Realigning Stockholder Inspection Rights
Publication| Corporate Governance| Corporate & Chancery Litigation
Access to corporate information plays a pivotal role in stockholder litigation. One key to that access is stockholders’ statutory right to inspect a corporation’s books and records prior to filing litigation, enshrined in the Delaware General Corporation Law’s Section 220. In the context of derivative actions brought by a stockholder on behalf of a company, Section 220 takes on an even greater importance. For years, Delaware courts have urged stockholder plaintiffs to use all the “tools at hand” to gather information before filing a derivative complaint to strengthen their allegations. One of those tools, Section 220’s inspection rights, has become all but a requirement for most successful derivative actions. Yet two recent shifts in the case law present unique challenges for both corporate defendants and stockholder plaintiffs involving statutory inspection rights.
First, Delaware courts have liberalized the scope of books and records available under Section 220 to include emails, text messages, and other electronically stored information that otherwise would not have been accessible to prospective plaintiffs until the plenary discovery process. The blurred distinction between pre-suit Section 220 inspections and post-pleadings discovery can put corporate defendants in a tough spot to comply with wide-ranging demands under Section 220 without the well-developed rules and procedures that govern similar post-pleadings discovery. Second, since the Delaware Supreme Court’s decision in California State Teachers’ Retirement System v. Alvarez—which found a stockholder plaintiff who pursued a Section 220 inspection and subsequent derivative action in Delaware precluded by the dismissal of a hastier, first filed action in another jurisdiction—Delaware plaintiffs have become vulnerable to a risk of preclusion due to the extra time (often a few months, but sometimes years) required to exercise their inspection rights.
This Article offers a novel proposal to preserve and realign Delaware’s Section 220 policies while minimizing those pain points: pleadings-stage discovery for derivative actions. By merging presuit Section 220 inspections into pleadings-stage discovery, parties could conduct those inspections under the auspices of court rules and oversight, with more certain boundaries and rules surrounding its scope and process. And stockholder plaintiffs in Delaware could bring their plenary suit from the start, with an amendment if needed after discovery, to limit the risk of preclusion posed by multi-forum litigation. The proposal does not add a new burden to the courts, on net. Instead, it only transforms the court’s existing oversight of the de facto pre-suit discovery under Section 220 into a formal pleadings-stage discovery process.