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Delaware: Reasonable Restrictions.

In Delaware, any stockholder is entitled to inspect the corporation’s books and records upon written demand, for any proper purpose.[1]  The statute defines a proper purpose as a purpose reasonably related to such person’s interest as a stockholder.[2]  Additionally, the statute grants the Court of Chancery the authority to “prescribe any limitations or conditions with reference to the inspection . . . as the court may deem just and proper.”[3]

In United Techs. Corp. v. Treppel, a recent Delaware Supreme Court case, the corporation sought to restrict the use of any information generated from an inspection by a stockholder, where the stockholder’s stated purpose was to evaluate the board’s decision to reject his litigation demand to investigate, address, remedy, and commence proceedings against certain officers and directors.[4]  The corporation agreed to allow the stockholder to inspect most of his requested documents, but insisted that he first sign a confidentiality agreement, which contained a forum selection clause requiring any related lawsuit to be brought in a Delaware court.[5]  The Court of Chancery denied the corporation’s request, saying that such a limitation “is not the type of restriction that [the statute] seeks to impose.  There is a mechanism for limiting which forum a suit may be brought in to enforce corporate interests, and that is through either a charter or bylaw provision.”[6]

The Delaware Supreme Court disagreed.  Noting that “Delaware courts have repeatedly ‘placed reasonable restrictions on shareholders’ inspection rights in the context of [inspection] suit,’” the court said that the ability to limit the use of information gathered from an inspection—not just the scope of the inspection itself—has long been recognized as within the Court of Chancery’s discretion.[7]  For example, the court noted, Delaware courts have frequently conditioned books and records inspections on confidentiality agreements.[8]  In some cases, the court added, inspections have been denied entirely if the plaintiff’s purpose was improper, e.g., pursuing a derivative action where the stockholder was not a proper plaintiff to bring such an action, or where there is pending litigation against the corporation and discovery is thus the more appropriate mechanism for obtaining relevant documents.[9]  The court explained that, in restricting a stockholder’s ability to use corporate books and records in certain ways, Delaware case law has consistently reflected the underlying principle that the stockholder’s inspection right is a “qualified one.”[10]  Accordingly, the court held that the Court of Chancery has wide discretion to shape the breadth and use of inspections to protect the legitimate interests of corporations, including consideration of the forum selection clause in the confidentiality agreement.[11]

In other words, Delaware courts will exercise their statutory discretionary power to impose reasonable restrictions on stockholder inspection to find the right balance between the legitimate interests of both the stockholder and the corporation, be it confidentiality agreement, forum selection clause, or whatever may be appropriate under the facts and circumstances.

This post was a part of a multi-part blog series on shareholder inspection rights and the limits thereof.  In our next post, we will discuss what constitutes proper shareholder purposes under New York law.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or

[1] See Del. Code  tit. 8, § 220(b).

[2] Id.

[3] Id. § 220(c).

[4] United Techs. Corp. v. Treppel, No. 8624-VCG (Del. Dec. 23, 2014), at 2–3.

[5] Id. at 3.

[6] Id. at 6.

[7] Id. at 7–8.

[8] Id. at 8 n.29 (internal citations omitted).

[9] Id. at 8–9, n.31 (internal citations omitted).

[10] Id. at 9 (internal citations omitted).

[11] Id. at 9–13.