WILMINGTON, Del., June 2, 2016 /PRNewswire/ -- The below article was authored by Kenneth L. Dorsney and Thomas E. Hanson, Jr., both of Morris James LLP:
Stockholders of a Delaware corporation have the right under Section 220 of the Delaware General Corporation Law to compel disclosure of the corporation's books and records in order to make decisions based on adequate information. This right is commonly known as a "220 action" in the State of Delaware. Stockholders have initiated hundreds of these actions over the years in the Delaware Court of Chancery. The right and the requirements for a books and records inspection are thus well established and straightforward.
Every stockholder has the right to inspect the books and records of the corporation and, under the appropriate circumstances, its subsidiaries for any proper purpose "upon written demand."2 The corporation has five business days to respond to the demand, after which, the stockholder may compel compliance by filing a 220 action in the Delaware Court of Chancery. These actions are summary in nature and usually resolve quickly.
The written demand must satisfy certain procedural requirements. First, it has to be in writing, made under oath, and directed to the corporation's principal place of business or registered office in Delaware. Second, the demand must state with some degree of particularity what is being requested and the reason for the request. Third, the demand must be accompanied by some proof that the person seeking the inspection is a beneficial owner of the corporation's stock. Finally, the demand must show by a preponderance of the evidence that it is being asserted for a proper purpose.
A stockholder's purpose for initiating a 220 action must be proper. Commonly recognized proper reasons include, without limitation, the following: valuing a stockholder's shares; assessing corporate mismanagement; and communicating with other stockholders regarding such things as proxy contests, mergers, or other investments or decisions by the board. For example, shareholders stating such proper purposes have been successful in asserting books and records actions against technology companies such as Lucent Technologies (Freund v. Lucent Technologies, Inc., 2003 WL 139766 (Del Ch. 2003)) and DSC Communications (Grimes v. DSC Communications Corp., 724 A.2d 561 (Del. Ch. 1998)).
Although a 220 action is initiated easily enough, it should be noted that it is not designed for carte blanche corporate access but, instead, as a lawful and efficient means to effectuate a review of the books and records a stockholder actually needs to make an informed and adequate decision regarding the stockholder's corporate ownership interest. Some other type of litigation would need to be instituted in the Delaware Court of Chancery to obtain more access or to redress greater or more serious stockholder harm.
1 Please contact Kenneth L. Dorsney and Thomas E. Hanson, Jr. at Morris James LLP in Wilmington, Delaware, for further information or assistance. The authors may be reached directly by email at firstname.lastname@example.org and email@example.com and by phone at (302) 888-6855 and (302) 888-6892, respectively.
2 8 Del. C. § 220.
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SOURCE Morris James LLP