Delaware Business Litigation Report

Chancery Orders Company to Produce Books and Records in Response to Section 220 Demand and Grants Stockholder Leave to Seek Fees and Costs

Myers v Academy Securities, Inc. C.A. No. 2023-0241-BWD (Del. Ch. July 27, 2023).
Under Section 220 of the Delaware General Corporation Law ("DGCL"), stockholders are entitled to corporate books and records if they make a valid demand on the company, have a proper purpose for conducting an inspection, and establish that each category sought is essential to that purpose. In this case, a Magistrate in Chancery found that the stockholder met his burden to receive books and records for the purpose of determining the value of his shares. The Court also recommended that the stockholder be permitted to seek his attorneys' fees and costs for the books and records action.

The company first argued that the plaintiff lost his status as a stockholder because his shares were canceled for the nonpayment of a subscription receivable. The Magistrate found this argument meritless because the purported subscription receivable was never memorialized in writing as required by the DGCL. Furthermore, even if the subscription existed, the cancellation of the shares did not comply with the DGCL because the company did not inform the plaintiff about it. The Court reasoned that the company should not have forced the parties to litigate these issues. Next, the company argued that the plaintiff did not articulate a specific immediate use for the books and records. The Court again found this position to be contrary to Delaware law because stockholders do not need to demonstrate "an end to which the fruits of the inspection will be put." The plaintiff demonstrated that he required books and records to value his shares and to determine whether the company conducted stockholder meetings for which he was not provided notice. The Court held that the company must produce most of the documents requested. Additionally, based on all the circumstances, the Court found that fee-shifting could be appropriate. It recommended that the plaintiff be permitted to move for costs and attorneys' fees within 30 days of the Magistrate's report becoming an order of the Court.

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