Delaware DGCL §220 “Books and Records” Got Narrower: How Stockholder Inspection Demands Change in Practice (and Why It Matters Before Filing Suit)
A recent change in Delaware law has made things potentially more difficult for shareholders to obtain information from companies. The securities litigation lawyers at Federman & Sherwood can still work to help you build a case.
Stockholder inspection rights have been a valuable tool for shareholders to obtain information from a company prior to deciding whether to file a lawsuit. Recent changes in Delaware law in favor of companies have narrowed this shareholder right. Nevertheless, it is still possible to file a successful lawsuit against the company for securities fraud or other wrongful actions.
To learn more about your rights as a shareholder and how you can potentially take legal action against the company, contact the securities litigation attorneys at Federman & Sherwood by calling us at (800) 237-1277. We can help you take strong legal action to either recover your losses personally or on behalf of the company.
The Right to Shareholder Inspection Has Been Reduced By Law
DGCL §220 is a Delaware law that allows shareholders in a company to inspect books and records. This right is an important one because it allows shareholders to keep abreast of corporate conduct and investigate potential misdeeds. The inspection of shareholder records is often a precursor to a derivative lawsuit filed on behalf of the company. However, Delaware lawmakers have also grown concerned about what they perceive to be burdens on companies that must comply with the statute. Accordingly, they have limited the scope of the application of this statute with recent changes to the law.
Before the law was changed, shareholders had a relatively unfettered right to request “books and records.” In the past, that term did not have a statutory definition that could serve as a limitation on the types of books and records that could be requested. While this allowed shareholders wide access to documents that could reveal misconduct, companies also argued that this permitted a so-called “fishing expedition.” Delaware often changes its law to accommodate the many companies that choose to incorporate in the state, and legislators believed that companies incorporated in the state were being overly burdened by these record requests.
The law now lists what are considered to be books and records. It lists the number of categories of books and records, and a shareholder request must fall within one of these categories for the company to have an obligation to comply with it. Most importantly, it does not contain certain internal communications, such as emails and texts.
Shareholders must make a request for information both in good faith and with a proper purpose. The request must be related to the purpose. The law also requires shareholders to use “reasonable specificity” in the documents that they are seeking.
Exceptions to the New Delaware DGCL §220
There are only two exceptions to the new narrower rule that may allow shareholders to seek information beyond the enumerated categories in the statute. The first is when specific formal records that are a part of the statute, such as financial statements, are not available. Then, a court may order the company to produce the functional equivalent of these unavailable documents, but subject to the requirement that it is “only to the extent necessary and essential to fulfill the stockholder’s proper purpose.”
The second exception may allow a court to order the production of even more records. There are three parts to this exception that you must meet for the court to order the production of “other specific records.”
- The request otherwise complies with Section 220
- There is a compelling need for these records
- There is “clear and convincing evidence” that these records will further the shareholder’s purpose
Shareholders may still be able to access information that is outside of the enumerated categories in the statute, but they will be facing a much higher test than they did in the past. Previously, a shareholder only had to demonstrate a need for these records. Now, the law has upgraded the standard to a compelling need. Since these changes in this law are relatively recent, it is uncertain how Delaware Courts of Chancery will interpret both the terms “compelling need” and “clear and convincing evidence.” The securities litigation attorneys at Federman & Sherwood remain on top of new developments, and we incorporate them into our litigation strategy.
Contact a Securities Litigation Law Firm
Suing a company for investment losses due to fraud can be a complex matter, and the securities litigation attorneys at Federman & Sherwood have a track record of obtaining money for our clients in these cases. Schedule a free initial consultation with a securities litigation lawyer by visiting our website or by calling us today at (800) 237-1277.