Under Section 220 of the DGCL, a stockholder of a Delaware corporation has a qualified right to inspect the company's books and records. The conditions to this right and the scope of available discovery are well settled. To enforce an inspection right under Section 220, the stockholder must establish both:

The inspection right, once established, does not entitle the stockholder to a wide-ranging discovery of the sort generally available in ordinary civil litigation. Rather, as the Delaware Supreme Court has cautioned, "a Section 220 proceeding should result in an order circumscribed with rifled precision" (Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570 (Del. 1997)).

A proper purpose for inspection is one that is reasonably related to the person's interest as a stockholder. The Delaware judiciary frequently addresses questions regarding the types of goals that qualify as a proper purpose and the limitations on discovery that should be applied in light of the stated purpose. For discussion of these cases and their primary takeaways, see Standard Document, Stock Ledger: Drafting Note, Inspection of the Stock Ledger and Other Records Under Delaware Law and Article, Expert Q&A: Stockholder Inspection Demands.

Changing times and practices precipitate evolution in all areas of corporate law. The common law right to inspection dates back over 100 years and was first codified in Section 220 in 1967, when physical books and records were the norm and the term "shareholder" conjured an image of "Mom and Pop." The advent of electronic records, institutional shareholders, and short-slate proxy contests require new interpretations of decades-old statutory language. Several recent Delaware decisions address these new issues.

Most books and records demands are made by stockholders seeking information about the company. Proper purposes for inspection by stockholders include investigating mismanagement, ascertaining the value of the stockholder's stock, investigating the possibility of an improper transfer of assets out of the corporation, and many others.

Section 220(d) of the DGCL also grants directors the right to examine the company's books and records "for a purpose reasonably related to the director's position as a director." This right has been described as "virtually unfettered" so long as the director establishes the proper purpose (McGowan v. Empress Entm't, Inc., 791 A.2d 1, 5 (Del. Ch. 2000)).

Director inspection rights most recently came up in the context of an LLC manager's demand to inspect the books and records of an LLC. In Red Capital Investment L.P. v. Red Parent LLC, an individual who was both a member and manager of the subject LLC requested to see various financial reports and bank statements of the company's wholly owned, bankruptcy remote subsidiaries ( (Del. Ch. Feb. 11, 2016)). After concluding that the demand was made in the individual's capacities of both member and manager, the Delaware Court of Chancery reviewed the inspection rights of managers under the Delaware LLC Act. The court analogized the standard under Section 18-305(a) of the LLC Act—which states that managers are entitled to all information "reasonably related to the position of manager"—to the similar phrasing under Section 220(d) of the corporate statute and held that managers are entitled to similarly unfettered access as directors are (, at *4). On that basis, the court granted the manager access to the subsidiaries' records, even though the records were, strictly speaking, not those of the parent company. The court granted the request because the records were necessary for the manager to understand the parent company's cash position and thereby discharge his managerial fiduciary duties.

Director inspection rights had arisen in a corporate case shortly before the decision in Red Parent. In Chammas v. NavLink, Inc., two directors who suspected that they were being excluded from the full board's business and related communications made a demand to inspect several categories of information, including:

( (Del. Ch. Feb. 1, 2016).)

The court's discussion began with a robust description of the directors' inspection rights under Section 220(d). The court noted that the "unfettered" inspection rights of any individual directors are at least as equal to that of the remainder of the board, and that management therefore cannot pick and choose which directors receive what information. The court added that a director's proper purpose does not become improper because of the possibility that the director will share the information he is entitled to with someone who is hostile to the company. The company can seek redress for any breaches of fiduciary duty committed by a director as and when those breaches occur, but it cannot keep information away from a director in anticipation of a possible breach.

This statement of the law by the NavLink court carries particular resonance in the age of shareholder activism. In 2015, over a quarter of the year's 507 shareholder activist campaigns were launched with a goal of seeking board representation short of full control, while over 40 percent of the year's campaigns resulted in settlement and over a quarter ended in victory for the dissident shareholder (see Legal Update, Shareholder Activism Trends in 2015). Those figures mean that many activist campaigns result in a potentially uneasy situation in which some of the board's members report to shareholders who may have plans that amount to threats against the continuing corporate existence of the company. Nevertheless, the director-appointees of those shareholders are entitled to the same information as the rest of the board.

Following its forceful statement in favor of directors' inspection rights, however, the NavLink court ultimately issued a somewhat surprisingly circumscribed production order for the information that the two plaintiff directors would be entitled to inspect.

Critical to the court's decision was that while plaintiffs are entitled to books and records reasonably related to their positions as directors, and while directors have a broader right of access than stockholders, the requested documents must qualify as books and records of the company in the first place. In NavLink, the court was unwilling to conclude that all communications between the non-plaintiff directors, on the one hand, and the Chairman, CEO or CFO, on the other, constitute books and records of the company. In particular, suspicions by the plaintiffs of pre-meeting collusion do not bestow the status of books and records on private communications between officers and directors. This is the case, the court added, even when the communications are stored on the company's computer servers.

The court emphasized that its holding was not to be interpreted as a blanket prohibition against inspection of private communications among directors. A plaintiff director can gain access to these communications if the request:

In the court's view, the second and third elements were missing from the request for private communications among the directors and officers. However, when all three of those conditions are met, production of private communications can be ordered.

In light of that standard, the court addressed the next category of requested documents: communications between the non-plaintiff directors and the board's secretary and former secretary regarding the preparation of board minutes. The court divided this request into two categories:

The court granted the request for communications containing draft board-meeting minutes on the grounds that board-meeting minutes fall within the ambit of books and records of the company. As for communications concerning draft board-meeting minutes, the court also granted the request for any communication to and from the secretary, because it is the role of the secretary to properly keep the minutes, which in turn makes any communication to or from the secretary one that directly affects the rights, duties, and obligations of the company. However, the court denied the request as to any communications among the directors not including the secretary, to the extent that those communications only concerned the minutes without actually attaching any draft of them.

The court also applied this test to communications regarding the possible termination of a material customer contract and regarding the company's budget and operating plan. The plaintiff directors were entitled to all official documents, proposals, and communications regarding the possible termination of the contract that were exchanged between company management and the customer, as well as documents necessary for evaluating the budget and plan, but not mere conversations between management and customers in the absence of an allegation of wrongdoing.

The final request, for communications between the company and its counsel regarding the company's annual meeting, was granted. The court held that communications between management and counsel regarding the time and place of the meeting are reasonably related to the director position, while the scope of the request was sufficiently narrow to permit a production order.

The day after the decision in NavLink, the court issued an opinion that addresses the production of electronic records and communications in depth. In Amalgamated Bank v. Yahoo! Inc., plaintiff stockholder Amalgamated Bank made an inspection demand to investigate the hiring, compensation, and termination of Yahoo's COO, Henrique de Castro ( (Del. Ch. Feb. 2, 2016)). The plaintiff alleged that the board essentially rubberstamped CEO Marissa Mayer's decisions on de Castro's hiring and compensation structure and did not consider the possibility that de Castro could or should be terminated with cause, which would have caused the forfeiture of his unvested equity awards. To investigate that possibility, Amalgamated made a demand for Mayer's files, including emails, and documents reflecting the discussions and decisions of the board.

For purposes of establishing a "credible basis" for wrongdoing, the court analogized the accusations brought against the Yahoo board to those made in the Disney litigation (on the "credible basis" standard, see Sec. First Corp. v. U.S. Die Casting and Dev. Co., 687 A.2d at 569). In that case, similar to this one, the plaintiff established a credible basis for a books and records investigation on the basis of the hiring of a number-two executive for generous compensation, poor performance by that executive, and a no-fault termination after approximately a year on the job that conferred enormous wealth on the executive when for-cause termination could have been justified.

To investigate that possible wrongdoing, the court ruled that Mayer's documents were appropriate for production. In so doing, the court made explicit that the production was to include emails and other electronic documents. Yahoo had argued that electronic documents are beyond the scope of Section 220, because the statute does not mention electronically stored information. The court, however, was unmoved by the argument, emphasizing that "times have changed" and over 90 percent of business documents are stored electronically. Therefore, although Section 220 does not contain the words "electronically stored information," the phrase "books and records" is not limited to paper records.

Before reaching the decision on credible basis and scope of production, the court addressed the question of whether Amalgamated Bank had standing to make an inspection demand. If the party seeking books and records is not a record holder of the corporation's stock, Section 220(b) of the DGCL requires that the demand contain three pieces of information:

As the Chancery Court once discussed in detail in the context of an appraisal decision in Dell, shares of publicly traded companies are not certificated on paper and certificates are not exchanged with every purchase and sale of shares. Instead, all record ownership of publicly traded shares stays with DTC (for a fuller discussion, see Legal Update, Ramtron and Dell: Chancery Court Provides New Defenses Against Appraisal Arbitrageurs). Consequently, when discussing public companies, in most companies the record ownership of shares does not change; it is only the beneficial ownership that changes. Because of this, the court as in Dell had to apply a statute that predates the advent of the share-immobilization system to modern-day realities.

In Yahoo, the court ruled that Amalgamated satisfied the statutory requirements by:

Yahoo argued that the demand did not comply with the statute's procedural requirements because the demand attached account statements reflecting the funds' ownership of Yahoo stock as of a date three days before the date of the demand itself. Yahoo also protested that the funds did not continually provide updated documentary evidence of their continuing ownership of Yahoo stock.

The court rejected these concerns, stating that "Section 220 must be applied with some appreciation of the practical considerations surrounding its use" (, at *14). The court held that it suffices to provide account statements, which by their nature are issued periodically, as evidence of beneficial ownership, as long as they are "sufficiently proximate in time" to the date of the demand. For these purposes, recent brokerage statements are adequate. The court similarly did not require that Amalgamated provide an ongoing stream of trading records reflecting continuing stock ownership, which it deemed "impractical and overly burdensome."

The court also reduced the paperwork required of Amalgamated by holding that it did not have to produce documentary evidence of its appointment as trustee of the funds. The court likened the trustee role to that of a president of a corporation and noted that Delaware law does not require the president to supply a copy of a board resolution appointing him as an authorized officer of the company.

In its analogy to Disney, the court found that Amalgamated had shown a credible basis (the lowest evidentiary bar under Delaware law) for findings of possible breach of fiduciary duty and corporate waste. The court also cited to the decision in Beam ex. rel. Martha Stewart Living Omnimedia, Inc. v. Stewart for the proposition that a proper purpose for inspection includes investigating questions of director disinterest and independence (845 A.2d 1040, 1056 (Del. 2004)).

Even when it finds a credible basis of wrongdoing, the court will deny the demand if it determines that the wrongdoing would ultimately not be justiciable. For example, the court has denied demands when:

The Chancery Court's AbbVie decision was recently upheld by the Delaware Supreme Court ( (Del. Jan. 20, 2016)). In its brief, two-page order, the Supreme Court noted in a footnote that two of the five justices on the court felt it unnecessary for the Chancery Court to have relied on the Section 102(b)(7) argument in its analysis and that the Chancery Court could have simply found that the plaintiff in that case had not established a credible basis for wrongdoing. In any event, a majority of the Supreme Court agreed with the Chancery Court that available exculpation under Section 102(b)(7) can render a matter non-justiciable and therefore inappropriate for a books and records demand. The Chancery Court in Yahoo proceeded with its analysis on that basis.

The Yahoo court distinguished AbbVie on several grounds and held that Amalgamated's claims were still theoretically justiciable:

In its recent, seminal decision in Wal-Mart, the Delaware Supreme Court held that if a stockholder has shown that particular documents are essential to its inspection, the stockholder can overcome the attorney-client privilege and work-product doctrine otherwise protecting those documents (Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1275-81 (Del. 2014); see Legal Update, Delaware Supreme Court Adopts Fiduciary Exception to Attorney-Client Privilege). In Yahoo, the plaintiff demanded to see copies of consultations with counsel in connection with all of the various categories of documents it had requested.

The court acknowledged that the attorney-client privilege and work-product doctrine can be overcome, but only if the plaintiff first makes a showing that the privileged documents are essential to its inspection. The court held that at this point in the proceedings, Amalgamated had not made that showing. Instead, the court ordered that Yahoo maintain a privilege log that identifies the relevant documents.

Section 220(c) of the DGCL authorizes the Court of Chancery to "prescribe any limitations or conditions" on the inspection as it deems appropriate. For example, the Delaware Supreme Court has authorized the Court of Chancery under Section 220(c) to prescribe an exclusive-forum condition in which the stockholder agrees that any information it learns in the books and records inspection will only be used in a legal action brought in a Delaware court, not elsewhere (see United Tech. Corp. v. Treppel, 109 A.3d 553 (Del. 2014)).

Facing an issue of first impression, the court was asked by Yahoo to levy a new condition, that the full scope of documents that Yahoo has produced or will produce be incorporated by reference into any derivative-action complaint that Amalgamated files. The court granted the request.

The court explained that the incorporation condition protects the legitimate interests of both Yahoo and the judiciary by ensuring that any complaint that Amalgamated files will not be based on cherry-picked documents. While a plaintiff is entitled to all reasonable inferences in its favor in a ruling on a motion to dismiss, an incorporation-by-reference condition allows the court to review the actual documents cited by the plaintiff to ensure that their contents have not been misrepresented. The incorporation-by-reference doctrine thus limits the plaintiff's ability to take language out of context, and also allows the responding company to point the court to documents that the plaintiff has not mentioned in its response to any particular allegation.