In the ongoing (and unfortunate) conflict between investors and management, investors often overlook a useful means of investigating what’s going on at a portfolio company, and of putting some pressure on management and directors.

Shareholders in all states have the right to demand to inspect the books and records of the corporation. Since Delaware leads in corporate law matters, we’ll focus on their particular law, as set forth in Section 220 of the Delaware General Corporation Law (DGCL).

Delaware allows shareholders to inspect books and records as follows:

1. ❖Submit a demand under oath
   

2. ❖Explain the “proper purpose” of the request
   

3. ❖Identify the specific books and records.
   

The demand usually takes the form of a letter setting forth the proper purpose and the specific books and records. We’ve had success with a well-worded email message, too.

Delaware has no minimums for ownership, either. Unlike the SEC requirements for shareholder proposals ($2,000 of shares for one year), investors need only one share for one day in order to submit a Section 220 demand.

Proper Purpose

Typically, investors request shareholder lists, so that they can contact shareholders to solicit proxies. Few corporations object to this purpose, and usually comply with few problems.

Other purposes count, too:

1. ❖investigate suspected mismanagement
   

2. ❖assess director independence
   

3. ❖analyze company value.
   

Investors should take care in drafting the statement of purpose, though. Shareholders and corporations have litigated “proper purpose” extensively in Delaware, and shareholders can consult a number of cases that help define what Delaware will and will not allow.

Books and Records

Consistent with the purpose of contacting other shareholders, companies routinely provide shareholder lists to investors. Yet, investors can and should demand many other books and records:

1. ❖BoD minutes
   

2. ❖BoD presentations
   

3. ❖Analyses of proposed deals, such as M&A proposals, both prepared internally and by external parties such as investment banks
   

4. ❖Internal memos, letters, and email messages
   

5. ❖Detailed financial information, such as expenses or capital expenditures.
   

The specific books and records will naturally depend on the purpose of the request. Again, corporations have litigated the scope of these requests in many ways, so investors should anticipate needing to defend their demand in Chancery Court.

Delaware also allows corporations to require investors to agree to confidential treatment of any books and records that they review. Confidentiality agreements may limit how an investor can use the information from a books and records demand, particularly in communicating its findings with other investors.

Recent Examples

We’ve made DGCL Section 220 requests for a number of purposes, including:

1. ❖Assess the process that a BoD has followed in screening and selecting independent directors
   

2. ❖Review how a BoD evaluated (and rejected) an unsolicited acquisition bid
   

3. ❖Review how a BoD determined how much to pay for a questionable acquisition.
   

These and other situations represent a proper means of defending investor interests. The initial request costs  little, and is worth making in many situations.