Unfettered Does Not Mean Unlimited: Two New Delaware Decisions Shed Light on the Limitations of Inspection Rights
As this blog has highlighted, a number of judicial decisions on statutory demands to inspect books and records under Delaware’s Section 220 in recent years have emphasized the broad scope of types of materials to which courts will permit access, and the consequences faced by companies that have attempted to restrict access. Two recent Delaware Court of Chancery decisions provide a welcome reminder of the limitations on the scope of the inspection right. These cases are Jose Mellado, D.M.D. v. ACPDO Parent Inc. and Greenlight Capital Offshore Partners, LTD. v. Brighthouse Financial, Inc.
Mellado is a case in which a director — who is afforded “virtually unfettered” inspection rights under Delaware precedent — sought inspection. The director, a pediatric dentist, sought to inspect ACPDO Parent’s books and records “for the purpose of fulfilling his fiduciary duties as a director and to have the same information about the [c]ompany, its subsidiaries and the dental practices, provided to the other directors,” after a battle for control of the company subsequent to Mellado’s termination as CEO. Defining the limits of even “unfettered” access, the Court denied Mellado access to categories of communications between other directors that failed to “direct the Court to specific books and records related to [Mellado]s proper purpose.” The Court also denied Mellado access to these categories as “these broad, discovery-like requests appear more geared toward fishing for documents” in aid of an ongoing administrative investigation and other litigations that Mellado had initiated than toward “seeking specific information needed for [Mellado] to fulfill his fiduciary duties.”
Similarly, in Greenlight, the Court struck some of Greenlight’s Section 220 demands, granting access only to documents sufficiently tied to Greenlight’s ability to “currently value” its Brighthouse shares. Here, Greenlight, a stockholder of publicly traded Brighthouse, requested to inspect the books and records of a private subsidiary of Brighthouse, and Brighthouse Reinsurance Company of Delaware (“BRCD”), a captive insurance company, pursuant to Section 220. Greenlight’s stated purpose for the demand was “to more accurately determine the value” of its Brighthouse shares, seeking, “[i]n particular[,] . . . to determine the true financial impact of BRCD . . . on the value of” the shares. The Court rejected Brighthouse’s argument that Greenlight’s stated purpose was improper, but nonetheless constrained the scope of inspection to formal board documents and communications, such as board minutes and formal communications with the company’s primary regulator, excluding informal internal communications and documents from inspection.
This decision suggests that when a stockholder’s stated purpose for inspection is not wrongdoing but to instead value shares, courts will closely examine what the stockholder needs to value shares and could bar inspection of records regarding potential wrongdoing. In other words, stockholders may receive the records responsive to what they ask for — not more.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
