Often times, shareholders of a Delaware company will make a books and records demand upon the company to investigate corporate mismanagement. Such a request was considered in the recent decision of the Court of Chancery in In re: New Media Books and Records Action, C.A. No. 9984-VCN (Del. Ch. Dec. 23, 2015).

There, Vice Chancellor Noble found that plaintiffs did not assert a proper purpose as to corporate misconduct:

Misconduct may be the foundation for a books and records inspection, but a plaintiff seeking such records must have made a showing by a preponderance of the evidence of a credible basis from which to infer mismanagement.  A simple statement that the purpose is to investigate possible mismanagement does not satisfy this standard. Plaintiffs have not provided a credible basis, and thus, they have not demonstrated that investigating misconduct or wrongdoing is their proper purpose.

Based upon the above, which is consistent with Delaware Chancery case law, in order to validly make a demand upon a company for books and records based upon corporate misconduct, a “credible basis” must be established by a “preponderance of the evidence”, and not simply a mere statement that the demand is being made to investigate potential misconduct.

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.