In Robotti & Co., LLC v. Gulfport Energy Corp., 2007 WL 2019796 (Del. Ch., July 3, 2007), read opinion here, the Chancery Court, after trial, "shaved the stubble" on a demand for books and records under DGCL Section 220, (i.e., cleaned it up a bit), but otherwise required the production of much that was requested. Many Section 220 cases have been summarized on this blog over the last 2 years, and this case is a good summary of some key principles that I will briefly highlight in numbered paragraphs. (Although I have come to think of litigation as a blunt instrument for achieving goals or vindicating rights, this case may be as sharp a tool as there is available to have in the toolbox of a litigator who handles these types of cases). Here is the sum and substance:
1) The court reiterated that valuation, generally speaking, is a proper purpose to demand books and records under 220, however, in this case, the court found that the demand for records for a period almost 2 years prior to the demand did not evince a "relationship between the valuation purpose and the inspection demand". In addition, the corporation involved was publicly traded and the publicly available data was sufficient to satisfy the valuation purpose.
2) Investigation of mismanagement or wrongdoing, generally speaking, is a proper purpose (i.e., if it is reasonably related to the person’s interest as a stockholder). However, to meet the Section 220 burden, the stockholder must demonstrate the proper purpose of investigation by showing "by a preponderance of the evidence, a credible basis from which the Court of Chancery can infer there is possible mismanagement that would warrant further investigation..." Neither "mere suspicion" of wrongdoing or mismanagement, however, nor an interest in investigating "general mismanagement, without more" is sufficient.
3) Although the court found that each instance of mismanagement alleged in this case could be based on legitimate management decisions, when "cobbled together" and taken as a whole, they satisfy the credible evidence standard to demonstrate the possibility of a violation of fiduciary duty owed to minority shareholders related to the use of anti-dilution provisions and the timing of actions of insiders in connection with a rights offering. (The primary motivation behind the demand was to investigate the circumstances surrounding a rights offering.)
4) The "scope of inspection" was the next hurdle the plaintiff had to jump. That is, the plaintiff "bears the burden of demonstrating that each category of books and records which it has identified is essential to accomplishing its proper purpose." Moreover, it is the court’s duty "to limit any inspection to those documents that are ‘necessary, essential, and sufficient for the shareholder’s purpose’". If some data requested is publicly available, the court may tailor the request to only that non-public data that would be supplemental and necessary, such as board minutes, for example.
5) In sum, the court allowed many requests but also denied some that had "no identified link to any mismanagement or wrongdoing, and also, because it is not narrowly tailored to accommodate any need, should one exist."