Section 220 of the Delaware General Corporation Law gives stockholders the right to inspect corporate “books and records” for “any proper purpose.” Nearly every state’s corporation code contains a similar provision allowing inspection rights. But in recent years, § 220 has become an unlikely flashpoint in stockholder litigation, largely because of the increasing utility of inspecting books and records to gather evidence for derivative litigation.
In Delaware (and nearly everywhere else), a stockholder may not prosecute a derivative suit unless the directors have wrongfully refused the stockholder’s demand to pursue the corporate claim or such a demand is excused as futile because the directors are incapable of impartially considering whether to pursue the claim. Most stockholder derivative actions assert demand futility, and they are subject to dismissal, before plaintiffs are entitled to any discovery, under Rule 23.1 of the Delaware Court of Chancery. Courts in Delaware and elsewhere intensively review Rule 23.1 dismissal motions and do not hesitate to dismiss derivative actions when the plaintiff has failed to “allege with particularity” facts that excuse a prelitigation demand on the corporation.
