The Shifting Landscape and Proliferation of Books and Records Demands in Delaware

June 23, 2021

Publication| Corporate Transactions| Corporate Governance| Mergers & Acquisitions

Section 220 of the General Corporation Law of the State of Delaware provides stockholders with the right to inspect the books and records of a corporation for a “proper purpose” that is “reasonably related to such person’s interest as a stockholder.”  Delaware courts have long urged stockholders to utilize Section 220 investigations as one of the “tools on hand” prior to filing derivative lawsuits.  Use of Section 220 by stockholders has increased steadily in recent years and has been met with what the Delaware Court of Chancery has recently characterized as “massive resistance” by defendant corporations.  In Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020), the Court of Chancery observed that the defendant’s “overly aggressive defensive strategy epitomized a trend” in which “defendants are increasingly treating Section 220 actions as ‘surrogate proceeding[s] to litigate the possible merits of the suit’ and ‘place obstacles in the plaintiffs’ way to obstruct them from employing it as a quick and easy pre-filing discovery tool.’”  Suggesting the desire to curtail this kind of behavior, the court granted the plaintiffs leave to move for fee-shifting.  This “trend” in “overly aggressive defensive strategy”—if such trend does exist—is likely in response to the recent proliferation of books and records demands, especially in the context of stockholder investigations of potential Caremark claims, and the ever-broadening categories of documents that are being sought in such demands.

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