“Strict adherence to the Section 220 procedural requirements for making an inspection demand protects the rights of the corporation to receive and consider a demand in proper form before litigation is initiated.”
The recent decision of Barnes v. Telestone Technologies Corp., 8513-VCG (Del. Ch. July 10, 2013) highlights the importance of strictly complying with the statutory requirements in a books and records action under Section 220 of the Delaware General Corporation Law. This decision is relevant to any shareholder seeking to assert a books and records action, and any corporation defending against such action.
In this case, the Court of Chancery dismissed the Section 220 complaint of plaintiff Barnes on the grounds that Barnes failed to provide evidence of his beneficial ownership of company stock at the time he sent his inspection demand. This is an express requirement under Section 220.
Plaintiff argued that he satisfied his obligation by providing a sworn affidavit affirming his status as a company stockholder. Barnes also argued that his complaint should not be dismissed, because he attached evidence of his beneficial ownership to his answering brief to Telestone’s motion to dismiss.
Notwithstanding these arguments, however, the Court granted Telestone’s motion to dismiss. In so doing, it held that plaintiff’s complaint was insufficient, because “[s]trict adherence to the Section 220 procedural requirements for making an inspection demand protects the rights of the corporation to receive and consider a demand in proper form before litigation is initiated.” Accordingly, the Court found that subsequent production of documentary evidence cannot cure the original defect.
The importance of this decision is that a plaintiff asserting a books and records demand upon a corporation must strictly comply with the statutory requirements under Section 220 of the DGCL. Failure to do so will result in the complaint being subject to dismissal. For more information regarding books and records actions, see pages 1 to 3 of the Directors’ and Shareholders’ Reference Guide to Summary Proceedings in the Delaware Court of Chancery.
Carl D. Neff is a lawyer 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 email@example.com.