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Woods v. Sahara Enterprises, Inc., C.A. No. 2020-0153-JTL (Del. Ch. July 22, 2020), a recent Delaware Court of Chancery opinion, provides insights into the rights of stockholders to inspect corporate books and records. 

Following consistent underperformance compared to market indices, the shareholder Plaintiff, Avery Woods, served a demand for books and records under Section 220 of the Delaware General Corporation Law on defendant Sahara Enterprises, Inc. (the “Company”), a privately held investment fund. Woods’s stated purposes in serving the demand were to understand the value of her shares and investigate whether the Company’s underperformance was due to mismanagement or a lack of oversight. The Company initially provided Woods with a list of its stockholders and a copy of its bylaws and then later with a summary of fees received by the directors of the Company and its sister entity, but refused to produce further information contending that she lacked a proper purpose and that the scope of her demand was overly broad. 

Woods subsequently brought an action to enforce her statutory inspection rights. The court held that she had proved that she had proper purposes to conduct an inspection, and that she sufficiently established her right to inspect certain categories of documents.

The opinion provides several important takeaways for corporate practitioners:

• The opinion sets forth a helpful list of previously recognized “proper purposes” under Section 220.
• If a stockholder has a proper purpose, Delaware law does not require the stockholder to also identify “an end to which the fruits of the inspection will be put.” Accordingly, Woods was not required to explain why she sought valuation of her shares. Rather, once a proper purpose is established, the burden shifts to the corporation to prove that the stockholder’s avowed purpose is not her actual purpose and that her actual purpose for conducting the inspection is improper.
• In cases in which the stockholder’s stated purpose is to investigate wrongdoing, the stockholder need only establish that there is a credible basis from which the court can infer a possibility of wrongdoing. Such a standard is “the lowest possible burden of proof” and the stockholder may rely on circumstantial evidence and hearsay to make such a showing. While the Company’s poor performance, without more, was not “sufficiently protracted or extreme to draw an inference of wrongdoing,” the Court found that the tactical position that the Company took during the litigation bolstered Woods’ position.
• Even where a stockholder has established a proper purpose, certain categories of documents may be deemed inessential to that specific purpose. The court categorized the requested documents as (i) formal board materials, such as meeting minutes, which will be sufficient for many inspections and should be minimally burdensome to collect and provide, (ii) informal board materials that evidence the directors’ deliberations, information received, and decisions reached, and may include communications between directors and officers; and (iii) officer-level materials, which may include communications and materials only shared among or reviewed by officers and employees. Plaintiff was granted access to formal board materials with leave to renew requests for informal or officer-level materials should the formal board materials prove inadequate to her purpose. This indicates that the threshold for production of informal and officer-level materials under Section 220 is very high.
• Records may be within the corporation’s possession, custody, and control, for purposes of inspection requests, even when held by a different entity. The Court noted that those in control of the Company were the same individuals on the board of directors for the sister entity and “[i]f the entity’s human representatives can access books and records in the ordinary course of business whenever they wish to do so for their own purposes, then they equally can be compelled to do so by court order.”