Section 220 of the Delaware General Corporation Law permits a stockholder to inspect the books and records of a corporation, provided that the demand for inspection meets certain form and manner requirements, and the inspection is sought for a proper purpose—one reasonably related to the interests of stockholders. The Delaware Supreme Court and the Court of Chancery have firmly established that investigation of corporate mismanagement or wrongdoing is a proper purpose under Section 220. To state a proper purpose to investigate mismanagement or wrongdoing of a corporation, a stockholder must, however, allege a “credible basis” to infer possible mismanagement or wrongdoing. The “credible basis” standard has been described as having the “lowest possible burden of proof under Delaware law.” Before filing a derivative action, the Supreme Court and the Court of Chancery have encouraged stockholders to use the tools at hand by first seeking inspection of a corporation’s books and records in order to successfully plead derivative claims under Court of Chancery Rule 23.1. Further, a Section 220 action for books and records is a summary proceeding, for which the Court of Chancery counsels against moving to dismiss based on its expedited nature and the attendant limited time to adjudicate a dispositive motion before trial.

In a recent decision, Master in Chancery Abigail LeGrow concluded, however, that despite the recommendations of the Delaware courts to seek a corporation’s books and records before filing derivative claims, and the lowest legal standard under Delaware law to obtain the right to inspect such records, a stockholder must nevertheless still satisfy the requirement to allege a “credible basis” for corporate mismanagement, or the Court of Chancery will entertain dismissal of even a summary proceeding for books and records at the pleadings stage under Court of Chancery Rule 12(b)(6). In Louisiana Municipal Police Employees’ Retirement System v. Hershey, C.A. No. 7996-ML (Del. Ch. November 8, 2013), LeGrow recommended dismissal of a stockholder’s complaint in a books-and-records action under Rule 12(b)(6). LeGrow held that the plaintiff stockholder failed to sustain its minimal burden of alleging a credible basis to infer mismanagement or wrongdoing of the defendant, The Hershey Co., as opposed to Hershey’s supply chain for cocoa, to support a proper purpose to inspect Hershey’s books and records under Section 220 of the DGCL.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]