By Steve Levine, Esq., Senior Vice President, Alliant
Stockholders of Delaware corporations have a qualified right to inspect certain nonpublic corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. As a prerequisite, the stockholder must first demonstrate a “proper purpose” that is reasonably related to the person’s interests as a stockholder. Delaware courts have recognized several categories of “proper purpose” including: 1) investigating corporate wrongdoing in advance of filing derivative litigation; 2) to inform the company electorate of corporate wrongdoing or to mount a proxy fight; 3) to seek an audience with the board; or 4) to prepare a stockholder resolution for a company’s next annual meeting (i.e. seek corporate reforms). Secondarily, in order to enforce an inspection under Section 220, the stockholder must demonstrate the scope of the books and records to be inspected is no broader that what is necessary and essential to accomplish the stated, proper purpose. Procedurally, the stockholder first submits a written demand and if the company refuses to permit the inspection or does not reply to the demand within 5 business days, the stockholder may commence litigation in the Delaware Court of Chancery.
Section 220 matters have evolved over time, both in terms of the scope of materials covered as well as the necessity for such actions to be commenced in the first place. With respect to scope, Delaware Courts have broadened the type of documents they will permit a stockholder to review. Recently, Delaware Chancery Court expanded shareholder rights to cover all electronically stored information as well as paper documents. This wrinkle resulted from the observation that business is now conducted in a predominantly electronic arena, with over 90% of business documents stored electronically. As a result, stockholders can now access personal emails if officers and directors utilize personal email accounts to conduct corporate business and thus, any corporate business conducted over personal email is fair game with respect to stockholder inspection. Individuals are reluctant to have such person email information shared.
In recent years, Delaware court rulings and other commentary urged stockholders to use Section 220 to conduct investigations into corporate mismanagement prior to filing derivative litigation. This procedural step has been used successfully by stockholders to meet the heightened pleading requirements of filing such derivative complaints. When 220 books and records demands are made with the purpose being “investigation of corporate wrongdoing”, there are often factual allegations contained within the initial books and records demand or the subsequent Section 220 complaint that reveal the particular mismanagement and/or wrongful conduct the stockholders are seemingly attempting to bring to light.
This aspect changes the applicability of D&O insurance coverage. This newer trend (alleging the mismanagement or wrongful conduct) generally results in defense costs coverage being available to the company as they respond to the 220 demand or defend the Section 220 proceeding. In the past, more generic or boilerplate Section 220 demands and complaints did not necessarily contain such specific allegations of wrongdoing and thus, insurance carriers often found that a “Claim” had not yet been made under the D&O policy because the materials submitted to the carrier did not contain Wrongful Act allegations.
Once a Section 220 proceeding advances beyond the information gathering phase and into the derivative litigation phase, Insured Persons are defending a suit for, among other things, monetary damages. The type of relief sought by shareholders in the derivative complaint raises other coverage issues. D&O coverage may include indemnity payments, or Side A payments, by the carrier in addition to defense costs.