Delaware Courts Refine Standards Regarding Appropriate Conditions to Stockholder Inspections of Books and Records
Recent decisions in two cases dealing with stockholder requests to inspect the books and records of Delaware corporations have suggested some interesting contours to the limits on conditions that corporations may impose on stockholder inspection rights.
In its December 23, 2014 decision in United Technologies Corp. v. Treppel, the Delaware Supreme Court confirmed the Court of Chancery’s broad authority to impose restrictions on a stockholder’s use of information received through inspection of a corporation’s books and records by holding that a forum selection restriction may be appropriate.
In its December 31, 2014 decision in The Ravenswood Investment Company, L.P. v. Winmill & Co. Incorporated, the Court of Chancery rejected a corporation’s attempt to condition inspection on the requesting stockholder’s agreement to indemnify the company from losses related to federal and state securities laws claims.
Section 220(b) of the Delaware General Corporation Law gives any stockholder of a Delaware corporation the right to make a demand to inspect the corporation’s books and records, including the stock ledger, stockholder list, and other books and records, for any proper purpose.
Section 220(c) provides that, if the corporation refuses the stockholder’s demand, the stockholder may apply to the Court of Chancery for an order to compel the corporation to allow the inspection. The statute gives the Court of Chancery exclusive jurisdiction to decide whether a stockholder is entitled to inspect, and provides a range of options for ways in which the court may compel the corporation to furnish information or allow direct inspection, if appropriate. Additionally, Section 220(c) states “[t]he Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.”
In the United Technologies case, the stockholder, Treppel, sought to compel inspection after the corporation rejected Treppel’s previous demand that it investigate and remedy certain violations of federal law by the corporation’s officers and directors. United Technologies did not dispute that Treppel’s purpose was proper, but did ask Treppel to sign a confidentiality agreement before allowing the inspection, which included a provision requiring that any action brought in connection with the inspection be brought in Delaware courts. Treppel objected to that restriction, and, after negotiations failed, filed suit under Section 220(c), asking the Court of Chancery to compel the inspection without any limitations.
The Court of Chancery ruled that it did not have the authority to impose the forum selection condition on the inspection request. The Supreme Court reversed, holding that the Court of Chancery does have broad discretion to impose conditions, as explicitly stated in Section 220(c). But, rather than impose the specific condition itself, the Supreme Court remanded the case, with instructions that the Court of Chancery determine if the forum selection condition was appropriate in this case, which the Court noted is an “inherently case-by-case and ‘fact specific’” determination.
The Supreme Court listed several factors that the Court of Chancery would be entitled to consider in making its determination, including (i) the fact that the corporate conduct underlying Treppel’s inspection request was already the subject of derivative litigation in Delaware courts, (ii) the corporation’s legitimate interest in having consistent rulings made by Delaware courts on issues of Delaware law, (iii) United Technologies’ adoption, while Treppel’s suit was pending, of a forum selection bylaw that restricts stockholder actions to Delaware courts, and (iv) the costs to the corporation of defending the inspection request action and the related derivative action.
The December Ravenswood ruling was a follow-up to the Court of Chancery’s May 30, 2014 decision in the same case, which dealt with the same books and records inspection dispute between stockholder Ravenswood and the Winmill corporation. In the May ruling, the court held that requiring Ravenswood to agree not to trade in Winmill’s stock based on the non-public information received pursuant to the inspection request was an inappropriate condition, because valuing that stock was the proper purpose for the request, and restricting trade decisions would frustrate that purpose, despite Winmill’s concerns about potential tipper liability under insider trading laws. The December Ravenswood opinion considered a further restriction that Winmill sought to impose before producing the requested financial information. Because Winmill could not condition the production on Ravenswood’s agreement not to trade, Winmill instead wanted Ravenswood to indemnify Winmill from losses related to federal and state securities laws claims. The court rejected the indemnity condition as well, stating that it would not presume that Ravenswood would violate the securities laws, and therefore an unlimited indemnity obligation would unduly impair Winmill’s rights under Section 220. The court did, however, acknowledge that some form of confidentiality restriction for a reasonable period of time was appropriate.
Ultimately, the Supreme Court noted in United Technologies that requests to inspect corporate books and records are made for a wide variety of reasons, and each involve unique circumstances, but, in exercising its discretion under Section 220(c), the Court of Chancery should “give weight to the importance of maintaining § 220 actions as streamlined, summary proceedings that do not get bogged down in collateral issues." In the Ravenswood rulings, the Court of Chancery provided little explanation (and did not cite the United Technologies case from just a few days earlier), but nevertheless concluded that unreasonable restrictions or conditions will be rejected if they unduly impair a stockholder’s statutory right to inspect.
With these rulings as background, it is clear that the Delaware courts will exercise their discretionary powers under Section 220(c) to impose reasonable conditions or limitations upon inspection rights. As a result, corporations may be more likely in the future to seek to impose forum selection or other conditions on stockholders' inspection requests, but should be wary of attempting to impose potentially more restrictive conditions, such as trading restrictions and unlimited indemnity obligations, which may unduly impair stockholder rights.