Section 220 of the Delaware General Corporation Law (“DGCL”) provides the means by which a stockholder can make a demand for the books and records of a Delaware corporation. The long-favored approach under Delaware law is for a plaintiff to file a Section 220 action as an investigatory tool prior to commencing litigation.
To properly commence a Section 220 action to inspect a corporation’s books and records, a “stockholder” must make a demand in writing, under oath, and assert a “proper purpose.” 8 Del. C. § 220. Further, the demand must be directed to the corporation’s registered office in Delaware or to its principle place of business, and if that demand is made by the stockholder’s attorney or agent, the demand must be accompanied by a written authorization from the stockholder. 8 Del. C. § 220(b). Additionally, when the demanding stockholder is not a record holder of the company’s shares, the demand must “state the person’s status as a stockholder, be accompanied by documentary evidence of beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be.” 8 Del. C. § 220(b).
Only a “stockholder” may properly assert a Section 220 demand for books and records. Section 220 defines a “stockholder” as “a holder of record of stock in a stock corporation, or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person, and also a member of a nonstock corporation as reflected on the records of the nonstock corporation.” 8 Del. C. § 220(a). The stockholder must make a written demand, under oath, spelling out the scope of the demanded inspection. The right of inspection may be exercised by any stockholder, regardless of the number of shares owned or the duration of the ownership. 8 Del. C. § 220(a).
Section 220 defines “proper purpose” as “a purpose reasonably related to such person's interest as a stockholder.” 8 Del C. § 220(b). A stockholder seeking inspection of books and records (other than the stock ledger or stockholder list) has the burden of demonstrating that he or she has a proper purpose for such inspection. By way of example, “it is well established that investigation of mismanagement is a proper purpose for a Section 220 books and records inspection.” Security First Corp. v. U.S. Die Casting and Dev. Co., 687 A.2d 563, 567 (Del. 1997). However, the “[m]ere curiosity or a desire for a fishing expedition will not suffice.” Id. at 568. An evaluation of the propriety of a stockholder’s purpose will necessarily depend on the facts of each case. See CM&M Group, Inc. v. Carroll, 453 A.2d 788, 792 (Del. 1982).
Scope of Demand
Once a proper purpose has been established, and assuming that other procedural requirements of the Section 220 demand have been met, the final inquiry centers on the appropriate scope of the inspection. The general rule is that a Section 220 demand is not a license for wide ranging discovery. See Saito v. McKesson HBOC, Inc., 806 A.2d 113, 114 (Del. 2002). Instead, a stockholder seeking inspection of books and records pursuant to this section must “make specific and discrete identification, with rifled precision, of the documents sought,” and those documents must relate to the purpose of the demand. Brehm v. Eisner, 746 A.2d 244, 266 (Del. 2000). Generally speaking, a stockholder will be allowed to inspect only those documents that it proves to be “essential and sufficient” to the accomplishment of its stated purpose(s). Tactron, Inc. v. KDI Corp., 1985 WL 44694, at *1 (Del. Ch. Jan. 10, 1985).
Ultimately, Section 220 provides stockholders of record with the tools to obtain access to a corporation’s books and records, and can serve as an important tool in forming a basis for a derivative action if corporate wrongdoing is found to have existed.