Section 220 of the Delaware General Corporation Law (“DGCL”) was recently amended by Delaware Senate Bill 21 to reflect the Delaware legislature’s efforts to continue to provide a business-friendly environment and preserve investor protection.
DGCL Section 220 is a key statute that deals with a stockholder’s right to inspect a corporation’s books and records. It often is the initial step, and the first battleground of corporate governance disputes and stockholder claims against the corporations. Key amendments to DGCL Section 220 are summarized below in our alert.
Corporate stakeholders should review their corporate records management policy and inspection strategies under the newly amended DGCL Section 220, as the statute now provides a statutory definition of accessible "books and records" while also introducing new statutory requirements and confidentiality protections that could impact both the scope and effectiveness of stockholder inspection demands.
Stakeholders should work with counsel to ensure their corporate records management policy and inspection demands comply with the enhanced specificity requirements, and anticipate potential confidentiality restrictions and other statutory obligations imposed by the amended DGCL Section 220.
Key Amendments to DGCL Section 220
Books and Records Defined
Historically, DGCL Section 220 did not provide a statutory definition of “books and records” to which a stockholder has access. Like many other parts of DGCL, the interpretation of the definition and the authorized scope of inspection have been largely developed under the robust case law in Delaware.
The amended DGCL Section 220, among other things, provides a statutory definition of a corporation’s “books and records” that includes the following:
a. The certificate of incorporation.
b. The bylaws then in effect.
c. Past three years’ minutes of all meetings of stockholders and the signed consents evidencing all actions taken by stockholders without a meeting.
d. Past three years’ written communications to stockholders.
e. Past three years’ minutes of any meeting of the board of directors or any board committee and records of their actions.
f. Materials provided to the board of directors or any board committee in connection with their actions.
g. Past three years’ annual financial statements of the corporation.
h. Contracts between the corporation and its stockholders.
i. Director and officer independence questionnaires.
In limited circumstances, the Court of Chancery may compel a corporation to produce books and records beyond the statutory scope if certain conditions are met. For example, in addition to other applicable requirements under DGCL Section 220, the demanding stockholder must overcome a high evidentiary bar by demonstrating that (i) “a compelling need for an inspection of such records”, and (ii) “clear and convincing evidence that such specific records are necessary and essential” to further the demanding stockholder’s proper purpose. The Court of Chancery may also compel a corporation to produce the “functional equivalent” of certain defined books and records (e.g., meeting minutes and annual financial statements) to the extent that the corporation does not have such books and records available and such books and records are “necessary and essential to fulfill the stockholder’s proper purpose”.
Conditions and Requirements
In addition to defining the “books and records” in scope for the stockholders’ inspection, the amended DGCL Section 220 also requires a stockholder demanding inspection to comply with the following: (i) the DGCL Section 220 demand must be “made in good faith for a proper purpose”; (ii) the DGCL Section 220 demand must “describe with reasonable particularity the demanding stockholder’s purpose and the requested books and records for inspection”; and (iii) the books and records sought must be “specifically related to the demanding stockholder’s purpose”.
Confidentiality Protections and Use Restrictions
The amended DGCL Section 220 also provides that the corporation may (i) impose reasonable restrictions on the confidentiality, use, or distribution of the books and records produced and (ii) redact portions of any produced books and records not specifically related to the demanding stockholder’s purpose. Notably, the amended DGCL Section 220 also specifically provides that the corporation may, as a condition to production, require that any books and records produced are “deemed incorporated by reference in any complaint filed by or at the direction of the demanding stockholder in relation to the subject matter herein”, allowing the corporation to utilize information it produced for its defense in the litigation, if any, related to such DGCL Section 220 demand.
Looking Ahead
Given the nature of the subject matter regulated, DGCL Section 220 will continue to be a hot topic for corporate governance. The legal landscape of this subject will continue to be developed and shaped by the Delaware case law, especially certain newly introduced statutory requirements and standards. Both corporations and investors should continue to observe and adhere to the current regulatory regime introduced, and be strategic and ready to respond to current market practices and any further legal developments.
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