Section 220 of Title 8 of the Delaware Code allows a corporation's stockholders to make a written demand to inspect the corporation's books and records. While initially conceived as an expansion of the common law right of stockholders to monitor the performance of their agents in corporate affairs, 1 Section 220 has evolved into a tool that stockholders (and their lawyers) use to obtain discovery to pursue litigation against a corporation's directors and officers. To make a Section 220 demand, a stockholder must, among other things, identify a proper purpose for the demand and the requested books and records must be necessary for that purpose.
Although books and records demands have been available for decades, there has been a recent upswing in their use as stockholders (including activist stockholders) have discovered the usefulness of Section 220 in obtaining materials for future litigation and campaigns. However, as Section 220 demands and disputes have increased, courts have imposed additional boundaries on their use. In particular, in recent years, courts have held that stockholders must demonstrate that they are not investigating conduct that has been statutorily exculpated and that they have good reason to request the production of emails.
Rising Use of 220 Demands to Prepare for Litigation
Stockholders are increasingly relying upon 220 demands in connection with mergers and acquisitions to gather information to potentially pursue damages claims after the closing of the transaction.2 For reference, we will call stockholders who serve these kinds of demands, potential M&A plaintiffs. These post-closing damages claims often come in the form of breach of fiduciary duty claims against the corporation's board of directors. Potential M&A plaintiffs usually seek materials relating to the M&A sale process and aim to use that information to criticize the process.
Potential M&A plaintiffs are pursuing books and records demands in court and, in some cases, through to trial. In the past year alone, they have obtained books and records in three Section 220 trials following an M&A transaction. 3 For example, in Inter-Local Pension Fund Graphic Communications Conference of the International Brotherhood of Teamsters v. Calgon Carbon Corp., stockholder Inter-Local Pension Fund GCC/IBT issued a demand to inspect defendant Calgon Carbon Corp.'s books and records under Section 220.4
Calgon had executed a merger agreement with a Japanese company named Kuraray Co. Ltd. for $1.1 billion. The fund's stated purpose for its 220 demand was to investigate the events leading to the [a]cquisition in order to determine whether it is appropriate to pursue litigation ... and [to investigate] the independence and disinterestedness of the directors generally with respect to the [a]cquisition. Calgon rejected the demand and the fund sued in Delaware Chancery Court. After a trial, Vice Chancellor Morgan Zurn held that the fund's purposes were proper under Section 220 and that the fund was entitled to books and records necessary to allow it to investigate potential corporate wrongdoing.
In Morrison v. Berry,5 The Fresh Market Inc. filed a series of public disclosures in connection with its proposed transaction with Apollo Global Management LLC. The public disclosures included...