Source: https://www.reedsmith.com/es/perspectives/2017/11/lawyer-driven-books-and-records-demand-rejected-by-the-delaware-court
Timestamp: 2019-04-23 23:51:17+00:00

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The Delaware Court of Chancery rejects the ability for stockholders to access a corporation’s books and records based on “lawyer driven” motives.
A recent decision of the Delaware Court of Chancery, Wilkinson v. A. Schulman, Inc., represents an important judicial effort to balance (i) allowing stockholders of a Delaware corporation that have a “proper purpose” to demand access to the corporation’s books and records, with (ii) ensuring the purpose asserted is actually that of the stockholder, as opposed to the purpose of an entrepreneurial lawyer.
Although Delaware courts encourage stockholders to seek legal counsel when pursing inspection of a corporation’s books and records, the Court of Chancery made clear that a stockholder seeking inspection of a corporation’s books and records, and retaining counsel to carry out the stockholder’s wishes, is “fundamentally different” from having an entrepreneurial law firm pursue inspection “with only minor and non-substantive involvement” from the stockholder. Stockholders seeking inspection of books and records should be actively involved in determining the purpose(s) for which inspection is sought, and remain involved in the process to secure inspection of the corporation’s records, including both prior to litigation and during litigation.
Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220, permits stockholders of Delaware corporations to inspect the corporation’s books and records by delivering to the corporation a written “demand,” under oath, asserting a proper purpose.1 Section 220 defines a “proper purpose” as “a purpose reasonably related to such person’s interest as a stockholder.”2 A stockholder’s proper purposes include, among other things, (i) valuing the stockholder’s interest in the company, (ii) communicating with other stockholders about matters relating to the company (e.g., governance matters), and (iii) evaluating potential breaches of fiduciary duty, mismanagement or wrongdoing committed by the corporation’s directors and/or officers.
The Delaware Supreme Court “has admonished stockholders repeatedly to use Section 220 … to obtain books and records to investigate their claims before filing suit.”3 In many cases, a stockholder-plaintiff’s failure to conduct pre-suit investigation using Section 220 results in the stockholder being unable to adequately plead causes of action sufficient to survive a motion to dismiss.
Although Section 220 is an important tool for stockholders, and its use is strongly encouraged, Delaware courts recognize that “entrepreneurial plaintiffs’ counsel” sometimes find a stockholder to make a demand to investigate misconduct that the stockholder is not actually concerned about (or sometimes not even aware of). The decision in Schulman represents an important effort to try to balance, on the one hand, allowing stockholders to use the important tool of Section 220 and, on the other hand, ensuring it is actually the stockholder’s purpose, as opposed to entrepreneurial plaintiffs’ counsel.
The court’s opinion serves as useful guidance to both legal counsel representing parties in seeking inspection of books and records, as well as counsel representing companies responding to or litigating such demands, in the future. At bottom, stockholders seeking inspection of books and records should be actively involved in determining the purpose(s) for which inspection is sought, and remain involved in the process to secure inspection of the corporation’s records, including prior to litigation and during litigation.
The demand must be delivered to either (i) the corporation’s registered office in Delaware or (ii) the corporation’s principal place of business. As a practical matter, by delivering the demand to the corporation’s registered office in Delaware, the demanding stockholder can avoid arguments regarding whether a certain location constitutes the corporation’s principal place of business. See 8 Del. C. § 220(b).
South v. Baker, 62 A.3d 1, 6 (Del. Ch. 2012) (citing Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1056 (Del. 2004); White v. Panic, 783 A.2d 543, 556-57 (Del. 2001); Brehm v. Eisner, 746 A.2d 244, 266-67 (Del. 2000); Scattered Corp. v. Chi. Stock Exch., 701 A.2d 70, 79 (Del. 1997); Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 567 n.3 (Del. 1997); Rales v. Blasband, 634 A.2d 927, 934 n.10 (Del. 1993)).
See Wilkinson v. A. Schulman, Inc., No. 2017-0318-VCL, slip op. at 4 (Del. Ch. Nov. 13, 2017).
See id. The court also noted that the stockholder-plaintiff was involved in at least seven other lawsuits (prosecuted by the same law firm) in which he had had minimal involvement. See id. at 7 (describing the stockholder’s role as that of a “nominal plaintiff”).
See id. at 7 (“[G]iven the complexity of Delaware’s sprawling Section 220 jurisprudence, a stockholder is well-advised to secure counsel’s assistance.”).

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