Section 220 of the Delaware General Corporation Law ("DCGL") allows stockholders to inspect a corporation's "stock ledger, a list of its stockholders, and its other books and records" upon a showing of any "proper purpose" for the inspection.1 Initially codified in the 1967 DGCL amendments, Section 220 formalized the long-standing common law principle that stockholders are entitled to understand how companies in which they invest are managed.2 As such, the statute is a critical tool for public investors seeking to investigate corporate mismanagement, assess litigation prospects, or monitor board activity.
Recently enacted legislation known as Senate Bill 21 ("SB 21") amends Section 220. While supporters of the amendments argue they primarily codify existing caselaw and clarify inspection procedures, critics, including advocates for pension and retirement fund interests, warn they could constrain much-needed stockholder oversight over directors, executives, and other corporate insiders.
I. The Books and Records Demand Process
The first step of the Section 220 process is the stockholder's submission of a formal demand letter to the corporation with proof of stock ownership, an identification of the requested materials, and a demonstration that the stockholder's purpose to investigate is "proper."3 As the Court of Chancery has stated, "the form-and-manner requirements are not onerous, but they are strictly enforced."4
The company then has five business days to respond and advise the stockholder whether any requested materials will be provided.5 The response frequently disputes the propriety of the demand, even when the company is agreeable to providing responsive books and records, to avoid any implication that its production concedes the existence of a "proper purpose." To the extent a corporation refuses to provide documents, or the parties are deadlocked on the particulars of the stockholder's inspection request, the stockholder may sue in the Court of Chancery to "compel the production of corporate records."6 This summary proceeding is often referred to as a "books and records action" or "220 action."
II."Proper Purpose"
Aside from adhering to form-and-manner requirements, stockholders must demonstrate that they have a "proper purpose" for the inspection request. Delaware courts have built a substantial body of caselaw explaining what constitutes a "proper purpose." For example, a stockholder's desire to investigate potential mismanagement or wrongdoing in order to assess whether to sue is considered a classic "proper purpose."7 Delaware courts have repeatedly warned stockholders against commencing litigation with underdeveloped allegations and instead admonish them to use the "tools at hand" from Section 220 to first investigate potential derivative actions or other lawsuits alleging fiduciary misconduct.8
Stockholders seeking to investigate potential wrongdoing under Section 220 have, historically, been required to present "some evidence "to suggest a "credible basis" from which to infer that mismanagement, waste or wrongdoing may have occurred.9 The "credible basis" standard under Section 220 is Delaware's lowest burden of proof.10 Stockholders need not prove actual misconduct (which would contravene the policy of encouraging stockholders to investigate whether misconduct occurred, before filing suit)11 but instead can meet this standard through a credible showing using documents, logic, testimony or otherwise, that there are legitimate inferences of wrongdoing.12 Reliable hearsay (such as reputable news articles) may also suffice.13
Although the desire to investigate securities fraud against corporate insiders has been deemed to be a proper purpose, the Court of Chancery has held that a stockholder may not use Section 220 to drum up helpful material in support of a federal securities pleading, which, in the Court's view, would sidestep the Private Securities Litigation Reform Act's automatic stay of discovery before the resolution of a motion to dismiss.14
III. What Are "Books and Records"?
To avoid intrusive demands, "books and records" have sometimes been construed narrowly, and certainly more narrowly than the broad discovery to which litigants are typically entitled in plenary litigation. Courts sometimes limit stockholders to formal documents made available to directors, such as board or committee meeting minutes and presentations from those meetings. As one court put it, "[t]he starting point...
