Delaware Business Litigation Report

Court Of Chancery Imposes An “Incorporation Condition” On A Stockholder’s Books And Records Inspection

Amalgamated Bank v. Yahoo! Inc., C.A. 10774-VCL (February 2, 2016)

This is a precedent-setting decision in the books and records context. In it, the Court imposes an “Incorporation Condition” on the stockholder’s inspection. That is, a stockholder who establishes a credible basis to inspect corporate records for the purpose of investigating alleged wrongdoing must agree -- as a condition to the inspection -- that all the documents it inspects will be deemed incorporated by reference in any later-filed derivative complaint.

This condition is meant to avoid the stockholder cherry-picking its allegations developed from the inspection while ignoring exculpatory facts. In particular, such a condition may help defendants show the majority of the board is sufficiently disinterested for Rule 23.1’s demand requirement.

The decision is also an excellent summary of stockholder inspection rights in general. It addresses, among other things, what is adequate evidence of stock ownership, that there is no need to show continuous ownership, that an exculpation clause in the corporate charter does not necessarily preclude inspection rights to investigate wrongdoing, and what officer-level documents might qualify as corporate books and records.

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