As discussed in various prior posts, a petitioner making a Section 220 books and records demand must state a “proper purpose” to justify inspection. Commonly approved purposes include valuation of stock, and investigation of wrongdoing.

The recent decision of Rodgers v. Cypress Semiconductor Corp., C.A. No. 2017-0070-AGB (Del. Ch. Apr. 17, 2017) sheds light on the standard needed to obtain inspection of books and records to investigate corporate wrongdoing.  There, a former chief executive officer sought inspection to investigate alleged excessive compensation paid to the chairman of the board.  Petitioner also alleged that the chairman violated the company’s code of ethics.

The Court reiterated the point that petitioner need not prove that wrongdoing is actually occurring.  Rather, petitioner need only show, by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation.  Chancellor Bouchard stated that such credible basis may be established through “documents, logic, and testimony”.

The Court also rejected the corporation’s assertion that the stated purpose was not the actual intent behind the demand.    The Court reiterated that it is very difficult to prove that a stockholder’s stated purpose is actually not the true purpose for seeking inspection.  Quoting Pershing Square, L.P. v. Ceridian Corp., “Such a showing is fact intensive and difficult to establish.” 923 A.2d 810, 817 (Del. Ch. 2007).  In light of this high hurdle, Chancellor Bouchard granted petitioner CEO’s inspection demand.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.