BOOKS AND RECORDS DEMANDS AND TECHNOLOGY: MEANINGFUL

STOCKHOLDER TOOL, OR LICENSE TO DEPART ON FISHING EXPEDITION

Aaron O. Thieme

I. INTRODUCTION

Delaware has strived to balance the interests and powers of directors and stockholders,

attempting to create an efficient corporate law system where all parties can thrive.1 The model of

corporation law is based upon a separation of legal control and ownership.2 The legal

responsibility to manage the business of the corporation for the benefit of the stockholder owners

rests with the discretion of the board of directors.3 Stockholders' rights to inspect the

corporation's books and records were recognized at common law because as a matter of self-

protection, the stockholder was entitled to know how his agents were conducting the affairs of

the corporation of which he or she was a part owner.4 Those inspection rights that originated at

common law are now codified in Section 220 of the Delaware Code.

Technology continues to permeate every aspect of life, the corporate record-keeping system

being no exclusion, which creates conflicts in the legal space. Almost fifty years ago, Delaware

enacted Section 220 and it is unlikely that the legislature could have foreseen the technological

1 Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 Columbia Law Review 1749, 1763–64 (2006) (“[T]oday's drafters of the DGCL do not devote an iota of conscious effort to make that statute more friendly to management and less protective of stockholders.... [W]e favor a much more conservative approach that seeks to maintain whatever balance currently exists, and we are distinctly uncomfortable with any change that alters that balance in either direction.”).2 Malone v. Brincat, 722 A.2d 5, 9 (Del.1998).3 8 Del. C. § 141(a).4 Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del.2002) (citing Shaw v. Agri-Mark, Inc., 663 A.2d 464, 467 (Del.1995)).

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advances that make books and records actions highly contested at the moment. Litigation exists

because shareholders are more consistently seeking information beyond just the list of

stockholders and the ledger, and the statute is silent in relation to what form the other

information must be stored in to be accessible to stockholders, and also what form it must be

transferred.

Technology creates a treasure trove of information documenting director activity, which in the

past would have only been stored in the minds of those present. At the same time, it also offers

directors the ability to cover their tracks. The Court of Chancery has been left to interpret what

digitally created and stored information is to be turned over, and that which is beyond the scope

of Section 220 demand.5 For example, in April of 2015, the Court refused to include non-

employee, director personal email accounts as the typical type of information that could be

compelled by the Court.6

What this paper argues is that the Court of Chancery has been given too much discretion when

interpreting Section 220 demands for electronically stored information, and the legislature must

step in and clarify the boundaries of these demands. This paper will prove that point by first

presenting a statutory analysis of Section 220. Then, a commentary of recent case law and

secondary sources will show how the shifting parameters for such stockholder actions that have

come to exist. This paper will lastly weigh arguments against and in favor of the current

5 See 8 Del. C. § 220(c) (The Chancery Court is granted exclusive jurisdiction to summarily grant Section 220 demands and approve the production of any document or information they deem fair and appropriate given the circumtances).6 In re Lululemon Athletica Inc. 220 Litigation, 2015 WL 1957196, at *5 (Del. Ch. Apr. 30, 2015). See infra.

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interpretation of Section 220, deciding whether the statute sufficiently accomodates the state of

technology.

Ultimately, the main conclusions this paper will arrive at are twofold; first, that it makes more

sense for the Delaware legislature to adopt new language that directly addresses the advent of

technology. Second, the Court of Chancery should not remediate the powerful tool of full-

fledged discovery that allows plaintiff stockholders access to corporate information at the

appropriate stage of litigation.

II. BACKGROUND

A statutory creation enacted in 1967, Section 220 of Delaware’s Corporate Code was an attempt

to balance the interests of stockholders and directors regarding access to non-public corporate

records that are often at odds.7 Section 220 provides stockholders of Delaware corporations with

a powerful right, so long as the shareholder demand for access is for a “proper purpose.”8 This

protection arguably keeps a watchful eye on directors and executives, but cannot be abused by

stockholders as substitute for full-fledged discovery.9 By properly asserting that right under

Section 220, stockholders are able to obtain information that can be used in a variety of contexts.

Stockholders may use information about corporate mismanagement, waste or wrongdoing in

several ways. For example, they may: institute derivative litigation with a more factually

7 8 Del. C. § 220 (Credits).8 Disney v. Walt Disney Co., 857 A.2d 444, 446 (Del. Ch. 2004).9 Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002).

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particularized complaint regarding alleged wrongdoing;10 seek an audience with the board to

discuss proposed reform or, failing in that, they may prepare a stockholder resolution for the next

annual meeting, or mount a proxy fight to elect new directors. Shareholder class-action plaintiffs

are even admonished by the Court of Chancery to ditch the “first to file” approach, and to first

exercise this important right under Section 220 in order to become lead plaintiff.11 Conversely,

directors argue their time is better spent working for the company’s interests, rather than staving

off books and records actions by warmongering stockholders.12 Where other sections of

Delaware Corporate Code have at least attempted to adapt to technological advances, Section

220 remains silent on electronic data.

A. Statutory Requirements of Section 220

Section 220 has enumerated the requirements for a stockholder to successfully demand books

and records.13 Any stockholder or beneficial owner of shares has the right to exercise this

action.14 If the corporation does not respond to the demand within five days, or refuses to permit

10 Del. Ch. Ct. R. 23.1.11 Rales v. Blasband, 634 A.2d 927, fn. 10 (Del. 1993) (The Supreme Court encouraged the Court of Chancery to ignore the custom of allowing the “first the file” to serve as lead counsel where a later filing plaintiff's counsel was diligent and employed Section 220 stating, “[s]urprisingly, little use has been made of Section 220 as an information-gathering tool in the derivative context. Perhaps the problem arises in some cases out of an unseemly race to the courthouse, chiefly generated by the “first to file” custom seemingly permitting the winner of the race to be named lead counsel. The result has been a plethora of superficial complaints that could not be sustained. Nothing requires the Court of Chancery, or any other court having appropriate jurisdiction, to countenance this process by penalizing diligent counsel who has employed these methods, including Section 220, in a deliberate and thorough manner in preparing a complaint that meets the demand excused test of Aronson.”)12 See Disney v. Walt Disney Co., 857 A.2d 444, 446 (Del. Ch. 2004) (Court agreed with Defendant and stated, “[i]f any stockholder can make public the preliminary discussions, opinions, and assessments of board members and other high-ranking employees, it will surely have a chilling effect on board deliberations”).13 8 Del. C. § 220 (Credits).14 8 Del. C. § 220(a)(1).

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a stockholder the opportunity to inspect the books, the stockholder can bring a summary action in

the Court of Chancery to compel the inspection of the books.15 Under the code, the stockholder

is entitled to inspect the corporation's stock ledger, list of stockholders, as well as other books

and records.16 When the stockholder seeks to inspect materials other than the ledger and list of

stockholders, the stockholder must first establish that: (1) the stockholder is in fact a stockholder;

(2) the stockholder has complied with Section (c) respecting the form and manner of making

demand for inspection of such documents; and (3) the inspection the stockholder seeks is for a

proper purpose.17

The statute defines proper purpose as a purpose reasonably related to such person's interest as a

stockholder.18 If the stockholder complies with these provisions of the statute, then the burden of

proof shall be upon the corporation to establish that the inspection such stockholder seeks is for

an improper purpose.19 When summarily deciding books and records actions, the Court of

Chancery can exercise its discretion to prescribe or attach additional conditions as it deems fair

and appropriate.20

B. Common Law Interpretations of Section 220

The powers under Section 220 are not limitless, and the Chancery Court has annunciated caution

when deciding Section 220 demands. The Legislature ensured that the Court would not be

15 8 Del. C. § 220(c).16 Id.17 Id. 18 Id. 19 Id.20 Id.

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pigeonholed under any formulaic model or circumstance, because the code explicitly grants the

Court of Chancery the discretion to prescribe any limitations or conditions with reference to the

inspection, or award such other or further relief as they deem just and proper.21 At the same

time, with the emergence of the technological age, the statute seems archaic in terms of even

attempting to identify the new sources of proper books and records demands. The relevant

inquiry in confining the scope of such an action is whether or not a particular document is

essential to a given inspection purpose.22 A document is essential for Section 220 purposes if, at

a minimum, it addresses the crux of the shareholder's purpose, and if the essential information

the document contains is unavailable from another source.23 Whether or not a particular

document is essential to a given inspection purpose is fact specific and will necessarily depend

on the context in which the shareholder's inspection demand arises.24

Although the Court of Chancery addressed Section 220 demands at many times prior, the 1997

holding in Security First v. U.S. Die Casting & Development serves as an appropriate starting

point for the scope of this paper.25 Technology had reached a point at which it was

commonplace in business, and more practical for documents to be created and stored on servers

21 8 Del. C. § 220(c)22 See Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 371-72 (Del. 2011) (The Court of Chancery denied plaintiff’s demand to inspect a report prepared by outside counsel in regards to allegations of a corporate officer engaging in sexual harassment. On appeal, the Supreme Court agreed with the Chancery Court’s ruling, and stated that plaintiff’s demand for this specific document was not essential to his stated purpose, which was to investigate for potential corporate wrongdoing. Additionally, the demand was overbroad because the document was confidential and privileged). 23 Id. (Emphasis added). 24 Id. 25 Although the conversion from paper to digital may have occurred sooner, it is quite appropriate that by the year 2000, digital information had firmly asserted itself as the primary means of recording, creating, transferring, and storing information and documents. See David McGurgan, Essential Communication Tools for the 21st Century Computers and the Internet, 16-SPG Del. Law. 23, SPRING 1998 (1998).

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rather than file cabinets. In that case, U.S. Die Casting demanded to inspect all books and

records of Security First after the company’s stock plummeted following the termination of a

merger agreement. U.S. Die Casting was granted an initial order by the Court of Chancery and

Security First challenged the scope of the order as too broad. On appeal, the Delaware Supreme

Court agreed with the Court of Chancery’s analysis, but limited the scope of information turned

over to U.S. Die Casting per the Chancery Court’s ruling. The Supreme Court advised that in the

future, a Section 220 proceeding should result in an order circumscribed with “rifled precision.”26

The Delaware Supreme Court went on to explain exactly why Section 220 proceedings are an

important part of the corporate governance landscape in Delaware. It hinted at the obvious

inference that these actions are precursors to derivative litigation, and therefore the Court was

not going to unfairly grant plaintiff stockholders all of the documents they should have to wait

for full-fledged discovery to obtain. Going forward, the Court reminded plaintiffs of their

substantial burden; a credible basis for finding corporate wrongdoing, and be able to justify each

category of documents sought as necessary to achieve that end.27 The result, the Court opined,

would be a decision by the Court of Chancery that was more carefully tailored to the plaintiff

stockholder’s reasonable needs.28 This case served as an important example of how deep into

non-public, director and executive information stockholders would be able to go.29 Although the

26 Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570 (Del. 1997); See e.g. Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 140 (Del. 1997) (This standard seems to have emerged as an adaptation of the pleading-stage standard assigned to the truthfulness of allegations concluded in a complaint.)27 Id. 28 Id. 29 See Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570 (Del. 1997) (“Stockholders have a right to at least a limited inquiry into books and records when they have established some credible basis to believe that there has been wrongdoing. In fact, a Section 220 proceeding may serve a salutary mission as a prelude to a derivative suit. Yet it would invite mischief to open corporate management to

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attachment of “rifled precision” has remained in the setting of Section 220 litigation, it is unclear

whether that standard has broadened with the emerging sources of technology.

Even if the Legislature did not originally undertake the task of planning for it when drafting

Section 220, the Court of Chancery has clearly contemplated the new challenges that technology

poses. The Court is well aware that its inquiry must not be limited to the merits of stockholder

requests, but also considerations about the potential harm to, and chilling effect of broadening

Section 220’s summary discovery, as communications that would not have existed in the past

now have the potential to be turned over to the stockholders.30

In 2004, Khanna v. Kovad Communications came before the Court of Chancery and served as

yet another stage for the Court to enumerate the proper inquiry for books and records actions. In

deciding that case, the Court disallowed certain requests as overly broad and reinforced the

notion that these actions are not a substitute for discovery.31 The Court may have accidentally

created confusion for the future, in regards to individual director and executive

communications.32 Interpretation of Section 220 at this point seemed to signal to plaintiff

indiscriminate fishing expeditions. The trial court must assure that a proper balance is struck.”).30 Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 823-24 (Del. Ch. 2007) (The Court of Chancery ruled that even though Pershing Square had stated a proper purpose, disclosure of the letters they sought would be unfairly harmful to Ceridian Corporation and its executives). 31 See Khanna v. Covad Communications Group, Inc., 2004 WL 187274, at *9 (Del. Ch. Jan. 23, 2004) (The Court enumerated, “[a] Section 220 action is not a substitute for discovery under the rules of civil procedure. For instance, the demand, which seeks correspondence, sent by or on behalf of Khanna to the board or any representative thereof is an example of documents for which Khanna has not shown any necessity and which he should be aware of in any event. Moreover, to require the production of all communications, including e-mails, among directors and officers of Covad, under these circumstances, would be excessive.”).32 See Khanna v. Covad Communications Group, Inc., 2004 WL 187274, at *9 (Del. Ch. Jan. 23, 2004) (Interestingly, the Court also stated, “the appropriate documents, i.e., necessary for purposes reasonably related to his status as stockholder, consist of those documents that are not the documents of individuals

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stockholders that documents, such as emails between directors, might be out of their reach for

the time being. Of course, as this paper will explore, the Court of Chancery did not hold on to

this sentiment for long.

In 2007, in Pershing Square, the Court of Chancery voiced their continued reservations about

stockholders gaining access to information outside the scope of Section 220.33 The Court of

Chancery denied Pershing Square’s books and records demand for two letters from the CEO of

Ceridian to the board of directors.34 Pershing Square sought to use the letters to disparage the

current board during a heated proxy contest.35 The Court essentially created two categories of

demands that would typically not be granted; circumstances when the stockholder demand for

otherwise potentially relevant corporate documents may be confidential, and when the scope of

documents sought is too burdensome and overbroad to possibly force disclosure by the

corporation.

but, instead, are those which are held by the corporation.”).33 See Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 823-24 (Del. Ch. 2007) (The Court stated, “[i]f any stockholder can make public the preliminary discussions, opinions, and assessments of board members and other high-ranking employees, it will surely have a chilling effect on board deliberations” and on important relations and communications between directors and executives. Directors, while they set the strategic vision of the company and monitor the managers in carrying out that vision, usually are not involved in the daily inner workings of the company. Executives, on the other hand, are exposed in this manner. Thus, executives may provide an invaluable source of information regarding highly relevant topics such as employee morale, employee efficiency, employee mismanagement, and a plethora of other topics. In order to keep directors well-informed in this regard, it is important as a policy matter that we protect the confidentiality of communications. I do not suggest that any document between an executive and a board member that the company marks as confidential is automatically excluded from inspection under § 220.”’).34 Id.35 Id.

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Conversely, there are also situations where the benefit of disclosure outweighs the risks of

harm.36 In this case, those documents involved both confidential business and personnel matters,

however the potential benefit of disclosing the information did not outweigh the potential harm,

and the Court should continue to exercise caution in requiring disclosure absent special

circumstances.37

This past spring, the Court of Chancery decided the Lululemon Section 220 litigation. The

plaintiff in that case successfully overcame the initial two-step gatekeeper of Section 220;

arguing a credible inference of corporate wrongdoing, coupled with a proper purpose for its

different categories of document demands.38 However, the corporation did not turn over all of

the documents enumerated in the initial order, and submitted a log of sixteen different chains of

documents that it argued were outside the corporations control, and also privileged, therefore

should not have been subject to the order.39 The pertinent documents for purposes of this paper

were email chains involving non-employee directors, using their own personal email accounts.

The plaintiffs argued it was immaterial that the emails were not stored on company accounts,

because they still directly involved the business and affairs of the corporation.40 Vice Chancellor

36 Id. 37 Id.38 See In re Lululemon Athletica Inc.220 Litigation, 2015 WL 1957196, at *2 (Del. Ch. Apr. 30, 2015) (Vice Chancellor Parsons concluded that Plaintiffs had a proper purpose to seek books and records regarding trades executed by founder and chairman-of-the-board because there was a credible basis to infer wrongdoing by founder and Lululemon. Specifically, in addition to a possible Brophy claim against founder, Vice Chancellor Parsons concluded that Plaintiffs had demonstrated a credible basis to infer possible mismanagement by the Company in connection with their oversight as to the questionable trading).39 For purposes of this paper, the other potential privileged documents and emails involved in the case will not be discussed. 40 The purpose of this demand was Lululemon's non–employee directors apparently did not have company email accounts and instead conducted any company-related business through email accounts of their own.

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Parsons ruled that his initial order was overly broad, and concluded that the corporation was not

required to search these non-employee directors’ personal email accounts for the demanded

emails.

This decision has at least one important future implication. It seems the Court of Chancery

remains firm in its stance against compelling corporations to turn over documents from non-

employee directors.41 This notion is particularly important when different issues of technology

are being decided. A director or executive may have control over a particular document or

email, and the corporation does not have any dominion over such document because it’s stored

on his personal email account or his own computer.

The outcome of these representative cases does not necessarily cry chaos. The Court of

Chancery has seemed to stick to its guns through the passage of time and adjusted to the

technological advances that could muddy the water in this arena of litigation. It is evident that

the Delaware Courts are more than well equipped to address these Section 220 claims. However,

the terms “books and records” are just too outdated to be workable, and for greater uniformity

the Delaware legislature should adopt new language to explicitly account for the emergence of

new technology in the statute.

C. Discussion of Secondary Sources

41 See Indiana Electric Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., 7779-CS, at 97-98 (Del. Ch. May 20, 2013); Wal-Mart Stores, Inc. v. Indiana Electric Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014) (Chancery Court decision and Supreme Court decision respectively) (This is based on an understanding of Walmart I & II, in which the Court ruled that only information the corporation could exhibit dominion and control over could be turned over in a successful Section 220 action.).

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Because Section 220 has become such an important precursor to derivative litigation, the area

has been ripe with scholarly debate, and articles have been published about the different

consequences of its use, particularly with the emergence of activist stockholders. Two articles in

particular serve as reasonable representatives of the avenues different scholars have chosen to

pursue when discussing the many complex issues Section 220 creates in modern law.

A 2006 article written by S. Mark Hurd and Lisa Whittaker posits that one potential harmful

effect of Section 220 is to gain better positioning for a settlement in a derivative suit, without

ever having any contemplation of really going forward.42 The article argues that if Section 220

continues to expand, the Courts should at least first ensure that they administer orders in a way

that minimizes abuse. The conclusion ultimately reached was that Section 220 should become a

more expansive tool, obviating the need for expensive and wasteful discovery proceedings once

real litigation begins.43

In 2012, an article even more aligned with the goals of the paper, Francis G.X. Pillegi, Kevin F.

Brady, and Jill Agro argued the Delaware legislature and Courts needed to explicitly address the

42 S. Mark Hurd, Lisa Whittaker, Books and Records Demands and Litigation: Recent Trends and Their Implications for Corporate Governance, 9 Del. L. Rev. 1, 34 (2006) (Courts must be diligent to prevent the use of Section 220 from clouding the distinction between claims “motivated by the hope of creating settlement leverage through the prospect of expensive and time-consuming litigation discovery” and claims that reflect “a reasonable apprehension of actionable director malfeasance that the sitting board cannot be expected to objectively pursue on the corporation's behalf.”)43 The authors proposed a straight-forward solution to potential abuse by permitting courts to consider, for pleading purposes, both the scope of the section 220 production and its entire contents. Such a rule, they argue, would serve to encourage a more-expansive production of books and records, and also minimize the need for judicial intervention regarding the appropriate scope of the section 220 production. It would make section 220 the “powerful right” that courts intend it to be, without creating the potential “waste of resources” that courts seek to avoid.

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issue of electronically stored information (ESI) in an authoritative manner.44 The article

discusses the fact that the Courts have skirted the issue of whether or not ESI is included in

Section 220 actions, and posits that they must come to some resolution on the topic. They use

the example of the adaptation of federal discovery rules to formulate a new standard for Section

220 that would adapt more easily to technological advances.45 The article makes a similar

conclusion that whatever change comes to Section 220, it has to be able to respond to the new

challenges technology creates.

The interesting proposition created by these two articles is that scholars almost seem to be

predicting that a change in the statute is imminent. The spur of that change is clear; at some

point in the future, the legislature or the Courts are going to have to respond to the many

questions created by technology.

III. BATTLEGROUND OF COMPETING INTERESTS

44 Francis G.X. Pileggi, Kevin F. Brady, Jill Agro, Inspecting Corporate "Books and Records" in A Digital World: The Role of Electronically Stored Information, 37 Del. J. Corp. L. 163 (2012).45 Id. (One possible solution for defining the limits of ESI production in response to a Section 220 request is to use the “reasonably accessible” standard developed in the discovery context. After the 2006 amendments to the FRCP 26, the accessibility of ESI in plenary litigation is now defined by the “reasonably accessible” standard. Although Delaware courts have applied this federal standard to discovery requests, there is not yet any Delaware case law directly addressing the issue of whether ESI in a Section 220 case is or is not “reasonably accessible.”).

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This section of the article is by no means an exhaustive list of all arguments on either side of the

expansion of Section 220, but rather is meant to serve as an illustration of the issues case law and

the secondary sources discussed above have created. The common inference created from the

many arguments, however, is that the solution may no longer simply be for the legislature and

Courts to continue down the same path. Section 220 creates many issues that originate with

varied sources from within the statute. The most reasonably prudent solution to this issue is for

the legislature to undertake the necessary steps to fill in gaps created by technology, and also to

ensure that Section 220 is not ripe for abuses. Drafting a new and updated statute would

accomplish those goals.

A. Section 220 Provides Chancery Court with Necessary Flexibility.

Section 220 litigation is a definitively factual process. In each case, the Court of Chancery is

presented with a new demand seeking constantly changing categories of documents. For that

reason alone, the Court needs to be equipped with a statute that allows them flexibility to tailor

their orders to the particular facts of the case at hand.46 Courts are not forced to grant every

demand of a plaintiff stockholder, even if they have successfully argued an inference of

corporate wrongdoing and a proper purpose.47 They are able to balance the competing interests

of stockholder plaintiffs who are seeking to hold directors and executives liable for their

potential malfeasance while at the same time ensuring those same directors are not constantly

staving off stockholder demands and can work for the benefit of the corporation.48

46 8 Del. C. § 220(c)47 Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 823-24 (Del. Ch. 2007).48 Id.

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It is clear that the legislature intended for the Court of Chancery to have flexibility, and a

potential downfall to the adoption of new language to compensate for technological advances

may be the loss of that flexibility. The way that the statute is currently written allows the Courts

to consider the ever-changing environment of the law, and determine at what point there needs to

be a change. This approach, however, could potentially grant too much legislative authority to

the judiciary, rather than vesting properly in the hands of the legislature.

B. Plaintiff Can Form More Particularized, Credible Complaints.

One of the likely possibilities for the installation of this statute was to empower plaintiff

stockholders with non-public corporate documents so that they would be better equipped to make

a decision about a lawsuit. The cost of discovery is incredibly high, and the burden to overcome

a 12(b)(6) motion creates a dilemma for stockholder who suspects corporate wrongdoing.

Section 220 serves as a means for that stockholder to gain valuable documents without incurring

the costs of full-scale lawsuits against the corporation. The Supreme Court has gone so far as to

admonish stockholder class-action plaintiffs to ditch the “first to file” approach, and to first

exercise this important right under Section 220 in order to become lead plaintiff.49

This important right serves many positive functions. First, it keeps poorly pled claims

potentially from ever being brought in front of the Court of Chancery. Second, it decreases the

wasteful necessities of full-fledged discovery because the plaintiff is asking for exactly the

documents he seeks to be turned over.50 The Court of Chancery will also not be bogged down

49 Rales v. Blasband, 634 A.2d 927, fn. 10 (Del. 1993) 50 The “rifled precision” used by the Court of Chancery will arguably keep discovery costs lower because the plaintiff will be in possession of at least some of the documents he would have sought preliminarily.

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with derivative claims lacking merit. It seems from a perspective of judicial economy, Section

220 is a very useful tool that should be expanded.

C. “Proper Purpose" Standard Contradicts Corporate Law Structure.

As previously stated, a “proper purpose” is a purpose reasonably related to such person's interest

as a stockholder.51 Allowing stockholder plaintiffs the right to invade the private space of the

corporation as long as they can enumerate some “proper purpose” contradicts the spirit of

Delaware’s corporate law structure. The legal responsibility to manage the business of the

corporation for the benefit of the stockholder owners rests with the discretion of the board of

directors.52 Even if directors are potentially committing acts that would subject the corporation

or themselves to liability, that alone should not give the stockholders the right to embark on a

fishing trip to find out if that is the case. An analogous example is citizens’ Fourth Amendment

right against illegal searches and seizures by government officials. The judicial activism

surrounding Section 220 demands blurs the line of separation between ownership and control, a

tenet of Delaware corporate governance.

Directors need to be granted the protection of control of the corporation, and there are other

safeguards in place that are more effective and more fair than the current interpretation of

Section 220 to ensure that they do their job properly.53 If Stockholders are increasingly able to

uncover traditionally non-public information used by directors, a chilling effect will occur, and

51 Id. 52 8 Del. C. § 141(a).53 Derivative suits, particularly where individual directors are named create a more realistic “check” on the activities of executives and directors who handle the corporation, because at that point the potential remedies are far more damaging than being forced to produce certain documents.

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directors will be second-guessed by their stockholders. In order to preserve the traditional

notions of Delaware corporate governance, Section 220 should no longer give the Court of

Chancery such discretion to summarily decide what documents will be turned over to

stockholders. The statute should be amended to more clearly reflect the wishes of the legislature

in regards to the scope of this essentially pre-filing discovery demand.

D. Section 220 is Silent on the Issue of Technology.

As indicated in the Pileggi article, there are other sections of Delaware law that have adopted

new language to address technological advances.54 Electronically stored information is

specifically enumerated in Chancery Court Rule 26 as one of the generally acceptable methods a

party may obtain discovery.55 Clearly, the legislature thought that the advent of new technology

was too inevitable and too important to keep the discovery statute silent on its use. It is a

reasonable inference to say that if the legislature would have contemplated such an expansion on

the use of Section 220 demands to reach such electronic information; they would have amended

the statute so that it explicitly stated such. Therefore, the legislature potentially could have never

contemplated Section 220 demands to be broadened to such a scope.

Instead, the legislature has left the interpretation of the statute and its implications on electronic

information to the Courts. Judicial activism has extended the scope of demands into electronic

information, and it is time for the legislature to interject and explicitly state its intent on the issue

within the statute.

54 Francis G.X. Pileggi, Kevin F. Brady, Jill Agro, Inspecting Corporate "Books and Records" in A Digital World: The Role of Electronically Stored Information, 37 Del. J. Corp. L. 163 (2012).55 Del. Ch. Ct. R. 26.

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E. Section 220 As A Tool of Litigious Investors and Law Firms.

Over time, the “proper purpose” as described above is potentially no longer related to

stockholder’s interest as stockholders, but rather as a tool for litigious, profit-seeking law firms

and investors to reach into the deep pockets of corporations.56 Therefore, their interests are no

longer aligned with the success of the company, and their rewards as a partial owner, but rather

in the profits from a successful settlement with the corporation. If a plaintiff stockholder is

successful in the Court of Chancery for its demand of corporate documents, they are in a much

stronger negotiating position when it comes to settlement price.57 For this reason, it can be

argued that Section 220 has become too broad, and the Court has not decided the scope of

inquiries with “rifled precision,” leading to stockholder plaintiff abuse of the statute.58

Additionally, law firms engaged in the practice of shareholder class-action and derivative

litigation are potentially cashing in on the benefits of these actions. The firms can encourage a

beneficial owner of stock in a company to institute a Section 220 action, gain access to that

information, and then later receive a large portion of the settlement as their fee once the case

evolves into a derivative suit. Nowhere in the statute has this practice been contemplated, but it

is just another potential example of the how the current state of the statute is being taken

advantage.

F. Plaintiffs Should Be Required To Overcome Pleading Stage.

56 The proper purpose standard is met when a plaintiff shows a document is related to their ownership of the stock, and necessary in order to investigate a claim of corporate wrongdoing. 57 When a corporation is forced to face a plaintiff armed with even more information than they originally had, it effectively turns the table on litigation strategy for the corporation, and places them in a more defensive position. 58 Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570 (Del. 1997).

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Section 220 has arguably become a beacon for plaintiff stockholders. It potentially obviates the

need for a plaintiff to overcome the pleading stage of litigation to obtain full-fledge discovery.

The result of a successful books and records demand is a treasure trove of evidence based upon a

summarily granted order. That information being turned over is then used to prepare for some

type of anticipated litigation. Although on one hand it creates potentially more well-pled

claims, it also leaves the door open for more rampant abuses on part of the plaintiff stockholders.

The Court of Chancery should be more hard-pressed to unveil non-public corporate documents

that most likely would have come to light anyway if the plaintiff had a meritorious suit. At the

very least, plaintiff stockholders should be forced to make it past the pleading stage of litigation

before they are granted the documents that the Court of Chancery has interpreted “other books

and records” to mean under Section 220 demands.

IV. CONCLUSIONS

Although this paper may not have explicitly answered whether Section 220 is a reasonable

plaintiff stockholder tool, or permission to go on a fishing expedition, it has nevertheless

engaged in an important dialogue. The question seems almost unanswerable at this time, and

further proves the point that clarification from the legislature is necessary. The case law,

secondary sources, and arguments on both sides of the issue discussed within this paper

emphasizes the need for more uniformity in the statute. Section 220 has remained untouched by

the legislature since 1967, its interpretation left to the Courts. It is high time that the legislature

addresses the many concerns created by this outdated statute and fill in the gaps to ensure this

powerful tool can be used reasonably and fairly. The law will almost always lag behind

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technology, but there comes a point, as there is here, at which there is a such a disconnect that

something must be done to correct it.

Attorneys need to be able to advise their executive clients in a more meaningful way about the

implications of Section 220. The Court of Chancery should also be given more explicit

instructions, particularly in the area of technology, and whether or not to grant all of the demands

for categories of documents in Section 220 actions. “Books and records” are simply outdated,

out of touch terms within Section 220 that need to be revised to accurately reflect the current

state of the intersection of technology and business and the law.

TABLE OF AUTHORITIES

Cases

Malone v. Brincat, 722 A.2d 5 (Del.1998).

Saito v. McKesson HBOC, Inc., 806 A.2d 113 (Del.2002).

In re Lululemon Athletica Inc. 220 Litigation, 2015 WL 1957196 (Del. Ch. Apr. 30, 2015).

Disney v. Walt Disney Co., 857 A.2d 444 (Del. Ch. 2004).

Rales v. Blasband, 634 A.2d 927, fn. 10 (Del. 1993).

Espinoza v. Hewlett-Packard Co., 32 A.3d 365 (Del. 2011).

Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563 (Del. 1997).

Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135 (Del. 1997).

Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810 (Del. Ch. 2007).

Khanna v. Covad Communications Group, Inc., 2004 WL 187274 (Del. Ch. Jan. 23, 2004).

Indiana Electric Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., 7779-CS (Del. Ch. May 20, 2013).

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Wal-Mart Stores, Inc. v. Indiana Electric Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014).

Secondary Sources

Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 Columbia Law Review 1749 (2006).

Francis G.X. Pileggi, Kevin F. Brady, Jill Agro, Inspecting Corporate "Books and Records" in A Digital World: The Role of Electronically Stored Information, 37 Del. J. Corp. L. 163 (2012).

S. Mark Hurd, Lisa Whittaker, Books and Records Demands and Litigation: Recent Trends and Their Implications for Corporate Governance, 9 Del. L. Rev. 1 (2006).

David McGurgan, Essential Communication Tools for the 21st Century Computers and the Internet, 16-SPG Del. Law. 23, SPRING 1998 (1998).

Statutes

8 Del. C. § 220

8 Del. C. § 141(a).

Del. Ch. Ct. R. 26.

Del. Ch. Ct. R. 23.1.

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