Imagine this scenario: you invested your hard-earned money into a Delaware corporation, hoping to obtain a profitable return on your investment. You have placed your trust in the management of the company to ensure that it is taking all steps necessary to grow and maintain the business. Yet how do you know that management is running the company effectively? What recourse do you have to review the company’s corporate records to make sure everything is on the up and up?
Fortunately in Delaware, a remedy does exist for shareholders, through what is called a books and records action. Generally speaking, such an action allows a shareholder or member of a Delaware company to demand inspection of certain books and records of the company.
Section 220 of the Delaware General Corporation Law (DGCL) governs books and records actions upon a Delaware corporation. The filing of such an action against an alternative entity such as a limited liability company or a limited liability partnership will be covered in subsequent posts. Section 220 establishes:
1) the right of a shareholder or director to gain access to books and records of a Delaware corporation;
2) the procedural requirements to properly make a request to inspect the corporation’s books and records; and
3) the right to file an expedited action to compel the corporation to provide access to its books and records if it refuses to comply with its obligations.
Procedural Requirements for a Shareholder To Initiate a Demand for Books and Records
Before bringing an action in the Court of Chancery, a shareholder must first make a demand to inspect the books and records of the company. The demand must be in writing, under oath and sent to the company by or on behalf of the shareholder. The shareholder must also include a power of attorney with the written demand if he or she wants someone to make the inspection on his or her behalf. The demand must state the purpose for which the stockholder seeks inspection. The shareholder must identify the type or category of documents that he or she is seeking.
What Are Some Common Purposes for Which Shareholders and Directors Seek Inspection of the Books and Records of a Company?
Some common and approved bases for which shareholders seek inspection of the books and records of a company are:
• To value their stock
• To communicate with other stockholders in the company
• To investigate corporate mismanagement
• To solicit proxies
When a director seeks to inspect the books and records of a company, it is usually because he or she is in the minority or has been precluded from information that is necessary to fulfill fiduciary duties to the company and its shareholders.
Subsequent posts will address each of the issues raised in this post in detail. Stay tuned.