Judicial Rewriting of Inspection Rights: Wolst v. Monster Beverage Corp. (Part 1)
Section 220 of the Delaware General Corporation Law provides shareholders with inspection rights. The provision imposes some process requirements (the request has to be in writing) and requires a proper purpose.
The Delaware courts have, however, used this simple statutory framework to throw up a substantial number of barriers that effectively deny shareholders access to corporate books and records.
First, the "form and manner" requirements are to be interpreted narrowly, even in circumstances that seem to defy common sense. See Cent. Laborers Pension Fund v. News Corp., 45 A.3d 139 (Del. 2012).
Second, the courts have grafted onto Section 220 a requirement that shareholders provide a "credible basis" for any proper purpose alleged. In effect, this requires shareholders to find affirmative evidence of mismanagement in the public domain, a standard often difficult to meet given the process nature of most fiduciary duty claims.
Third, the statute requires shareholders to have a “proper purpose” for inspecting any records. Although the statute provides that this is any purpose “reasonably related” to a shareholder's interest, the courts have, for the most part, defined a proper purpose only as corporate waste, mismanagement, or other wrongdoing. It is as if the only interest shareholders have in the assets they own is whether management engaged in improper behavior.
In Wolst v. Monster Beverage Corp. the Chancery Court added another barrier. The court essentially found that the purpose was less relevant than that intended use of the materials. Although the shareholder seeking the right to inspect had what would seem, on its face, a proper purpose (to understand why a special committee denied the demand request), the court found the intended use was a derivative suit. Because the derivative suite was barred by the statute of limitations, the court denied the right to inspect.
We will discuss this case in the next several posts.
Primary materials on this case, including the opinion of the Vice Chancellor, can be found at the DU Corporate Governance web site.