Pursuant to 8 Del .C. § 220, stockholders of Delaware corporations the ability to inspect certain corporate books and records provided they have a “proper purpose” for seeking such materials. This statute can provide an important tool for stockholders seeking to investigate allegations of corporate wrongdoing.
What Must a Stockholder Establish to Enforce an Inspection Right Under Section 220?
First, pursuant to Section 220(b), the stockholder must make a demand under oath and state his status as a stockholder, and provide documentary evidence of his beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be. The demand must be directed to the corporation at its registered office in this State or at its principal place of business.
Then, in order to be able to enforce an inspection right under Section 220, the stockholder must establish both: (1) a “proper purpose” for the inspection (DGCL Section 220(b)); and (2) that the scope of the books and records the stockholder seeks to inspect is no broader than what is “necessary and essential to accomplish the stated, proper purpose.” Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).
What Constitutes a Proper Purpose?
Section 220(b) defines a proper purpose as “a purpose reasonably related to such person’s interest as a stockholder.” Delaware court have recognized that alleged mismanagement, waste, or wrongdoing by fiduciaries as proper purposes for a books and records inspection and are frequently asserted by stockholders making inspection demands. However, the courts have also repeatedly recognized they may not be asserted in conclusory fashion to meet the proper purpose requirement. Instead, a stockholder must explain why that purpose is relevant to its interest as a stockholder; for example: to seek corporate governance or other reforms; to prepare for a proxy fight; or to file a shareholder derivative action.
To establish a proper purpose of investigating corporate, Delaware courts require “some evidence” suggesting a “credible basis” from which a court can infer that mismanagement might have occurred. A stockholder may meet this standard, by presenting evidence, in the form of “documents, logic, testimony or otherwise,” from which the court can infer wrongdoing. In determining whether there is a credible basis to infer wrongdoing or mismanagement, the Court of Chancery will consider allegations raised in a separate complaint to determine whether there is a credible basis to infer wrongdoing or mismanagement, when such complaint is supported by sufficient and extensive supporting documents and testimony.
For example, in In re UnitedHealth Group, Inc. Section 220 Litig., C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28, 2018), the court granted plaintiff*s Section 220 demand. The Court found that allegations raised in a complaint filed by the U.S. Department of Justice against the Defendant corporation, UnitedHealth Group, Inc. established a credible basis to infer wrongdoing or mismanagement based on the allegations in the qui tam action, when such allegations were sufficiently supported by documentation and testimony.
What Documents Are Deemed Necessary when Investigating Wrongdoing?
Delaware courts have observed that the following materials are typically necessary and essential when investigating alleged wrongdoing: (1) minutes from relevant board meetings and board committee meetings; (2) materials provided to the board or its committees in connection with those meetings, including presentations made to the board or its committees; and (3) relevant corporate policies and procedures.
In order for a stockholder to obtain documents beyond relevant portions of board minutes and other board materials, and corporate policies and procedures, he must establish the requested documents are “necessary and essential.” Documents are “necessary and essential: when they: (1) address the crux of the stockholder’s stated purpose; and (2) are unavailable from other sources.
Finally, under the Garner doctrine, a stockholder may access a corporation’s privileged documents in certain circumstances on a showing of “good cause.” In determining whether good cause exist, because is a fact driven inquiry, courts may rely on a number of factors to find good cause, including: (1) the nature of the stockholder’s claim and its viability; (2) the necessity of the stockholder having the information and its availability from other sources; and (3) if the stockholder’s claim is of wrongful action by the corporation, whether the action is criminal, illegal, or of doubtful legality. Garner v. Wolfinbarger, 430 F.2d 1093, 1104 (5th Cir. 1970).
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Timothy L. Miles has committed his entire career to representing shareholders in complex litigation. Mr. Miles has been recognized for numerous awards for his legal abilities in his struggles to fight for shareholder rights not only among his peers but also those in the judiciary who see firsthand not only his tenacity for protecting shareholder rights, but how he always adheres to the utmost ethical standards when litigating against his adversaries and in a Court of Law. These efforts have resulted in Mr. Miles being recognized not only as an industry leader in his fight for shareholders but also in the ethical manner in which he conducts himself as a lawyer and member of the bar. These recognitions include: The AV® Preeminent™ Rating by Martindale-Hubble®, which is bestowed on fewer than 5 percent of attorneys, in Securities Law, Litigation and Class Actions (2014-2018); The AV® Preeminent™ Attorney – Judicial Edition, the Highest Possible Rating in Both Legal Ability & Ethical Standard Reflecting the confidential opinions on members of the Bar and Judiciary (2018-2017); The Top-Rated Lawyer in Litigation™ for Ethical Standards and Legal Ability by Martindale-Hubble® (Feb. 2015); Superb Rated Attorney, (10.0 out of 10), the Highest Rating Possible by Avvo; Avvo Top Rated Lawyer 2017 & 2018 (Avvo); America’s Most Honored Professionals – Top 1% (2016-2018) (American Registry). Mr. Miles is also a member of Top 100 Civil Plaintiff Trial Lawyers: The National Trial Lawyers Association, which is by invitation only and according to the National Trial Lawyers Association, is “extended to those attorneys who exemplify superior qualifications, trial results, and leadership in their respective state based upon objective and uniformly applied criteria.” The press release by The National Trial Lawyers Association announcing Mr. Miles selection for inclusion into its Top 100 Trial Lawyers stated: “With the selection of Timothy L. Miles by The National Trial Lawyers: Top 100, Miles has shown that he exemplifies superior qualifications, leadership skills, and trial results as a trial lawyer. The selection process for this elite honor is based on a multi-phase process which includes peer nominations combined with third party research.” Mr. Miles focuses his practice on securities fraud class actions, shareholder derivative actions, and corporate mergers and acquisitions class actions.