Court of Chancery Determines Criteria To Decide Inspection Rights
Posted In Books and RecordsWynnefield Partners Small Cap Value LP v. Niagara Corp., C.A. No. 1261, 2006 WL 1737862 (Del. Ch. June 19, 2006). This is Section 220 action where the principal issue is whether the plaintiff had satisfied the criteria to inspect records related to alleged wrongdoing. The Court of Chancery held that merely alleging that wrongdoing had occurred was not sufficient to warrant inspection of corporate records. However, in some areas the Court held that sufficient facts had been alleged to justify record insepction. The importance of this case lies in the method of analysis employed to decide whether to warrant inspection. In general, the Court of Chacnery examined the facts the plaintiff had establised and then decided if a reasonable explanation of those facts could be inferred or if, instead, those facts warranted an inference that there might have been wrongdoing. Only in the latter case was inspection ordered. Also interesting was the allocation of the burden of proof. While the statute has long stated that as to inspection of the stock list the burden of proof was with the corporation to justify any objection, the burden rests with the plaintiff in all cases seeking record inspection. Here, however, as some of the records sought to be inspected to show wrongdoing involved the stock list, the Court held the burden was with the corporation to show why inspection should not be allowed.
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