Delaware Business Litigation Report

Delaware Supreme Court Clarifies That There Is No Blanket Rule Requiring Dismissal Of An Overbroad Section 220 Demand And That A Proper Purpose May Be Established Through Hearsay

Nvidia Corp. v, City of Westland Police and Fire Ret. Sys., et al., No. 259, 2021 (Del. July 19, 2022)
In this decision, the Delaware Supreme Court clarified two points concerning books and records actions under Section 220 of the Delaware General Corporation Law: (i) there is no blanket rule requiring the Court of Chancery to dismiss overbroad demands; and (ii) a stockholder may establish a proper purpose under Section 220 through hearsay evidence, but this exception should not be abused.

Post-trial, the Court of Chancery ordered a corporation to produce some of the records requested in the stockholder’s 220 demand and found that the stockholder could establish a proper purpose through reliance on hearsay. The corporation appealed arguing, among other things, (i) in favor of a blanket rule that the Court should dismiss an overbroad demand outright, rather than sort through the demand and determine which records are appropriately requested; and (ii) that a stockholder’s burden to show a proper purpose for a Section 220 demand cannot be based on hearsay. 

As to the blanket rule argument, the Delaware Supreme Court recognized the Court of Chancery’s discretion to either deny overbroad demands outright or to craft a production order “circumscribed with rifle precision.” The Supreme Court affirmed the Court of Chancery’s decision to take the latter approach here.

Reviewing past decisions, the Delaware Supreme Court also clarified that sufficiently reliable hearsay evidence may establish a proper purpose for a Section 220 demand. However, and relevant here, this hearsay exception cannot be abused by stockholders. In the context of this case, the Supreme Court found that the stockholder abused the exception by delaying identifying its trial witnesses and, thus, denying the corporation the ability to cross-examine the plaintiff regarding its purposes. Accordingly, the Supreme Court reversed the Court of Chancery’s decision with a remand for further proceedings.

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