A books and records demand made under Section 220 of the Delaware General Corporation Law (“DGCL”), must, among other things, state a “proper purpose”, and the categories of documents sought must be “necessary and essential” to such stated proper purpose.

After a Section 220 demand is made, a corporation has five business days to allow for inspection.  If the corporation denies inspection rights or declines to provide inspection to all of the books and records demanded, then a shareholder or director may petition the Delaware Court of Chancery to compel the corporation to allow for inspection of such books and records.

The question becomes – after a petition is filed with the Court of Chancery, may the scope of documents requested be expanded during the litigation by the petitioning shareholder or director?

This question was answered in the negative by the recent decision of Fuchs Family Trust v. Parker Drilling Company, C.A. No. 9986-VCN (Del. Ch. Mar. 4, 2015).  In that decision, petitioner Fuchs attempted to broaden its demand (shortly before trial and after briefing had commenced) to include additional documents and reports not requested in its original demand.

In rejecting Fuchs’s attempt to broaden its Section 220 demand, Vice Chancellor Noble held that:

Given the circumstances, Fuchs’s late attempt to expand its inspection must be rejected.  Strict adherence to the section 220 procedural requirements for making an inspection demand protects the right of the corporation to receive and consider a demand in proper form before litigation is initiated.  Parker’s right to consider Fuchs’s demand properly would be substantially impaired by forcing it to adapt its response and defense to Fuchs’s evolving requests.  (Slip op. at 10-11) (emphasis in original) (citations omitted).

Key Takeaway

This decision is significant in that it prevents a petitioning shareholder or director to broaden a books and records demand after a Section 220 action has been commenced.  Therefore, parties seeking inspection of corporate books and records must carefully identify those categories of documents sought in the pre-litigation demand, else they may be precluded from demanding inspection of the same.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.