Delaware Master Recommends Dismissing Books And Records Request By Activist Shareholder

Stephen Warren is a Partner in our Miami office.

On August 16, 2013, a master in chancery issued a draft report recommending that the Delaware Chancery Court dismiss a request by an activist stockholder to inspect the books and records of a large corporation that produces and sells chocolate products. The report is notable because Delaware law gives stockholders wide latitude to inspect corporate books and records.

The stockholder, a large pension fund, stated in its inspection request that the company sourced a substantial amount of its cocoa beans from two West African countries where the use of child labor is widespread. According to the master, those facts were not in dispute. The report noted that the company had acknowledged publicly that child labor in West Africa is a major problem in the cocoa industry. Nevertheless, the company refused the stockholder's inspection request, which led to the proceeding in the Delaware Chancery Court.

Under Delaware law, a stockholder may inspect a corporation's books and records so long as the inspection is for a "proper purpose," which is defined as a purpose "reasonably related to such person's interest as a stockholder." 8 Del. Code Ann. §220(b). A proper purpose includes an investigation of possible corporate waste, mismanagement or wrongdoing. To obtain access to the corporation's books and records, a stockholder must provide "some evidence" to suggest a "credible basis" that there is mismanagement, waste or wrongdoing. See Seinfeld v. Verizon Commc'ns, Inc., 909 A.2d 117, 118 (Del. 2006). The master's report noted that the "credible basis" standard has been described by the Delaware Chancery Court as the "lowest possible burden of proof" under Delaware law.

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