out Plaintiffs’ theories, that does not support Plaintiffs’ request for ‘comprehensive,’ discovery-style email production through a books and records action.”²⁷

Other recent decisions have explained that officer-level materials may be appropriate where the stockholder’s stated purpose directly involves communications between officers or alleges officer wrongdoing. For example, in Hightower v. SharpSpring, the Court of Chancery ordered a targeted production of officer emails to resolve material inconsistencies between proxy disclosures and board materials, because the “alleged wrongdoing happened exclusively or predominantly at the officer level.”²⁸ And in NVIDIA Corporation v. City of Westmoreland Police and Fire Retirement System, the Court ordered a production of officer-level materials where the stockholder’s Section 220 complaint contained “specific and concrete allegations” that executives had communicated about the impact of cryptocurrency on the company, the subject of the demand, but had not shared their conclusions with the board.²⁹

Redactions of Books and Records

Last, the Court of Chancery has issued several rulings in the past year that should warn companies against overzealous redactions when producing Section 220 inspection materials. In addition to privilege redactions, irrelevant portions of minutes, presentations, and emails can be redacted because Section 220 “only entitles a stockholder to information essential to accomplishing its stated purposes for inspection.”³⁰ But two recent decisions penned by Vice Chancellor Laster show the need to be judicious with any redactions.

First, the Vice Chancellor criticized a series of relevance redactions that seemed to defy logic, including mid-sentence redactions in apparently responsive paragraphs, redaction of a paragraph in the middle of minutes for a special meeting to address the exact subject of the Section 220 demand, and multiple redactions to a one-page memorandum that also addressed the subject at issue.³¹ The Vice Chancellor explained, for example, that “there is no reason to think that the author of the minutes incoherently injected an unrelated topic into an otherwise responsive sentence.”³² The Court made clear that its ruling was not influenced by seemingly improper redactions, but cautioned that similarly overbroad redactions have the potential to affect the outcome of a proceeding.³³

Several months later, the same issue of over-redaction contributed to the Court of Chancery’s denial of a motion to dismiss.³⁴ Because all substantive discussions of the disputed topic were redacted from board minutes, the Court allowed plaintiffs’ claim to proceed on the inference that the company’s board did not discuss or act on the issue.³⁵

These decisions demonstrate that companies must exercise caution in both drafting and redacting information from minutes to avoid a perception of excessive redactions. When drafting minutes and gathering documents in response to an inspection demand, companies and counsel can take several steps to preserve a robust record of board action:

• minutes should be drafted to organize like-with-like, include clear headings showing the different topics discussed, and reflect both privileged and business discussions, if any, on the pertinent topics,
• minutes should provide sufficient detail on each item discussed to show that the directors engaged in a discussion on the issue and decided on some further action,
• ideally, the directors will be informed by management, ask questions, deliberate, and exercise their business judgment, and the minutes will reflect that,
• materials considered by the board, such as presentations and reports, can be attached to meeting agendas or minutes, to provide a complete record of each meeting, and
• if redactions are needed, litigation counsel should be judicious in considering what information is redacted in response to a Section 220 demand, and consider carefully whether the reasons for a redaction (particularly based on a lack of relevance) are sufficiently clear from the face of the document so as to avoid any inference that directors did not engage on the topic at issue.

Conclusion

Delaware courts continue to refine Section 220 jurisprudence, including on the proper purpose for a demand and the appropriate scope of productions. Developments from the past year emphasize that the proper drafting of formal board materials is the best defense to future inspection demands and any litigation that may follow. The Court of Chancery has signaled that robust board-level productions with minimal redactions can forestall attempts to obtain additional materials through an inspection demand, and will be a powerful tool in avoiding adverse inferences should the Court be asked to review a board’s decision years after the fact.