08 March 2021

Durham v. Grapetree, LLC: A Helpful Affirmation of the Limits on the Scope of Section 220 Inspections in the Context of Email and Text Communications

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A short decision issued in January by the Delaware Supreme Court provides helpful insight into an issue of practical import in the context of Section 220 demands: when does a stockholder have a right to go beyond formal communications, such as board minutes, presentations, and resolutions, to conduct a more invasive and burdensome search of informal methods of communication, such as text messages and emails?

Recent decisions by Delaware courts have been much remarked upon, including in this forum, for affirming the breadth of “proper purpose” that courts will view as sufficient for a stockholder plaintiff to state in order to be permitted to inspect a company’s books and records.

In each of these decisions, however, courts have continued to emphasize that whether a stockholder plaintiff is permitted any inspection at all does not end the inquiry. Section 220 requests are not intended to allow “indiscriminate fishing expeditions” or overly broad inquisitions that are akin to discovery in litigation. Instead, the stockholder is limited to inspection of documents that are “necessary and essential” to the “proper purpose” the stockholder asserts for inspection. Accordingly, it is axiomatic that, even where a stockholder states a proper purpose, the scope of records the stockholder is permitted to inspect must be circumscribed with “rifled precision.”

In some tension with the quintessential limited nature of the Section 220 proceeding has been Delaware courts’ consistent affirmation in recent years that emails, text messages, and other informal communications are within the realm of documents that might be found “necessary and essential” to a stockholder’s purpose. While not as extensive as discovery in litigation, even a targeted email and text message search of a company’s most senior officers and directors can be time-consuming and expensive.

Beginning in 2019, in a welcome and less-remarked-upon parallel track to the courts’ decisions affirming the breadth of the “proper purpose” requirement, the Delaware Supreme Court has provided guidance and concrete limitations on when “informal” communications, including emails and text messages, will be found “necessary and essential.” Specifically, whether those communications are necessary will depend on the company’s recordkeeping and communication practices. Where key communications are documented by letter, in board minutes and resolutions, or via similar formal mechanisms, it is not necessary or essential for a stockholder to delve into more informal communications. But, where the key matters for inspection are not documented in any formal manner, the lack of formal communications should not stand as a bar to inspection, and the stockholder may be permitted to search informal communications. In addition to providing welcome guidance, this line of cases provides a helpful reminder regarding the importance of appropriate record-keeping, as recently discussed.

While previous decisions arose in the context of a company that failed to properly document the matters at issue (necessitating broader inspection of informal communications), a short decision issued by the Delaware Supreme Court in January, Durham v. Grapetree, LLC, affirms the importance of the guidelines set out in those decisions. In that case (which arose under a different statute governing limited liability companies that Delaware courts consistently hold should be interpreted in a similar manner to Section 220 in this regard), the Court affirmed a decision of the Delaware Chancery Court denying inspection of informal records where board presentations and minutes concerning the matters for inspection were available. This decision provides evidence that, in the arguably more run-of-the-mill context in which an inspection seeks information regarding matters, for instance regarding corporate management, that have been documented in formal materials, Delaware courts will not permit a stockholder to perform an invasive and expensive email search. Stockholder plaintiffs are entitled to such informal communications only if they are necessary, not simply because they would like to know more about a particular matter.