A recent decision of the Delaware Court of Chancery explained the well-established case law that has been developed over many decades to define the contours and nuances of DGCL Section 220, which is the basis for a qualified right of stockholders to demand certain records from a corporation. Many of those Section 220 decisions over the last decade have been highlighted on these pages. In KT4 Partners LLC v. Palantir Technologies, Inc., C.A. No. 2017-0177-JRS (Del. Ch. Feb. 22, 2018), the Court determined that a stockholder satisfied the prerequisites of Section 220 to obtain certain corporate records, notwithstanding other pending litigation in California in which the company is claiming that the stockholder stole trade secrets. Bloomberg posted an article about this ruling.

UPDATE: On January 29, 2019, the Delaware Supreme Court reversed and remanded this decision in an opinion highlighted on these pages. The Supreme Court ordered the production of emails–and cited to a law review article co-authored by yours truly on this topic.

This 50-page decision can serve as a primer for the requirements of Section 220–including those that have been imposed over the years by judicial gloss even though they cannot be found in the words of the statute. On a procedural level, through no fault of the court, this post-trial ruling came about a year after the complaint was filed, though the court’s guidelines suggest that trial in a Section 220 case might take place in about 90 days from the date of the complaint being filed. There were several complications of the parties’ making that caused the protracted timeline, though prior commentary on Section 220 cases on these pages demonstrates that, despite the apparent simplicity of the statute, these cases can be expensive and time-consuming without much to show for a win.

Anyone seeking to employ rights contained in Section 220, or defend against a Section 220 claim, would be well-served to read this opinion. Assuming a basic familiarity by the reader with Section 220, a few noteworthy aspects of this decision include the following bullet points:

  • The prerequisites of a Section 220 demand must be satisfied in the demand letter, prior to suit, and can’t be fixed in the complaint. Stated another way, the pre-suit Section 220 demand letter in this case did not clearly state a purpose of valuation. Even though that is a recognized “proper purpose”, because that purpose was not stated in the letter, it could not be argued in the complaint or presented as a purpose at trial.
  • An exception to the rule that the stockholder has the burden to prove a “proper purpose”, is when a stockholder seeks to inspect stocklists or stock ledgers pursuant to Section 220(c)–in which case the corporation has the burden of proof to establish an improper purpose. See footnote 75.
  • Investigation of alleged wrongdoing, waste or mismanagement is a recognized “proper purpose” for a Section 220 demand. In this case, that purpose was clearly stated in the pre-suit request along with a satisfaction that there be a “credible basis” to the claims of mismanagement or wrongdoing.
  • The court explained that the purpose must relate to one’s status as a stockholder and not for personal vendettas, for example.
  • This requirement necessitated that the court “thread the needle” involving the company’s defense that the Section 220 demand was an attempt to obtain “early discovery” in the pending litigation between the parties in California, as well as other suggestions that the “primary” purpose was other than the stated purpose. It remains well-settled in Section 220 jurisprudence, however, that as long as the primary purpose is proper, the secondary purpose is not controlling. That determination, of course, is intensely factual–which explains why this opinion is 50-pages long.
  • The failure of the company to hold an annual meeting supported the stockholder’s claimed purpose to investigate wrongdoing and mismanagement.
  • The “credible basis” standard was not met regarding claims that the company thwarted a potential transaction to sell the private company, that would have given stockholders liquidity, and also rejected as a “personal claim” (not a “proper purpose” under Section 220) that the company interfered with his efforts to sell his own stock.
  • The scope of the requested documents was tailored by the court with “rifled precision” to include only those documents essential to address the crux of the stated purpose.