Books and records disputes in Delaware will look a little different now

SB 21 NARROWS SCOPE BUT WITH A CAVEAT—HOW WILL STOCKHOLDERS DEMONSTRATE A “COMPELLING NEED” TO ACQUIRE NON-BOARD LEVEL DOCUMENTS?

Senate Bill 21, signed into law on March 25, 2025, amended Delaware General Corporate Law § 220 to provide additional guidance on the specific documents stockholders are entitled to when requesting corporate books and records.

As originally drafted, § 220 of the DGCL permitted record stockholders access to books and records “necessary and essential” to a “proper purpose,” as delineated by the requesting stockholder in their demand. The proper purpose standard is commonly fulfilled through a stockholders’ purported desire to investigate potential wrongdoing by the company or its executives. More benignly, stockholders also request books and records simply to value their shares. In general, the recent changes to § 220 do not significantly modify this proper purpose standard; however, demands must now be made in good faith, and instead of specifying documents “reasonably related” to a stockholders’ proper purpose, the documents must be “specifically related” and described with “reasonable particularity.”

More importantly, the new § 220 provides welcome clarity on the exact documents a corporation must provide when faced with a stockholder demand. Previously, “books and records” remained undefined and subject to judicial interpretation. As stockholders requested a wider range of documents over the years, the scope of § 220 expanded beyond its original intent. As amended, § 220 seeks to limit the proliferation of overly-broad books and records demands by setting parameters and only allowing stockholders access to non-board level documents in limited circumstances.

Under the amended § 220, stockholders can request a finite category of corporate documents (some of which are time-limited) as follows:

1. The certificate of incorporation (including a copy of any agreement or other instrument incorporated by reference in the certificate of incorporation);
2. Bylaws (including a copy of any agreement or other instrument incorporated by reference in the bylaws);
3. Minutes of all meetings of stockholders and any actions taken by stockholder written consent in the past three years;
4. All communications in writing or by electronic transmission to stockholders generally within the past three years;
5. Minutes of any meeting of the board of directors or any committee of the board and records of any actions of the board or a committee of the board;
6. Materials provided to the board or any committee of the board in connection with actions taken by the board or the committee of the board;
7. Annual financial statements of the corporation for the past three years;
8. Any stockholders agreement; and
9. Director and officer independence questionnaires.

The Court can expand on these categories in only two limited circumstances:

• First, if a corporation’s formal records (such as board minutes or financial statements) are not available, the Court may order the production of the “functional equivalent” of those records, though only to the “extent necessary and essential to fulfill the stockholder’s proper purpose.”
• Second, the Court may order production of “other specific records,” but only when a stockholder:
  • (1) complies with § 220(b);
  • (2) has “compelling need” for additional records; and
  • (3) provides “clear and convincing evidence” that the additional records are “necessary and essential” to further their proper purpose.

Interpreting these exceptions likely will encompass the majority of § 220 litigation moving forward. It remains to be seen how a stockholder will demonstrate a “compelling need” and how far the scope of “other specific records” will stretch.

Additionally, § 220 now codifies general confidentiality practices, permitting corporations to require confidentiality agreements prior to producing documents and allowing corporations to redact information not related to a stockholders’ proper purpose.

Finally, corporate counsel should note that § 220 now permits the corporation to require, as a condition precedent to producing any documents, agreement by the stockholder that the § 220 documents be incorporated by reference in any subsequent stockholder complaint. Importantly, implementing this requirement will preserve the corporation’s right to use all of the § 220 documents in a motion to dismiss—preventing a stockholder from ignoring or withholding key documents by simply failing to attach them to their complaint.

Note that the now-implemented changes to § 220 apply retroactively, but only for demands made after February 17, 2025 that are not already subject to pending litigation.

Here at Kennedys, we regularly represent corporations faced with books and records demands. The recent changes to § 220  are significant, and will impact strategy for handling both pre-litigation books and records disputes and filed § 220 actions. Please reach out to one of our Delaware attorneys with any questions. We would be glad to assist.