On January 28, 2011, the Delaware Supreme Court issued an opinion relating to a derivative shareholder’s books and records inspection action. See the full opinion here. In the opinion, the Delaware Supreme Court focuses on what constitutes a “proper purpose” for inspection, a requirement of Delaware (and many other jurisdictions’) law.
The Delaware Supreme Court, applying Delaware law, opined: “to obtain inspection relief the stockholder must demonstrate a proper purpose for making a [books and records inspection] demand.” King v. VeriFone Holdings, Inc., Del. Supr., No. 330 at p.9, 2010 (Jan. 28, 20100). The court further held:
A proper purpose is defined as a purpose reasonably related to such person’s interest as a stockholder. To cite one example, investigating corporate mismanagement – the purpose stated by King – is a proper purpose for seeking a Section 220 books and records inspection.
Id. at pp. 9-10 (internal citations omitted).
While the King court reversed the Delaware Court of Chancery’s Opinion, which required a books and records inspection to occur before filing a derivative action (article here), the Delaware Supreme Court cautioned:
Delaware courts have strongly encouraged stockholder-plaintiffs to utilize [a books and records inspection] before filing a derivative action, in order to satisfy the heightened demand futility pleadings requirements. . . By first prosecuting a [books and records inspection] action to inspect books and records, the stockholder-plaintiff may be able to uncover particularized facts that would establish demand excusal in a subsequent derivative suit.”
Id at. pp. 10-11. The Court further cautioned, “[a] failure to proceed in that specific sequence, however, although ill-advised, has not hereto fore been regarded as fatal.” Id. at p. 11 (emphasis added).
To read more about books and records inspections, click here & here. If you are interested in conducting a proper records inspection upon a business or corporation in which you hold an interest, or simply have questions, you may want to consider consulting a licensed attorney.
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