Source: https://eanetpc.com/blog/2017/3/5/shareholder-litigation-to-obtain-corporate-books-and-records-to-value-company-and-investigate-wrongdoing
Timestamp: 2019-04-18 15:14:58+00:00

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A stockholder may seek books and records for any “proper purpose.” Against this right is balanced a corporation’s interest to manage its affairs free from interference of requests that are frivolous. To strike this balance, Delaware courts require a shareholder to present evidence showing a “credible basis” to warrant investigation. Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 118, 122 (Del.2006).
In the first case, Biederman v. Domo, a shareholder sought financial information to value their shares. The corporation refused on the basis that it was a private company. Biederman v. Domo, Case No. 12660-VCG (Del. Ch., Dec. 27, 2016) (transcript of ruling). The Court stated: “There is no question that valuation is a proper purpose under Section 220, particularly in a corporation like this which is not particularly transparent. A stockholder is entitled to value his shares.” The Court ordered that “three years of audited financials” was sufficient to this proper purpose.
In the second case, Haque v. Tesla Motors, a shareholder alleged the board of Tesla Motors, Inc. (“Tesla”) breached fiduciary duties by issuing false statements to shareholders that Tesla’s failure to hit sales targets were the result of production capacity and supply chain issues, when it fact there was a lack of consumer demand. Haque v. Tesla Motors, Case No. 12651-VCS (Del. Ct. Ch. Feb. 2, 2017) (available at http://courts.delaware.gov/Opinions/Download.aspx?id=252150). It was conceded Tesla’s failure to hit targets alone was not a credible basis, as Delaware law “requires more than a divergence between forward-looking statements and subsequent results” to infer mismanagement or wrongdoing. Shamrock Activist Value Fund, L.P. v. iPass Inc., 2006 WL 3824882, at *2 (Del. Ch. Dec. 15, 2006).
Biederman and Tesla Motors demonstrate that Delaware corporations may be required to undertake significant litigation in the face of shareholder requests for books and records, either to value shares or where there are allegations of wrongdoing. Inspection rights are a powerful tool for shareholders, and responding to requests appropriately is critical.
Acknowledgement to Bahram Seyedin-Noor and Bryan Ketroser of Alto Litigation, PC for their e-bulletin on Biederman v. Domo and materials provided.

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