It is well established that when a stockholder of a Delaware corporation makes a books and records demand under Section 220 of the DGCL, the stockholder must state a proper purpose for the requested books and records.  “Valuation of a stockholder’s investment in a corporation, particularly where the corporation is privately held, has long been recognized as a proper purpose under 8 Del. C. § 220.” Thomas & Betts Corp. v. Leviton Mfg. Co., 685 A.2d 702, 713 (Del. Ch. 1995), aff’d, 681 A.2d 1026 (Del. 1996).

An interesting question was posed in a recent Delaware Court of Chancery action as to whether a stockholder must go one step further and explain why the stockholder wants to value such shares.  In the recent written opinion of Woods v. Sahara Enterprises, Inc., C.A. No. 2020-0153-JTL (Del. Ch. July 22, 2020), the Delaware Court of Chancery explained that imposing this additional requirement upon a stockholder is contrary to Delaware law.

In the Woods action, the investments of Sahara Enterprises, Inc. (the “Company”) had underperformed broad market indices, according to the written opinion.  Plaintiff Woods became concerned that the Company was paying its officers and directors, paying highly compensated fund managers, and paying professional consultants to help select the fund managers, yet achieving subpar results.  Plaintiff also sought to value her trust’s shares in the Company.

The Company defended on the grounds that Plaintiff failed to explain why she needed to value her trust’s shares.  The Company argued that Woods had to point to some reason for valuing her shares, such as evidence that she has a desire to sell her shares, buy out another family member, personal estate planning, apply for credit, make an offer to purchase the Company, etc.

The Court did not find this argument persuasive.  According to Vice Chancellor Laster:

The Company’s position is contrary to Delaware law. It would require that a stockholder establish both a proper purpose (valuing shares) and an end use for the resulting valuation. Delaware law does not require that a stockholder establish both a purpose for seeking an inspection and an end to which the fruits of the inspection will be put. Cf. Lebanon Cty. Emps.’ Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752, at *11–14 (Del. Ch. Jan. 13, 2020). It is sufficient under Delaware law that a stockholder has a proper purpose reasonable related to its interests as a stockholder, such as valuing its shares. See 8 Del. C. § 220(b).

Accordingly, the Court granted Plaintiff’s books and records demand.

This decision is an important read for litigants to a Section 220 demand, in which a stated purpose of the demand is to value shares in a Delaware corporation.  A stockholder need not go one step further and actually establish why valuation is sought.

Finally, the decision sets forth a helpful list of previously approved proper purposes under Delaware law in connection with a books and records demand.  The list below is as follows:

  • to investigate allegedly improper transactions or mismanagement;
  • to clarify an unexplained discrepancy in the corporation’s financial statements regarding assets;
  • to investigate the possibility of an improper transfer of assets out of the corporation;
  • to ascertain the value of his stock;
  • to aid litigation he has instituted and to contact other stockholders regarding litigation and invite their association with him in the case;
  • “[t]o inform fellow shareholders of one’s view concerning the wisdom or fairness, from the point of view of the shareholders, of a proposed recapitalization and to encourage fellow shareholders to seek appraisal”;
  • “to discuss corporate finances and management’s inadequacies, and then, depending on the responses, determine stockholder sentiment for either a change in management or a sale pursuant to a tender offer”;
  • to inquire into the independence, good faith, and due care of a special committee formed to consider a demand to institute derivative litigation;
  • to communicate with other stockholders regarding a tender offer;
  • to communicate with other stockholders in order to effectuate changes in management policies;
  • to investigate the stockholder’s possible entitlement to oversubscription privileges in connection with a rights offering;
  • to determine an individual’s suitability to serve as a director;
  • to obtain names and addresses of stockholders for a contemplated proxy solicitation; or
  • to obtain particularized facts needed to adequately allege demand futility after the corporation has admitted engaging in backdating stock options.

Slip op. at 8-10 (citations omitted).