Reed Smith Client Alerts

The Delaware Court of Chancery recently explained that a stockholder seeking records from a corporation to value its interest in a Delaware corporation under Delaware General Corporation Law (DGCL) 8 Del. C. section 220 (Section 220) need not explain why the stockholder seeks to value its interest.1 However, the records a stockholder is entitled to inspect to value its interest are generally restricted to more traditional, formal board-level financial documents.2

Auteurs: Brian M. Rostocki Justin M. Forcier

Background

Defendant Sahara Enterprises, Inc. (Sahara or the Company) is a privately held investment fund.3 Plaintiff Avery L. Woods is the trustee of the Avery L. Woods Trust (the Trust), which owns 278 shares of Sahara.4 Ms. Woods sought to value the Trust’s interest in Sahara, because the Company’s investments have allegedly underperformed in recent years when compared to broad market indices.5

To begin her investigation, Ms. Woods served a demand on Sahara for the inspection of books and records pursuant to Section 220.6 The stated purpose of the demand was to, among other things, value the Trust’s interest in Sahara.7 Sahara responded to the demand by providing a list of its stockholders, its bylaws, and a summary of the directors’ fees, but otherwise refused the demand.8

On March 2, 2020, Ms. Woods filed an action seeking to compel the inspection of additional books and records from Sahara under Section 220.9 Following a trial on a paper record in May 2020, the Court of Chancery issued its opinion.

Analysis

The Court of Chancery began its analysis by stating “[t]he paramount factor in determining whether a stockholder is entitled to inspection of corporate books and records is the propriety of the stockholder’s purpose in seeking such inspection.”10 Notably, “[t]he most straightforward purpose,” the court explained, “is to ascertain the value of [the Trust’s] interest in” Sahara.11 This is especially true because Sahara is a closely held corporation, resulting in the “absence of a publicly traded market” in which the Trust can more easily value its shares.12

Sahara argued valuation of the Trust’s shares was not a proper purpose because Ms. Woods failed to show that she “actually has an intent to use the requested books and records to value her shares.”13 Instead, Sahara claimed that simply stating “valuing one’s shares” is insufficient, and Ms. Woods was also required to demonstrate “why she needs to value the Trust’s shares.”14

The court rejected Sahara’s position, because “[i]t would require that a stockholder establish both a proper purpose (valuing shares) and an end use for the resulting valuation.” The court reiterated that all that is required is a showing of a proper purpose to be “entitled to inspect books and records in support of that purpose.”15 Thus, there is no requirement under DGCL that a stockholder demonstrate what it plans to do with the valuation of its shares in the corporation.