Richards Layton & Finger

Delaware Court of Chancery Rulings Highlight the Importance of a Plaintiff's Subjective Intent in Books and Records Action

January 2018

Two recent rulings of the Delaware Court of Chancery highlight the need to examine a stockholder plaintiff ’s objectives in seeking to inspect the corporation’s books and records under Section 220 of the Delaware General Corporation Law (DGCL). As is well known, a stockholder seeking to compel an inspection of books and records under Section 220 must demonstrate a “proper purpose” for the inspection by a preponderance of the evidence. In general, to meet its burden, the stockholder must establish a “credible basis” from which the court can infer there is “possible mismanagement that would warrant further investigation.” But, even if its stated purpose is facially proper, the stockholder may not be entitled to conduct the inspection if it can be shown that the stated purpose is not the stockholder’s actual primary objective. Th e Court’s recent rulings demonstrate that the stockholder’s subjective intent, and not any unrelated objective of its counsel, is the focus of the inquiry into whether the stockholder has articulated a proper purpose.