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DELAWARE SUPREME COURT ACKNOWLEDGES LIMIT ON SHAREHOLDER INSPECTION RIGHT

10.26.10

In a recently published decision, City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc. (PDF), the Delaware Supreme Court upheld the Dela ware Chancery Court’s dismissal of a petition to inspect corporate books and records because the plaintiff did not present “credible evidence” of mismanagement or other wrongdoing to constitute a “proper purpose” for the requested inspection.  The plaintiff was a stockholder of the defendant, a Delaware publicly held corporation, that filed a petition for inspection of corporate books and records under Section 220 of the Delaware General Corporation Law (the “DGCL”).  The defendant had recently been the target of an acquisition proposal, which the defendant’s board ultimately rejected.  The defendant also had recently held an election of one class of its directors, all of the members of which had received a plurality, but not a majority, of the votes for reelection.  Because of existing board policy in light of such voting results, each of the members of that class tendered his resignation, but the defendant’s board did not accept any of those resignations. 

Section 220 of the DGCL requires that a stockholder requesting inspection rights state the purpose of the inspection, and that purpose must be a proper purpose – which is defined as one “reasonably related to such person’s interest as a stockholder.”  In its petition for inspection, the plaintiff expressed its purpose as the investigation of the board members’ compliance with their fiduciary duties relating to the acquisition proposal and the refusal to accept the resignations of the directors who received less than majority of votes for reelection.

The Delaware Supreme Court concluded that the Chancery Court had properly applied the statutory standards in dismissing the plaintiff’s petition.  The Supreme Court stated that although possible director mismanagement or wrongdoing is a proper purpose, the plaintiff must provide some evidence of it to establish “a credible basis” for a court to determine that the inspection right should be exercised.  The evidence need not prove that wrongdoing occurred, but there must be some evidence apart from the plaintiff’s allegation or suspicion.  The Supreme Court agreed with the Chancery Court that the plaintiff in this case did nothing more than state a purpose, without providing any evidence of possible mismanagement or wrongdoing.

OUR TAKE:  This decision does not change existing law or create new law in this area.   Nevertheless, the Supreme Court’s opinion is worthwhile because it provides an updated explanation of the bases for the stockholder-inspection right and clarifies the burden imposed on a stockholder in seeking to exercise that right.  Counsel advising corporate boards in this area generally are well aware of the “proper purpose” requirement and of case law and (probably more numerous) commentaries suggesting a broad interpretation of a “proper purpose.”  This opinion reminds us, however, that the stockholder’s mere statement of a purpose is not enough.  The corporation or the board is acting reasonably by refusing an inspection request just because a stockholder is curious or suspicious and by insisting that the stockholder be able to present some evidence to support the alleged purpose of the inspection.

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