Stockholder Information Rights under Delaware Law
by Jed Weiner
Under Delaware General Corporation Law, stockholders of privately held corporations have a statutory right to access company information. This “inspection” right is limited to review of the company’s “books and records” for a “proper purpose.” The scope of inspection is tailored to what is “necessary and essential to accomplish the stated proper purpose.”
A “proper purpose” is one that is reasonably related to the person’s interests as a stockholder. Delaware courts have deemed wrongdoing, mismanagement, waste, share valuation and communication with other stockholders as a proper purpose.
A shareolder must explain why the purpose is relevant to its interest as a stockholder. Courts have previously accepted reasons such as exploring derivative actions, proxy fights for new directors and corporate reforms. Courts have permitted stockholders to review meeting minutes and materials, director questionnaires, officer emails and corporate policies. A judge has broad discretion in determining the scope of the inspection rights. Courts limit inspection demands that look like fishing expeditions.
When stockholders make inspection demands, these demands are usually resolved between the corporation and the stockholder by negotiation. If a company believes that producing documents would materially hurt the corporation, the company may decide to accept the risk of litigation.
Under Delaware law, members of a limited liability company can waive their inspection rights. It is not uncommon to see provisions in limited liability operating agreements whereby members waive all information rights. To my knowledge, no Delaware court has ruled that stockholders can waiver inspection rights. However, dicta in recent court opinions suggest that the stockholders may waive statutory inspection rights if the waiver is sufficiently clear and affirmatively expressed. As a result, adding such a waiver in a stockholders agreement may reduce a company's risk of litigation over inspection rights.