Delaware Business Litigation Report

Chancery Holds that Corporation Cannot Rely on Its Stock Ledger to Deny A Stockholder Inspection Rights When it is Aware of and Concedes the Stockholder’s Status

Knott Partners L.P. v. Telepathy Labs, Inc., C.A. No. 2021-0583-SG (Del. Ch. Nov. 23, 2021)
To seek corporate records under section 220 of the DGCL, the plaintiff must demonstrate that it is a stockholder. Generally, a corporation can rely on its stock ledger to determine who is a stockholder of record. This case confirmed, however, that a corporation may not rely on its stock ledger to deprive a stockholder of inspection rights when the corporation was aware of the stockholder’s status but failed to update its stock ledger to reflect that.

Here, the plaintiff-stockholder had purchased notes that would automatically convert into stock as of a date certain. But when the plaintiff filed an action under Section 220, the defendant-corporation claimed that the plaintiff would need to sign a joinder to an investment agreement in order to effectuate the conversion. The defendant later acknowledged in a separate writing to investors that the conversion had already occurred. Nevertheless, it did not update its stock ledger. In this post-trial decision, the Court held that the plaintiff was a stockholder as of the time of its books and records demand. The Court reasoned that, while a corporation may rely on its stock ledger when determining who is a record stockholder for a Section 220 action, it cannot rely upon its own failure to update those records when it actually was aware of the stockholder’s status as such.

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