Self-Dealing Inquiry: Proper Purpose Under Section 220

The Chancery Court ruled in Sutherland v. Dardanelle Timber Company, download file, that a proper purpose under Section 220 includes investigation of possible self-dealing and that a credible basis for the claim existed due to the controlling shareholder establishing his own salary. In this 29-page decision that described in great detail the disagreements among the three family members who owned a very successful lumber yard business, the Court ruled that as long as the primary purpose is proper, secondary motives will not defeat the primary purpose, and in any event it would be very hard to prove “false pretenses” in such a context. The court determined that it could review de novo the report of the Master on the record alone without a new hearing.
The court also acknowledged as a proper purpose in a Section 220 demand for books and records the investigation of the possible breach of fiduciary duty as long as there was “some credible evidence to warrant further investigation.” Finally, the court also reiterated prior Delaware rulings that a parent corporation can only be forced to produce documents of a subsidiary if it controls that subsidiary.